A lot of people who have a variety of debts make the mistake of paying off the small ones first. They do this because, obviously, it is easier for them. It gives them the sense of having gotten at least part of the debt out of the way, albeit the smaller part, with a corresponding sense of relief. It eludes them that larger debts have higher interest rates, sometimes so much higher that they cancel out the smaller debt. In other words, the interest rate compensates the smaller debt in the time you spend paying the latter off. Depressing, isn’t it?

Still, it is hard not to give in to the temptation of eliminating something small, even though it is an illusion. Yet, the divide-and-conquer rule does not apply when it comes to debt. This is why you should focus on the total amount of money you owe, not on the number of outstanding loans. 

The good news is that Canadians are beginning to make good on their debt, albeit gradually. No big growth in lines of credit, loans and credit cards can be noted on the Canadian market. Obviously they are finding the right tactic, which neglecting high interest rates and total debt amounts is definitely not. This is exactly what banks are doing – increasing rates to make up for the dwindling demand for financial products.

One thing that some people are opting to do is consolidate debt. This means rolling the entire debt into one. There is also a lot banks can do to help their clients deep in debt to get out of it, such as showing them the total interest rate they will have to pay over time. This has proven to have a positive effect on the outstanding debt amount in the long run (The Globe and Mail).

The most important thing to do is come up with a working plan to deal with the debt. If you come into extra money, how do you decide what part of the debt to cover? We have determined that you should not necessarily pay off the smaller debts first, but what if you have several large debts? Start by making a list of them. Look at your bank statements and all kinds of old paperwork having some bearing on your debts. In some cases, you can get a free credit report as well. This will help you work out how much you owe, and to whom. (Money Central).

First, you should look at your unsecured debts. These include credit card debt, personal loans, medical bills, and payday loans. These loans ordinarily have the highest rates precisely because they are unsecured. This means you have offered no collateral as a safeguard. So, it is best to get rid of these ones first. The next step is finding a repayment method (PT Money). The method is the means – that is, start working harder so you can make more money. Get a second, third, fourth job. Do not spend money on things you can do without.

Sending your children to private school is not only an important decision, but this amounts to a considerable financial investment. Depending on the location and type of school you choose, tuition fees range widely, with prestigious boarding schools costing over $50,000. This expense compares to purchasing a luxury new car. Naturally, you wouldn’t even think of driving your new vehicle without insurance. While this is true, what about sending your children to a boarding school without first protecting this investment?

You will be usually required to sign a contract stating that the fees you pay are non-refundable. What will happen, however, if you are transferred to another city, lose your job, your child falls ill, or he/ she is expelled? This is where school insurance comes in. It will cost you between 1 percent and 2.5 percent of the tuition fee, but this will give you peace of mind. Even if your kid withdraws before the end of the school year, you will still recoup a good portion of the tuition fees. If the child becomes injured or critically ill or dies, or if the parent or guardian dies, the insurance policy pays out up to 80 percent. In case of bankruptcy or job loss the policy reimburses up to half of the unused fees. Considering that layoffs loom, the economy is still shaky, and tuition fees increase, experts recommend school insurance as a good way of safeguarding the investment.

Buying tuition insurance is not necessary in all cases. This is the case with college tuition given that most universities reimburse part or all of the tuition paid if the student withdraws by a set deadline. Normally, this is within the first couple of weeks of the semester, explains insurance agent David Galvin. In addition, it should be noted that some college policies will pay out only if the student withdraws due to mental-health or medical reasons. (Smart Money) College plans do not cover other reasons students drop out, for example, family problems and academic difficulties (The Wall Street Journal).

The best strategy is to carefully evaluate the risks. According to certified financial planner Tim Higgins, college policies are hard to sell. After all, we are talking about 20-year-olds and their health, notes Higgins. If your children attend secondary or private elementary school, however, buying school insurance makes sense. This is especially true for parents that move a lot or those working for a company which is facing layoffs. Then, some parents think their skinny minny is just a little angel, but it is a good idea to check whether they are struggling with academic or disciplinary issues. This may put them at risk of being transferred or, God forbid, kicked out (Smart Money).

Before buying an insurance policy, it pays to read the terms and conditions, especially if your child is attending a more expensive university or college. For example, some school insurance plans have a preexisting condition exclusion of 6 months to 1 year (The Dallas Morning News).

