How Much to Budget for Car Insurance

How Much to Budget for Car Insurance

Car insurance is usually on the highest costs of owning a car. When purchasing a car, people are usually more concerned about car loan payments, maintenance, or gas. While these costs need to be considered, there are additional costs such as insurance. Ignoring additional costs such as insurance can lead to budget overages which can impact your finances.

How Much to Budget for Car Insurance

When you are thinking about how much to budget for car insurance there are several factors you need to consider. Insurance companies take several factors into consideration when providing a quote.

Insurance Rating

If you are purchasing a car, you need to do some research. Always check the insurance rating of the car, one of the factors insurance companies use is a rating system that helps them determine the premium. For this, you should go to the Insurance Bureau of Canada, which measures the cost of collision, comprehensive, direct compensation property damage, and accident benefit claims. These indexes are then highlighted green, yellow, and red, with green being the best and red the worst.

Impact of Address

Insurance companies also factor in your address. Geography plays a role in insurance premiums; premiums can fluctuate wildly depending on your postal code. Cities or neighbourhoods with higher collisions or thefts lead to higher costs.

Age of Driver

Insurance companies take into consideration. A young driver with little driving experience is likely to pay higher premiums than an older individual with more time behind the wheel. However, your driving record also comes into play, a clean driving record will obviously lead to lower costs.

Vehicle Safety

Car safety matters as well, insurers are concerned with liabilities they may face in case of an accident. Always check the car safety rating, it is important not only to reduce premiums but also you want to buy the safest car available within your budget.

Car Use

Insurers are also interested in what and how you will use the car. If your car is going to spend most of the time on the road then the risk of an accident will increase, that is why you will see a question about the expected distance to be driven.

Compare Insurance Quotes

It is always a good idea to shop around and get quotes. Don’t buy insurance from the first insurer you reach out to. Check out online insurance quotes and compare the premiums, websites such as Insurance Hotline and Rates.

Understanding what impacts your insurance premiums and comparing different quotes is a good place to get an idea of how much to budget for car insurance. Checking insurance rates before buying a car will ensure that you can stay within your budget and there are no surprises. Once you buy a car there is not much you can do about insurance premiums. Research is key to knowing how much to budget for car insurance.

Zero-Based Budgeting: Is it a waste of time?

Zero-Based Budgeting: Is it a waste of time?

What is Zero-Based Budgeting?

In a nutshell, zero-based budgeting is preparing a budget from scratch, ignoring last month or last year figures and budgeting from the ground up. Zero-based budgeting is not just about budgeting, it is also about planning every expense, telling your money where to go. Whereas traditional budgeting is basically using your existing budget and making changes to it to get to the desired budget.

This method is appealing as it forces you to justify every expense on your budget. As our financial resources are limited each activity must prove its merit to earn a place in the budget. With traditional budgeting, often expenses get carried over into the next budget, it does not mean you will end up spending that amount, it just means that you are not planning your finances efficiently. This is not to say that traditional budgeting does not work, for a seasoned budgeter it may make sense to use the regular budgeting method. But if you are new to budgeting, zero-based budgeting may make more sense as you try to understand the relationship between your income and expenses.

What are the Disadvantages?

As appealing as this may sound from a financial perspective, there is a downside to using zero-base budgeting. The downside is that practically it can be time consuming. There is a fatigue factor which means that building a budget from zero every month can be tiring and can lead to loss of motivation.

What are the Advantages?

Following a set budget month after month is quick, easy, and has an element of simplicity requiring very little effort. While rolling over budget from previous month or year can be tempting, there is an inherent problem that causes inefficiencies to be carried forward.

Zero-base budgeting, on the other hand, requires that you build your budget at the lowest level possible and then add additional spend based on the cost-benefit of the specific activity. In effect, you are incrementally increasing your budget from the lowest level possible to a level you feel more comfortable. This activity highlights your essential expenditures that are included in your base budget, fixed expenses like rent/mortgage, insurance, car payments, any other fixed monthly expenses and then identifying the discretionary expenditures.

The insight this activity provides is invaluable in understanding your financial constraints and your spending habits. Let’s not overlook the fact that this method incorporates a high level of accuracy in your budget, that cannot be realized by just tweaking your previous budget.

