A Guide to Budgeting

Man using calculator and calculate bills in home office.Written by Optimity Team

2 min read

For over 4 years, Optimity has been learning from our community. From physical activity, to mental wellness and financial literacy, we’ve learned about the challenges you’ve overcome, the milestones you’ve achieved, and the questions you still have. 

One challenge that almost half of our community is facing is that they don’t keep a monthly budget, and the number one reason was not knowing where to start. The benefits of budgeting can include increased financial stability and awareness along with less stress and better mental health (just to name a few!). With that in mind, we’ve created a simple three-step guide to creating a budget so you have the information you need to start your own.

1 – Set your goals

Whether your goal is paying down debt, creating an emergency fund, or having enough money to go out to eat once a week, it’s important to have goals in mind before you create your budget. Your goal can be a stand-alone or one of many, short-term or long-term. It does not have to be something as daunting as saving for a house or a car. It can be as simple as saving for a date night out every month or for a special trip. The important thing is that your goals are specific, measurable, achievable, realistic and timely. Yup, you know where we’re going: SMART goals. Keep your goals in mind, and adapt them as needed, as you continue to create your budget. 

2 – Track and categorize your expenses

A key to making an accurate budget is understanding how much money you’re earning, and how you are currently spending that money. There are several apps that can help you with this process. But, if you prefer a more hands-on approach, track your monthly spending – yes, everything – and use that as your sample. 

Once you’ve chosen how you’re going to track your spending, you can start to categorize your expenditures. Break them down into Fixed (rent, food) and Variable, or get even more specific with categories like Utilities, Grocery, Travel, etc.  Next, subtract all your monthly expenses from your income. This way, you will see how much is left over for your future goals, and the areas you may need to cut back on.

3 – Match your goals, income, and expenditure

Once you’ve got all the information you need, the final step of creating a budget is to actually create one. This is when being realistic is key. If you go out to 15 restaurants a month, but want to bring that number down, budgeting enough for only two dinners out every month is unrealistic. Dropping that number down to 10 might be a better starting point. Creating a budget doesn’t mean that you can’t spend money or that you must feel bad about spending money on non-essential purchases. There is nothing wrong with treating yourself. The goal of creating a budget is taking your goals, income, and spending, and finding a point where they can all connect. Tracking your spending will enable you to achieve your goals and feel more confident in your financial situation.

What is Goals-Based Investing?

The hands of women holding watering can sprinkle coins

Written by James Gauthier, Chief Investment Officer at Justwealth

Most individuals are aware of the importance of investing – not everybody does it, but they know that it can be beneficial for their future. For those that are able and engaged in investing, a good percentage will invest their savings through their financial institution, a financial advisor or some will do it on their own. Financial planning helps investors figure out questions such as “How much do I need to save?”, “How much can I spend?” or “What rate of return do I need to make?”.
Before you attempt to answer these questions, you should be asking yourself the question “What is the objective of my investment?” The responses to this question can vary greatly, but might fall into one of the following categories:
• Saving for the short term (such as a down payment for a home in a few years)
• Saving for the long term (such as a retirement nest egg)
• Generating income (either as a primary or secondary source)
• Preserving your capital (looking to keep up with inflation or just very risk averse)

In the absence of having an objective for your investment, it is quite possible that financial planning software could determine that your required rate of return is something like 4% per year. Any asset allocation expert will tell you that there are hundreds of ways to construct a portfolio that can be expected to make a rate of return of 4%: it could be 4% purely in the form of income, it could be 4% through a combination of dividends and capital appreciation across a variety of conservative equity markets or it could be a portfolio that has very limited risk of producing a negative return over short periods of time (i.e. strong downside protection). Until you identify the specific investment objective that you are trying to achieve, there can be a lot of uncertainty in how best to create a portfolio that will satisfy your financial needs.