HELOCs may sound like a great idea, but they are often overrated. A home equity line of credit is a very easy way to get money, yes, but that could be their only advantage, as many debt-ridden Canadians are finding out. The latest statistics show that 36 per cent of Canadians have a home equity line of credit, but the majority of them do not know very much about how these credit lines work. It is also true that on some occasions HELOCs offer low interest rates and flexible borrowing terms. The low rates are contingent on the fact that people use their real estate property as collateral. But what happens when the rates increase?

Experts claim that these credit lines encourage people to spend more than what they normally would. What are HELOCs most often used for? Usually they are used to make home repairs, buy a car, make a down payment, or go toward a child’s tuition. Some rather frivolous reasons include going on vacation. What is also surprising is that a large number of people who get a HELOC do not even use it. The minority of those with a HELOC admit to having read the fine print and/ or having consulted a lawyer before making the decision to get it.

Sometimes HELOC agreements are such that you are prevented from using your credit card or your credit rating is affected. In some cases, you cannot sell your home if you have not paid your HELOC back because the bank has claims to it. This is something many Canadians are finding out the hard way, too. Few people know the important things about a HELOC, such as the fact that the bank you get it from puts a mortgage on your home (or a second mortgage if you already have one). Then, any credit card consolidated under the HELOC could be canceled when you pay the credit line off. What is more, having a HELOC can make it difficult to get a loan from another financial institution (The Globe and Mail).

With a HELOC, the lending institution sets a maximum amount of money that you can get, and the full amount is not paid in advance. This is how a HELOC differs from a home equity loan. When you get a HELOC, you are given up to 15 years to use it, and you only pay interest during this period. At this time, it is impossible to refinance or sell your home, of course. You can repay the loan without penalties in this period. If the lender demands that you pay at the end of these 15 years, you will have to refinance. If no such demand is made, you have to start repaying the loan gradually (Canada Trust).

It should be noted that the interest rate on a HELOC is calculated on a daily basis, as is done with credit cards. Interest rates fluctuate, and this goes with a high degree of risk. All changes in the prime rate affect the HELOC, which in turn affects your mortgage payments. You cannot establish a fixed rate with a HELOC.

Creating a rental unit and becoming a landlord, you put your house to work for you. This looks like a no-brainer, especially if you have a spacious house in an area that is preferred by renters. You make some extra income, which is great if you are living on a pension.

One obvious question here is whether you will feel comfortable sharing your place with another person. According to Antara Financial Group’s president and financial adviser Judith Kane, renting out a basement apartment or another part of your house is a good idea if you can handle sharing your home with someone. This is a fantastic way for retirees to supplement their pension. Moreover, if you have a mortgage loan, this is an opportunity to repay it faster than you normally would. Renting out a part of your house is also a good idea if you do not have a significant retirement income, you have lost your job, or your savings fund is almost depleted (The Globe and Mail).

In addition, income property is a great asset to have when approaching retirement. If you do not have a pension, renting out means money coming in regularly, explains Certified Financial Planner Barbara Pietrowski.

If you have a spacious house, you can choose to rent out a part of it, but what if you do not have enough space yourself? You may think of buying an income-producing property. At the same time, buying a rental property does not mean you have to generate profits immediately, explains landlord and author Andrew McLean. The purchase may still be worthwhile, especially if you have a time horizon to retirement and are stable financially. The reason is that the value of real estate is set to go up, rents are going up, while costs are not, especially if you apply for a fixed-rate mortgage, notes McLean (he is the author of “Making Money in Foreclosures”, and “Investing in Real Estate”). Even if you are not making much in the beginning, eventually, your income will increase over the years (Bankrate).

There are many advantages to becoming a landlord but what are the downsides? To begin with, income property is not the best choice for everyone. And a dead-beat renter can easily ruin one’s budget, while there are tax and bookkeeping headaches and upkeep expenses (Time Moneyland). Second, rental properties are often expensive, and financial institutions usually require a substantial down payment. If you apply for a mortgage loan, your bank will also charge a higher interest rate compared to that of an owner-occupied home.

Another downside is that rental properties are an illiquid asset. If the owner is forced to sell, he may have a hard time, especially in the midst of a down market. Thus, he may not get a reasonable price for the property. Renting out poses other problems as well. For example, those who are repaying a mortgage loan and cannot find a renter when they need one may be forced to pay off the mortgage by themselves (Bankrate).

Most people will agree that insurance is important and yet it is expensive to have. How to lower your home and auto insurance premiums?