This method is also useful for people who do not have regular income. Rather than using a previous month budget template which may be built on a different income amount, you can tailor your budget each month on the expected income for that month. It gives you more control over your budget as you get to build it from ground up.

This method is great for achieving your financial goals. Let’s say you want to save for a car, with zero-based budgeting once you have taken care of your fixed expenses you can decide to forgo other discretionary spend and allocate the remaining amount towards saving for a new car, for example. If you are trying to pay off debt, then you know exactly how much you have left towards paying down your debt after allocating your fixed expenses.

What is the Verdict?

So, is this method a waste of time? In my opinion, absolutely not, as the advantages of this method far outweigh the disadvantages. It pays to take time to evaluate expenditure in greater detail as required under zero-base budgeting.

What is an RRSP and How Does It Work?

What is an RRSP and How Does It Work?

What is an RRSP?

Registered Retirement Savings Plan (RRSP) is a retirement savings account. Individuals can contribute up to their contribution limit.

Amounts contributed are deducted from taxable income, reducing your taxes payable for the year. So if you earned $100,000 in a year and contributed $10,000 then CRA will only tax you on $90,000 in that year. Any gains in the account are tax-deferred. This does not mean that there is no tax on the amounts contributed. Taxes are deferred until funds are withdrawn from the account.

You can start contributing at any age up until you turn 71. If you haven’t started contributing then you should consider contributing as soon as possible. This will allow you to earn income on contributed amounts for a longer period.

How does an RRSP work?

RRSP’s can hold a wide range of investments. They can include:

    • Cash
    • GIC’s
    • Mutual Funds
    • ETF’s
    • Bonds
    • Equities
    • Treasury Bonds
    • Savings Bonds

Depending on the investment, the downside is that the value of investments can fluctuate which means they can go down as well as up. 

What is the RRSP contribution limit?

The contribution limit is the maximum amount you can contribute in the year. It will be stated in your Notice of Assessment. The contribution limit for 2021 is $27,800.

Your contribution limit is calculated as the lessor of, contribution limit for the year and 18% of your income earned in the previous year.

What happens if I don’t use my contribution limit?

Unused contribution in any year is carried forward to the next year allowing you to catch up and use it when you are able to. Therefore, your unused contribution limit is added to the following year.

Benefits of RRSP 

    • Any amount contributed is deducted from your taxable income, thereby reducing taxes payable for the year.
    • Amounts contributed are not taxed until withdrawn. 
    • RRSP savings can be used to pay for education (Lifelong Learning Plan) or used as down payment for purchase of your first home (Home Buyers’ Plan).
    • You are allowed to use your contribution limit towards your spouse RRSP.

What if you overcontribute to your RRSP?

CRA provides a $2,000 buffer, this means that CRA will not impose any penalties up to this amount. You will receive a letter informing that your have overcontributed and action is required. If you don’t take action then there is a penalty of 1% per month on over-contribution.

Withdrawing from RRSP

When you withdraw funds, the amount withdrawn will have to be included in your income reported to CRA. Therefore, it will be taxable.

However, if you withdraw funds for first time home purchase (Home Buyer’s Plan) or for paying for education (Lifelong Learning Plan), then there is no tax payable. This condition is only applicable if you put the funds back into your RRSP within a certain period.

Home Buyer’s Plan allows you to withdraw $25,000 from your account and your spouse can withdraw the same amount.  

Lifelong Learning Plan allows you to withdraw up to $20,000 to pay towards your education.

Where can you open an RRSP?

You can open it in Banks, Credit Unions, Investment Firms, Trusts, and Insurance Companies.

Registered Retirement Savings Plans are a great way to save towards your retirement. As the name suggests this plan is for retirement which means it is a long-term investment. While this is a long-term strategy, there is a short-term benefit, it allows you to reduce your taxable income. You may think you are too young to think about retirement but the earlier you start, the longer your money can grow in this account.

Budgeting for a Car

Budgeting for a Car

Budgeting for a car should be the first step in preparation for buying a car. It is a big decision that requires careful financial planning. For most people buying a car is not a frequent event, it probably happens every few years.

Research is the key to buying a car. There is an endless supply of cars and finding the right can be daunting but we mostly know what kind of car we are looking for. The only hurdle is the cost of buying a car. You are most likely to buy a car on finance and financing comes at a cost. Whenever you take out a loan, you will have to make regular payments to service that loan. The rate of interest you get is important as your regular payments will include principal and interest. So, before you walk into a dealership, find out what you can afford. Look at your budget and decide the maximum monthly payment you can make for a car loan. This is where budgeting for a car comes into play.