What goals-based investing attempts to do is to put your investment objective as the starting point in constructing a portfolio that will accomplish what you want it to do. Once that is defined, the variable(s) that need to be optimized are known, and you can place other constraints, limits, or preferences into your quantitative models that collectively produce a portfolio that will be optimal for achieving the investment objective.

As an example, consider a new retiree who is single, has a company pension of $20,000 per year and is entitled to government benefits of $15,000 per year. It is determined that the pensioner will require an additional $10,000 per year from investments to live comfortably, and has a non-registered investment account worth $250,000. If the pensioner were to go to a typical institution or financial representative that does not use goals-based investing, it is most likely that the portfolio recommended would be something along the lines of a “Moderate Growth” portfolio or 40% equity, 60% fixed income. This portfolio would be expected to deliver a return of roughly 4% with the lowest volatility possible. The portfolio would rank as a 2 out of 5 in the risk/return spectrum of the five different portfolio options that the firm offers.

This recommendation is likely the result of using modern portfolio theory (MPT) or optimization to determine the portfolio. Companies who use this approach are quick to point out that a Nobel Prize was awarded for the work done in this area back in the 1950’s by Harry Markowitz. The biggest problem with MPT is that it is 2-dimensional – there is risk (defined as the volatility of investment returns), and there is return; there is nothing else. To many people, risk is not defined as some statistical measure, it is the probability of losing money, making one of the 2 variables used by MPT of questionable value!

Goals-based investing does not restrict the analysis to the same 2 variables. The variables could include theoretically anything: income yield, after-tax total returns, probability of loss in the short term or the long term, etc. Goals-based investing can also use the same principles of MPT, but also add in many other forms of quantitative analysis including simulation, scenario analysis or stress testing to name a few.

Going back to our example, the same pensioner who provides the financial scenario to a company that uses goals-based investing is likely to get a portfolio recommendation that will provide almost all of the 4% required return in the form of income, the income would likely receive more favourable tax treatment, there will be little or no need to regularly realize gains (i.e. sell securities to make up for the shortfall in income) and the probability of losing money should be lower. That would be a win-win-win-win situation!

If done properly, goals-based investing is a more customized approach to building portfolios, and it results in investors having greater choice available to them to have a portfolio that has a greater likelihood of meeting their financial objective. Not using goals-based investing reminds me of a Henry Ford quote: “A customer can have their car painted any colour as long as it’s black.” Don’t settle for a black car, find a company that offers goals-based investing and get any colour that you like!

 

Source: https://www.justwealth.com/wp-content/uploads/2018/04/What-is-Goals-Based-Investing.pdf?x42623

5 Concepts to Understand Before Taking a Big Loan

Written by Emma Hughes

From taking a loan out for the purchase of your first house to paying off your kids’ education, there are several reasons for taking out a big loan.

While there are many different loans, the concepts we will go over apply to any loan out there. For instance, loan interest rates are one of the factors to consider when getting a loan, and as Tasneem Panchbhaya discussed it’s also one of the factors to consider when repaying your loan. Interest and other concepts we will cover are important to understand before finalizing any loans and you should avoid the temptation to gloss over them. Here we’ll go over five of the concepts to give you a better idea before taking out a loan.

Annual Percentage Rate (APR)

When shopping for a business or personal loan, one concept to keep in mind is that the total annual cost of borrowing is called the APR. Many confuse this with interest rate; however, interest is just one aspect of APR, which includes other fees like origination fees and monthly maintenance charges. US News reveals that APR is generally a factor in business lines of credit loans, and term loans among others. Unsecured loans will also have higher APRs than secured ones, so do your research first to find the best type of loan suited to you. In their guide to loans, Marcus points out the importance of comparing loaning agents based on their APR. As such, from where and from whom you get a loan is a deciding factor. For instance, loans from online lenders generally cost more than a bank loan and may have other hidden fees.