You may be surprised to find out, but the best thing to do is talk to an insurance agent before you buy a house. Chief underwriter and vice president of TD Insurance Henry Blumenthal explains that there are houses with problems so serious that they invalidate the home insurance or increase insurance premiums to a level that makes them unaffordable.  For example, a routine home inspection may reveal that the house had experienced serious water damage that will cost thousands to fix. Or the house may be built in an area where the insurance company often receives water damage claims. Even after repair works, the home will be susceptible to damage. This is one example how an insurer’s experience and insight can help home buyers make the right decision, which is particularly important when it comes to insurance premiums. To this, insurers are mainly concerned with 2 factors when they assess risk. One is the potential loss that may result from a particular problem and the other is the frequency of occurrence (The Globe and Mail).

There are other reasons to get a quote before buying. Seemingly identical houses may carry different premiums because of the many factors that determine the cost of insurance. These include proximity to emergency services such as hydrants, police station, fire department, and others. Once you buy a house, there are other ways to lower your home insurance premium. You can install an alarm system and protect your house against hurricanes, earthquakes, and other natural disasters. This is particularly important if the area where you live is prone to such. You will lower your premium if you add features such as storm shutters or a reinforced roof. Improving your credit score will also help as insurance providers often run a credit check before giving quotes. Finally, it is a good idea to buy all insurance policies, be it homeowner’s, auto, and so on from one insurance provider to get a discount (About.com).

Buying your auto insurance from the same company you bought your home insurance is one way to lower the premium. You can also consider forgoing coverage you do not need. For example, you may drop comprehensive or collision coverage if you have an old vehicle with a low market value. Having such coverage is often useless because the cost of the insurance may be as high as the amount on any claims made. In addition, it is a good idea to buy a low-profile vehicle. Buying a car that is expensive to repair increases the premium. Opting for safety gear is another way to qualify for a discount. If you have daytime running lights, anti-lock brakes, automatic seat belts, and air bags, you are likely to qualify for a discount. Anti-theft devices (e.g. an alarm system) will get you additional savings. Finally, you may want to look for insurer providers that feature low-mileage discounts to further lower your auto insurance premium (MSN).

We could argue for a long time as to which form of infidelity is worse – financial infidelity or infidelity in the strictest sense of the word. In both cases, it is possible to get your life (and that of your partner) back on track and to overcome the damage. Again in both cases, this will take a lot of hard work for both of you.

If your spouse declares bankruptcy, it is very likely that you are going (or have gone) under too. The first step to rebuilding your spouse’s finances and credit is calculating exactly how much you have left to pay off and how long it will take. If you are still in the process of declaring bankruptcy, this probably won’t help much, but it will be helpful to the degree that you will not lose hope. And you should not, indeed. There is life after bankruptcy.

The next thing to do is figure out how much money you need to cover the necessary expenses. By this I mean the expenses you cannot do without. These include food, utility bills, shelter costs, insurance, child care and rent/ mortgage payments, as well as mandatory minimum loan or credit payments. Keep in mind that you may not be earning enough as a family even to cover must-haves. The latter expenses should not exceed 50 percent of your net income. A lot of people manage their debt successfully thanks to the 50-30-20 budget rule. The “50” in this rule goes for the maximum percent of your income that should go toward must have expenses. The “30” goes for wants – holidays, gifts, clothes, gadgets, and other unnecessary but pleasant little things. The last “20” goes for paying off debt. If your spouse has declared bankruptcy, he will most likely be relieved of paying a large portion of his debts, but he will still have to make some kind of payment, and it is probably going to be quite substantial. 20 of his income should go toward these debts.

Despite the difficult time you are having, you should set aside some money for an emergency fund as well. It does not have to be anything substantial – 700 Canadian dollars will do. Sustaining such a fund will help you start living from paycheck to paycheck and getting used to it.

It may be good to know that if you have not signed on a contract or agreement to this end, you are not responsible for your spouse’s debt by law. If you have a supplementary credit card that you have accumulated debt on, then you bear responsibility. Even though you are not responsible for his debt, his declaring bankruptcy will affect your day-to-day finances and family budget. What can you do? You can stand by him and support him as he goes through the steps of declaring bankruptcy. It is your duty, if you helped him get to where you both are. On the other hand, if you had no idea he was having financial problems, this can come as a shock that you need to cope with before you can give him a shoulder to cry on.

