Why you need to reduce your spending and save more in uncertain times

We are living in uncertain financial times. We've just come out of a pandemic that dramatically shifted our spending habits. Inflation is wreaking havoc, reaching an almost-40-year high of 7.7 percent in May 2022. At the same time, Canadian stocks are also declining.

Why reduce spending?

For two primary reasons, savvy Canadians will save more of their earnings during this uncertain time. The first is to help protect against inflation. The second is to protect against stock market losses. You don't want to have to draw on your stocks when they are at their lowest value. Instead, you'll want to have additional savings in another account to use, if necessary.

How to save more

The best way to save more is to decrease household spending. While that may sound difficult, you can accomplish it by categorizing your spending and creating a lean budget.

Categorize spending

You can divide spending into three categories: Needs, Wants, and Savings. In her book, All Your Worth, the Ultimate Lifetime Money Plan, U.S. Sen Elizabeth Warren developed a formula for spending based on these three categories. Warren says you should spend 50 percent of your after-tax income on needs, 30 percent on wants, and 20 percent on savings. While Warren's formula is not necessarily suitable for everyone, the idea is that you should distinguish between needs and wants and establish a regular pattern of saving a significant amount of your income.

Sometimes, distinguishing between needs and wants can be tricky. Needs are expenses that are required for life, such as shelter, food, and basic clothes. However, wants might include gourmet foods, trendy clothes, or closets full of clothes.

For example, a minimalist blogger suggests that most people can live stylish lives with fewer clothes by

Wearing fewer colours, which means you'll need fewer accessories
Embracing the idea of one, for example, one swimsuit, one pair of sneakers, one dark suit, one black dress
Establishing a moratorium on buying more clothes
Avoiding the sales racks, which often tempt you to buy something you don't really need
Only buy clothes that you genuinely love
Choose quality over quantity

Create a budget

After you've categorized expenses, you'll create a budget. You create a budget in three steps: document, identify, and plan.

Document

Document every cent your spend throughout the month, including automatic payments, cash payments, and credit card purchases. You can use technology to help you. The Government of Canada offers a free budget planning tool, and many companies also produce apps that can make keeping track of spending easier. Some of the apps have specific features to help you save.

Identify

Now, look at what you're spending money on and identify extravagant purchases that represent wants rather than needs. Check for automatic payments for services you no longer use, and consider if you can limit excursions to coffee shops or eating lunch out.

Consider whether you sometimes buy items based on emotions, such as boredom or depression, and try to eliminate these emotion-based purchases. One way to do this is to recognize your triggers and find healthier ways to cope with them.

For example, suppose you discover that when you have a bad day at work, you often go to the boutique to buy clothes to cheer you up. Consider alternative free activities that might make you feel better, such as watching a favourite movie on TV or taking a warm bath. Another way to cope with emotional spending is to budget a small amount for it and stick to that number.

Plan

Now, think ahead of events you'll spend money on. Vacations, weddings, and holidays may be examples. Set a budget for the event and set aside money each week in a special savings account designated for that event. When the event arrives, use the money you've saved to make your purchase.

Benefits

Once you've found ways to avoid excessive spending, you'll be able to save more and pay down your debts. If your debt is challenging, several agencies, such as Credit Counseling Canada and Association Cooperatif d'Economie Familiale, can help you find a solution.

With your additional savings, you can begin to invest towards your children's education or contribute more to your company's retirement plan. You'll also be able to develop a solid emergency fund that can help you should you face significant economic losses during the uncertainty.

Partnering with People Corporation gives you advice from the experts on how to manage your financial wellness. Contact People Corporation to learn about or help with your financial health.

Originally written by Salina Shariff, Financial Wellness Leader at People Corporation.