September is the perfect time for a budget reset.
We tend to think a lot about our budget, our balances and our bottom lines in January, but I think September is actually the perfect time to reevaluate where your money is going - especially when the September is bringing the start of a recession.
Contrary to what the media will tell you, I don’t think the upcoming market downturn is necessarily a time to panic. I do however think that this is the perfect time to break out the ol’ spreadsheet, reheat your morning coffee, and take a serious look at your cash flow and start planning to pay down high interest debts, save for a rainy season, eliminate any unnecessary expenditures and reset any payments possible to be sure you are getting the most out of every dollar (including your mortgage payment, of course). There are a hundred ways you can consciously update your budget to ensure you are in a good place for whatever the market brings at us this fall, but here are a few of the simplest and most impactful things I have been discussing with money-minded clients in recent weeks.
Trim the excess
Without much exception, we are all probably making payments we don’t even know about each month (or making much larger payments than we have to be). Some easy ways to trim the extra include:
Cancel memberships you don’t use. Think streaming services, online publications and app subscriptions that you may have signed up for and forgotten about, or
Shrink your bills. Reach out to your utility providers (water, electricity) and phone companies and speak to retention departments. There is almost always wiggle room, and cutting these bills back by 10-20% can have a big impact on your cash flow each month.
Understand the effective rate of all of your outstanding debts, and use equity to consolidate
Consolidating high interest consumer debt payments (credit cards, unsecured lines of credit) using the equity in your home is one of the most valuable tools we have at our disposal as homeowners. But does it make sense to consolidate, even if your mortgage rate will be higher than it is currently? In short, yes. To better understand how consolidating into your mortgage can save you money, I created an effective rate calculator that will show you the average interest rate you are paying between all of your debts as well as the borrowing power you have with the equity in your home.
Consolidating can mean either using a home equity line of credit to move debt, or the proceeds from a refinance to pay out high interest credit facilities.
If your current mortgage interest rate is lower than posted rates when you refinance, your monthly payments may end up similar overall. Here is an example:
Even with prices dropping, the average Canadian homeowner’s equity remains high. As such, many homeowners who are refinance to consolidate debt are finding they are left with freed up cash from their payout even after their high interest facilities are paid off. We’ve seen owners be able to put thousands into high interest savings or TFSA accounts for a rainy day.
Keep in mind that since these cash payouts do increase your mortgage amount they are still a type of debt. However, if the equity is there, freeing it up in the form of easy-to-access cash now, before values decrease, is a great idea.
Review your mortgage
Even with interest rates on the rise, this month is a perfect time to review your mortgage. We may be able to restructure to save you cash each month now, or help you better prepare for renewal time. Some of the most simplest changes we can make include:
Locking into a fixed rate to alleviate the risk of payments fluctuating as the Bank of Canada continues its rate hikes
Utilizing prepayment privileges to increase payments incrementally in an effort to reduce payment shock at renewal time
Finding a mortgage product that better suits your current needs such as a readvanceable, combined mortgage and HELOC which allows you to borrow your equity without an immediate repayment schedule.
If you have questions about how to readjust your budget this fall to weather whatever the economy throws at us, reach out. Our team is not just here to support you with mortgages, but are all experts in personal finance and are happy to help you ensure that you can make it through this next year stronger than ever! In the meantime, download a copy of my budget spreadsheet and get tracking those expenses!