Being self-employed means running your own show, but at the same time, there is a degree of financial insecurity to it. Those who take salaried positions enjoy a variety of benefits, including retirement savings, steady income, sick leave, paid holidays, paid vacations, and more. These do not apply to self-employed persons.

According to Joseph D’Agnese and Denise Kiernan, authoring The Money Book for Freelancers, Part-Timers, and the Self-Employed, there are three types of accounts self-employed persons should have – one for retirement, another for taxes, and a third for emergencies. Called the Holy Trinity, this system is said to be paramount to growth and financial peace. The authors recommend starting small, setting aside just 3 percent a month into a ‘sunny day’ savings. Then this amount can increase to 5 percent, which, if you get a check of $1,500, is just $75 (less than a night partying with friends). However, it is enough to get going.

Many experts advise to open an emergency account and keep the equivalent of 3 to 6 months of living expenses. This is for persons who have salaried positions. If you are self-employed, part-timer, or freelancer, it is best to have at least 6, which makes for a secure cushion (The Globe and Mail).

You may also want to draft a plan every month, matching up expected expenses with your income (which fluctuates). This is helpful in encouraging you to be a mindful spender. Not only that, but you can see the real numbers, which may motivate you to try harder and earn more so that you can afford some luxuries after meeting the basics. In any case, try to hit a zero balance at a minimum. If you have an emergency fund and have unexpected expenses, that will be great. However, if something pops up, like a fridge repair or a forgotten birthday, and you don’t have savings, you should cut your spending somehow.

Persons who work salaried jobs know how much they earn, which makes it easier to develop a financial plan. Is it that simple if you are self-employed? To find out your baseline income per month, you should take your gross income over the last 5 years and divide by the number of months (60 in this case). If you have commissioned income, it is quite likely that you see considerable swings within this period of time. However, you will get a good idea of what to expect as a baseline income.  How to go about saving then? Say your monthly gross average is $3,600. If you have had $4,600 in one month, put the additional $1,300 into a money market interest bearing account. If you build an emergency income fund with a 12-month reserve, you will be prepared for periods when money is tight. There are many benefits to not working as a full-time salaried employee, but obviously, financial and income stability is not among them (Single Minded Women). Once you’ve built your emergency income fund, you can keep up putting money into your money market account. This is a good time to think of saving enough to invest. If you run your own company, you may consider investing in business-owned real estate, for example.

US tourists who come to Canada think that gas is cheaper than back home. Not really true – they compare gas prices per gallon, but in this metri-cized country, it is measured in litres. The reality is that in Canada, gas is still around $2 more per US gallon (Market Watch). And while crossing the border to fill up your tank may be out of question, there are some ways to save money on gas.

One way to save on gas is to park further way rather than circle around to find the perfect parking spot. Eventually, you end up settling for one at the back. Walking to get to the mall or store may look like a waste of time, but it’s definitely not a bad thing. Try to park in the shade if possible. Why? When your car is cool, you will not be tempted to turn on the air conditioning. Less gas will evaporate from your car’s tank, which turns into savings. You may want to buy a shade for your tinting and windshield to save even more.

If you shop from your home, this is one more way to save money on gas. Look for free shipping deals and you will find plenty. By shopping online, your car spends more time in the driveway. If you must go out, however, be sure to check the traffic report. You will need more gas if you spend long hours sitting in traffic; so, it pays to look at the traffic report before going out (About.com).

This is not all you can do. According to statistics, nearly 1 in 4 cars is in need of an air filter replacement. Your gas mileage will improve by up to 10 percent when you have the old filter replaced by a clean air filter. What does this mean in terms of cost savings? You save 20 cents per gallon. You probably don’t think of poor alignment as a reason to spend more on gas, but only as a cause for tires to wear out quicker. However, this makes your car’s engine work harder. You will save up to 10 percent on gas by aligning the tires. Speaking of tires, over one forth of cars has deflated tires. A loss of close to 3 percent in fuel efficiency is caused by an under-inflation of 7.5 pounds. You will save 6 cents a gallon by inflating the tires. Now, do you remember when the last tune up was? Your mileage will improve by up to 4 percent if your engine is property maintained. So, you save 8 cents per gallon taking care of this. Finally, make sure you check your gas cap. This may come as a surprise, but close to 17 percent of vehicles on the road have missing or broken gas caps. This may not sound like a big deal, unless you care about environment, with escaping fumes releasing smog-causing compounds. However, if you replace the gas cap, you will improve the fuel mileage as well (the Daily Green).