Loan Repayments

Repaying your loan involves paying the amount you borrowed, as well as the interest rate. As you understand how loans work, you’ll see that each monthly payment is split into two parts, which CFP Justin Pritchard explains are your interest costs and the loan balance. You’ll also understand that through amortization your interest payments will decrease over time as long as you consistently pay the scheduled payment amount. As we mentioned, in the beginning, a good practice is to pay down the loans with the highest interest as in the long run, you’ll be saving on higher interest charges by prioritizing high interest revolving loans, like credit cards.

Non-Bank Loan Options

More and more Americans are turning to alternative options of borrowing, both online and through traditional brick and mortar institutions. Oracle’s Digital Demand in Retail Banking study on 5,200 consumers from 13 countries points out that over 40% of customers think that non-banks can better serve them with personal money management, and loans for their particular needs. These can include payday lenders and check cashing centers. Other non-bank alternatives offer a variety of loan options including mortgages loans and peer-to-peer loans. When compared to banks, however, these might have higher fees, costlier APRs and very high-interest rates.

Loan Collateral

When qualifying for a loan, lenders will look at your credit history. Good credit shows that in the past you’ve paid back loans, which means you’re a low-risk client who will most likely pay back their loan. However, if your credit isn’t good, if you qualify it might mean higher interest rates and you might also be asked for collateral. It can be anything from a vehicle to a house or anything else that is on par or exceeds the loan’s value. Whatever was agreed upon as collateral can be taken by the lender to be sold in the event you aren’t able to repay your loan.

Loan Default

If you fail to make your loan payments on time, your loan can go into default. The amount of time it takes for this to happen will depend on your loan terms, the lender as well as local and federal laws. With loan defaults not an uncommon occurrence in Canada, The Bank of Canada reported that defaults on Canadian consumer loans incur the highest loss rates. Defaulting on a loan can affect your credit score and in many cases, a default may be sent to the lender’s collections department or sold to a third-party debt collection agency. Worse, a default could result in potential garnishing of wages or tax refunds if a judgment is awarded against you.

Find your Financial Bliss

Posted by Tasneem Panchbhaya 

How many of you have found yourself in a situation where you looked at your recent credit card statement and are in disbelief by what you see, because like most, people are now tapping/swiping their cards without giving it much thought, and bringing your spendure to more than expected? Or, have you found yourself in a situation, where your cash income is going to be delayed, so now you don’t know how your going to cover your major, necessary expenses. If any of these situations or similar ones apply to you, just know you’re not the only ones. A Manulife study, states that about 40% of people in North America are financially unwell and 26% of people are doing “okay”. Meaning only 34% of people are making the right strides to better financial health.  

As nice winning the lottery would be nice, it often times actually will not make your financial situations better. More money does not equal better financial wellness, and here’s why: financial wellness is the relationship one has with money, meaning are you able to keep your spending within you comfort, and are prepared for any unexpected financial emergencies (do you have savings/rainy day funds); do you have access to any resources or tools that you need to make good financial decisions; are you ready for the future, have you started making plans to achieve your goals? These are the types of questions that should be surfacing in your mind when you think about your finances. When you think about your financial wellness, it shouldn’t feel like an uncomfortable topic, you shouldn’t have to get depressed every time you think of money (or lack thereof).

Now the overbearing question, why does any of this matter for both the employees and employers? When an individual (employee) has the financial bliss they need, they are able to produce better work because they’re more productive and more engaged, because they’re less stressed, and therefore are more likely to stay on the job.

According to a study by Mercer, when you have financially stressed employees, 22% have reported missing at least 1 work day to take care of any financial issues; 15% have spent more than 20 hours or more in a month while at work, thinking about their financial situations; and 20% said to actually leave their job because of their financial stress.

As employers, who want the best for their employees overall health, as well as retaining productive employees, it’s a matter that should be taken into the hands of the organization in order to provide tools that can help bring upon financial stability for their employees and as a result bringing down any indirect cost associated.  

Here are my top 3 tips for finding better financial wellness!

