A little while ago, one newsworthy survey showed that most Canadians would have trouble managing their household expenses if interest rates went up. Well, rates have indeed climbed. The cost of servicing a mortgage is up, putting pressure on household budgets for everything else, from groceries to gasoline. How can Canadians manage their household expenses better so that they can put away a bit more each month and even invest?
We asked the CBC and other forums’ go-to expert on personal financial advice, Rubina Ahmed-Haq for her ideas. How can families and couples meet the challenge?
When people in one household have trouble making ends meet, the problem often isn’t a one-off. Very often, it can stem from a clash of values. “Why don’t bills get paid?” Rubina asks. “Most couples come with their own set of financial values. Whatever financial situation they grew up in, they bring to their marriage or partnership.
“For instance, one person is used to spending on get-togethers at social events or holidays. This could be a point of frustration for someone who might not have grown up spending hundreds of dollars on these kinds of things every weekend. Those expenses can add up fast. Or imagine living with someone who loves changing their car every four or five years, but you’re a bike and transit person. Right there, you’ve got a conflict.”
Even if the people running the household are on the same page, Canadians are often managing a household budget using outdated expectations. “The bank still uses that 32 percent figure for mortgage and hydro and according to their advice, it shouldn’t add up to more than that,” Runina explains. “Yet this figure seems laughable in places like Vancouver where home prices are astronomical.”
Ratios like the figure around housing can even cause more confusion than they’re worth. “It depends on where you live in Canada,” she says. “And if it’s your forever home, you could potentially go over that 32 percent. But if you’re buying a condo and 50 percent of your earnings are going to your mortgage, you’ve got to rethink that.”
That core cost of housing is now bigger thanks to the interest rate rise. “I was asking aloud before whether people can afford to make those payments at even 2 percent higher… Now we’ll find out.” When looking, it may be smarter not to max out the purchase price of a home for whatever the lender says you can afford. If you can allocate more of your home payments to principal than interest, you’re that much further ahead in your longer-term financial future.
Of course, shelter is not the only expense. Couples, families or roommates sharing expenses need to eat. “The average Canadian family spends about $8,000 on food. That’s for a family of four, including groceries and restaurants. If you’re triple that and you’re a 4-person family, you should probably reduce.”
But again, that benchmark number can be misleading. “If I was told someone was making $30,000, in that particular case, 11% of their income might actually be too low. But for someone making $300,000, 11% is way too much. They’d probably be throwing out or wasting food. Instead of going by percentage, go by the average.”
Even if the people in the household might agree on the numbers, it’s important for people sharing a budget to feel they have their say. It’s very commonplace for the higher earner to make the ultimate big-budget decisions, which can cause tension in a relationship.
“One person may decide where household expenses get spent, but generally the higher income earner says yes or no when it comes to major expenses like buying a home, a car or an expensive vacation,” Rubina says. “I always advise the person who is making less to still have a voice. Just because you make more money doesn’t make you good with money. Some people who make less money can still make very wise decisions about saving, investing, getting insurance, etc. You need to be honest with your partner.”
A healthy and honest relationship where everyone is on the same page is a key to managing household expenses. “The best advice I ever got was marry well. Not marry rich. Marry well. Be with someone who treats money the same way you treat money. That’s not just good dating advice. It’s good advice for your personal finances.”