Having roommates can be difficult for many people, either because they have never shared a flat with anyone before or because they simply are not good with people. College is when you usually end up with a roommate for the first time – studies show this is the case for 75 percent of all people – but college roommates are not the only issue. The real issue is learning to budget and share expenses with other people. In this sense, college can help you prepare for married life, especially if you have moved in with a college sweetheart.

Joint budgeting starts with individual budgeting. This means you have to make your own budget first. You cannot work anything out with another person or people if you can’t work it out for yourself. If you are living with someone who blew their scholarship or grant on new clothes or football tickets, you do not have much of a future with them. Enjoying sound joint financial management is out of the question here.  

Hopefully, you have something in common with your roommate, because this will eventually make joint budgeting easier. However, the personal budget should include all your revenue sources and respective expenses, be they fixed, periodic, or incidental. And hopefully, the former exceeds the latter. Calculate how much you individually spend on food, bills, and entertainment. Then talk to your roommate about your financial philosophy. Are you going to share everything or keep your stuff to yourselves? It can be hard to divide grocery, furnishing or cleaning expenses, so this is something you should definitely talk about. It can be easier to split bills, although arguments could result from this too, as in, “You leave the light on in your room all night” and “you leave the heater on when you go out, so why should we split the bill even?” They would be right about the heater. If anything, it is dangerous to do this. Decide at the beginning which expenses you will split even and which you won’t. The person getting the better or best room should probably pay the bigger part of the rent. If you have cable TV but one watches far more frequently than the other, you wouldn’t want to split even either. Also, decide how you will make payments. If there are two of you, one could write the checks for all of the individual bills every month and the other can cover his part by writing one cheque each month. You could prepay all the bills at the beginning of the month or make two payments a month, or pay at the end of the month. This is something you should decide on. You can also pay the bills as they come in. You can pay by card, cash, or check. One could pay by card and the other returns his part in cash at a later time.

It might be a good idea to write a contract outlining the terms of your agreement, including who pays what and how. It need not be signed by a notary – you can use it to avoid miscommunication and ensuing arguments. Or, if you want to be 100 percent safe, make it official.

You just spent a couple of hundred dollars for clothes and school supplies, but you know this is not the end of it. You will be parting with money until June. There are book fairs, class parties, hot lunch programs, after-school gymnastics, and what not. Thinking of these, it is surprising that many families are not prepared to meet these extra costs.

True, more parents in Canada are budgeting for back-to-school shopping in 2011 compared to last year, but in terms of percentages, these are 34 and 29 of respondents respectively. Moreover, only 50 percent of those who are budgeting follow their budgets perfectly. Some 42 percent of parents think they are likely to overspend, and 8 percent have overspent already (Ipsos Reid poll).

It is easier to have this pay-as-you-go mindset if you have one child, but what about parents of three or four children? Budgeting may be key, especially if you have to choose between Lunch Lady, milk-and-cookie snacks programs, pizza days, and the like. School-year expenses can vary quite a lot depending on the type of school, whether the parent council is active, and of course, the age of the child/ children. Some parent councils are good at fundraising, and they subsidize field trips, team uniforms, and other school expenses, while others leave it to parents to cover the costs, explains author of Money Smart Mom: Financially Fit Parenting Sarah Deveau (the Globe and Mail).

What if you are one of those parents who have to meet all school-year expenses? The key to budgeting is to reduce expenses. One thing to do is sell outgrown clothes and unneeded supplies from last year as to raise funds for this school year. You can offer these to a consignment store, sell them on eBay, or organize a yard sale. Reusing is an alternative to selling. You may find notebooks, which have only a couple of sheets ripped out. And the lunchbox or backpack from last year may be as good as a new one. Sport equipment often lasts for more than one season, and the computer is certainly not a piece of equipment to change every couple of months. As most kids, yours probably want news things.  If money is tight, however, you can explain this to them. Even better, you may want to explain to them why equipment and supplies from last year are as good as new stuff. Moreover, buying brand new things sometimes amounts to spoiling, which is not the best of ideas. Replace items that are really past their usefulness and those that are outgrown.

Pay attention to loss leaders. Some discounters sell items like scissors, glue, pencils, paper, and so on for very low prices just to get clients in the store, hoping that they will buy everything there. Why not buy the cheapest there and walk out?  Finally, do not over-promise – tap dancing, jazz, yoga, or other classes, especially if … you have three children.