1. Plan

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Experts cannot stress enough how important planning is for your financial wellness. I know saving for the future and/or emergencies, isn’t as fun as splurging on unnecessary necessities, however planning ahead makes the world of a difference. Planning works hand in hand with goal setting, setting goals (both short, medium, and long term) will help make planning easier, figuring out what you value makes deciding where and how much you need to save for the future. It also makes daily/weekly spendings a lot easier to control since now you can differentiate what you need from what you want.

2. Investing

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Similar to planning, it’s essential that employees start investing into their future retirement, it’s never too early or too late to start. Investing into retirement savings that accumulate compound interest over time will help increase your savings without lifting a finger. Knowing you’re financially prepared for the future will  help release any stress or doubts you were having about life after retirement.

3. Control Debt 

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This last tip is a given, the best way to increase your financial wellness is by decreasing any financial debts that you have. Many of us have to juggle (student) loans, credit card payments, recurring expenses like car or housing, and much more. You’re priority when it comes to paying off loans or debt is to start with the ones with the highest interest rates, if you can clear those ones out first, it’ll be better for you in the long run because the higher the interest rates, the higher accumulation of debt.

Make the most of what you earn through Optimity, we can help you stay on track by providing you with the tools you need to make better strides with your financial wellness. Our platform, is innovating and constantly changing to meet the needs and demands of every busy individual. Let us help you, help yourself. We know that it can be hard to juggle your financial health as well as all other aspects of your wellness, but we can make that easier for you. Contact us to learn more about how you can make the burden of financial wellness easier and fun! All you need is the right platform with the right tools to help guide you!

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How Can an Employee Wellness Program Impact Your Bottom Line?

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Employers are increasingly focused on the well-being of their employees and continue to introduce wellness programs that address physical, sentimental, social, rational and financial health issues to assist employees in improving both their work and home life.

Employee sponsored wellness programs have been adopted by nearly two-thirds of companies and they make a great deal of effort to ensure that all their employees benefit from these programs. These programs have also become increasingly available via smartphones, which assist in helping individuals track many aspects of their health with ease.

The table below table highlights the ways in which both employers and employees can benefit from company wellness programs:

 

Benefit to Employers Benefit to Employees
Increase in productivity of employees Boost up employees morale and their efficiency
Reduced absenteeism Enhanced health condition
Strong bond with employees helps in retaining the employees Increase self-dependency and boosts confidence
Decreased healthcare cost helps save money Stress free life
Reduction in employees compensation claims Increased productivity helps gain positive rewards and promotion

 

Workplace wellness programs have the objective to enhance your work life and overall productivity. These programs aim to help employees, who are suffering from chronic disease, to adopt a healthy lifestyle, which can improve their quality of life and boost their confidence. This can, in turn, help the organisation’s bottom line.

 

Do wellness programs really help in reducing cost to employers?

As per the study done by RAND Corporation, wellness programs earn an average return on investment of $1.50 for every $1 invested by the employer. The study also found that there is positive correlation between wellness programs and the efficiency of employees. Another survey done with Citi Bank employees on the benefits of their wellness program depicts that on an average there were savings of $4.50 in healthcare costs per employee for every $1 invested on their wellness treatment. While a wellness programs may be costly to employers in the short term, its immense long-term benefits foster a win-win situation for the employers and the employees.

Whether a wellness program really helps employers save on healthcare costs is dependent on factors, such as whether the employer is ready to invest such a significant amount for long-term gain and commit to it. The wellness program needs to be included in the core culture of the organisation and employees need to be educated about its benefits, which will help them increase their productivity and lead a healthy life.

 

Abena is a Client Services Associate at Optimity. She graduated from the University of Toronto with a BSc in Global Health. She is passionate about human rights and health education, and hopes to develop tailored interventions to combat health inequities around the globe. Her interests include story writing, camping and exploring different cultures on her travels.

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