Often a lot of emphases is placed on getting approved for a car loan. It is not difficult to get approved for a car loan, the difficulty lies in servicing the loan. Just because you have been approved for a car loan does not mean that you can afford it.

The amount you can afford is not necessarily in sync with the loan you can get.

Budgeting for a Car

Affordability

When budgeting for a car remember that the advertised price is never the purchase price if you are buying from a dealer, there are always add-ons. So when you’re working on your budget to determine the amount you can afford, I would recommend adding an extra on the sticker price. Budget for the absolute maximum you can afford, this way you know with certainty your affordability.

Down Payment

Making a down payment towards your car purchase will have an impact on your monthly payments. The higher the down payment, the lower the monthly payments will be.

Down payment will reduce the amount of loan you need which will reduce the total interest over the term of the loan.  Deciding on what should be your down payment is dependent on how much you can afford to pay out of your savings.

Miscellaneous Costs

When budgeting for a car it is easy to make the mistake of just budgeting for monthly loan payments. Loan payments are just one aspect of owning a car. There are a whole host of other costs that need to be considered, such as insurance, maintenance, and gas. You have to be certain that you can cover these costs.

Don’t fit your budget around your car payments, your car payments should reflect what you can afford.

What is the Importance of Saving Money?

What is the Importance of Saving Money?

The importance of saving money should not be taken lightly considering the role it plays in achieving financial stability. Saving is basically when you spend less than you make, the money left over in your savings. Whatever may be your financial situation, saving money is always a smart move. Savings can help meet unexpected costs and help plan for the future. It is a short, medium, and long-term look at your plans and how you are going to finance those plans.

Importance of Saving Money:

  • Can help achieve your goals
  • Provides security knowing you have a cushion financially
  • Provide options to spend when you may not have been had you not saved

There is a long list of reasons to save but a lot of people don’t save regularly or not at all. Most of us would like to save but think we are unable to put money aside. It could be because you are already spending all the money you earn on necessities. While you may feel you don’t have any money left to save, there are ways you can find money to save.

Budgeting is a good place to start. Have a spending plan, and the best way to do that is to start budgeting. Budgeting provides control over your spending and that control, in turn, enables you to save. It is important to realize that we ourselves are the biggest hurdle in our path to saving. Look at your spending and find ways to squeeze out savings.

Automatic saving plans are a good place to start. Most if not all institutions provide options to transfer a portion of your paycheck directly into your savings accounts automatically every month. You will feel the crunch when you first start automatic savings but you will soon find ways to adjust your spending to your new after savings income. Don’t think of this in terms of denying yourself of your hard-earned money, think of it as paying yourself first before your paycheck disappears paying bills.

7 money saving tips

7 Money-Saving Tips

Saving is vital to taking control of your finances. Here are 7 Money Saving Tips to get you started.

High-Interest Debts and Saving

While it’s great if you have decided to save it will amount to nothing if you are paying high interest on loans such as credit cards. You may be paying more on interest than you are saving. The money you are paying towards interest payments is a saving opportunity lost. Car and mortgage payments are medium and long-term loans that are usually not high-interest loans, don’t try paying off these loans before you have tackled credit card debt.

How Much Should I Save?

As a rule of thumb, it is generally considered saving 10% of income a good place to start, if you can save more even better. Always make regular contributions to your savings, if you put aside 10% every month you will likely reach your savings goals a lot quicker.

Should I Save in Savings Accounts?

Keep in mind that simply keeping your money in a savings account may not be the best option. Make sure you are getting the most out of your savings. Your money should be earning more than what simple savings accounts offer, in the current economic climate with low-interest rates savings accounts are not the ideal place to keep your savings. Look at other saving options, talk to your bank.

There is no set rule or secret to follow when it comes to saving. It all depends on your circumstances and your savings goals but it is always better to start as soon as possible. Keep in mind that saving even a small amount is better than saving nothing at all. It is not going to be easy, taking money every month that could otherwise be used towards something you really want is hard. A lot of discipline is required when it comes to saving. Now that we have discussed the importance of saving money, make saving a habit.