How to Maintain Healthy Money Habits Despite the Rising Cost of Living

Living on a budget can be tough—especially when the cost of living is on the rise. As goods and services get more expensive as inflation increases, finding ways to maintain healthy money habits becomes more difficult.

Is the cost of living in Canada rising? What are the common living expenses driving increased costs? Most importantly, what can you do to stay on budget and avoid racking up debt?

What Is the Cost of Living in Canada?

The average cost of living varies from one province to the next. Additionally, there will be differences in the cost of living between urban, suburban, and rural areas. So, it’s important to take a broad estimate of the cost of living with a grain of salt and do some local market research if you plan to move for work or any other occasion.

As of 2022, the city with the highest average cost of living was Toronto at $4,975/month and the city with the lowest average cost of living was Montreal at $3,038/month.

Is the Cost of Living Really Rising?

One of the main driving factors of increasing living costs is the rate of inflation—the increase in the cost of goods and services over time as the purchasing power of a dollar decreases. In April 2022, it was estimated that the year-over-year inflation rate was 6.8%.

However, it’s important to note that inflation is not even across all products and services. Some things might see more inflation than others or even see deflation, or a reduction in cost, because of different economic factors. For example, the price of food rose by 9.7% from April 2021 to April 2022—which was higher than the average rate of inflation.

So, when preparing to deal with inflation, it’s important to know the different monthly expense categories and how inflation impacts each one. This can help you better prepare your budget for ever-changing costs.

Common Living Expenses

What are the common living expense categories and how much should you spend on them? Monthly expenses can be divided into several different categories such as:

1. Housing. The money spent on rent, mortgage payments, property taxes, insurance, etc. that helps you maintain a safe space to live. This is often the largest portion of a person’s monthly living expenses—equal to roughly 35% of your budget.
   
   
2. Food. Food typically accounts for 15% of a person’s monthly expenses—though it’s easy for food spending to rise out of control when the cost of basic foodstuffs rises faster than the national average for inflation (and when people eat out due to a lack of time to prepare meals at home).
   
   
3. Transportation. Costs for transportation may vary depending on how you get around, but can include things like car payments, automotive insurance premiums, fuel, vehicle maintenance, bus passes, parking passes, etc. Usually, this accounts for about 15% of your monthly budget, but situations such as vehicular breakdowns and repairs can make transportation costs vastly exceed your usual budget.
   
   
4. Utilities. Most Canadians spend about 10% of their monthly budget on utility bills. This includes things like electricity, hydro, gas, cell phone, cable, and internet bills.
   
   
5. Debt Payments. When you place purchases on your credit cards or take out loans, it’s important to pay down those debts as soon as possible. On average, about 10% of a budget should be reserved for making debt payments. However, if you carry a large amount of debt, then you may have to divert funds from other expense categories to pay them down.
   
   
6. Savings. Setting aside some money for savings is important for covering emergency situations and avoiding financial disasters. Setting aside about 5% of your earnings for savings can be a good place to start—though if you have a lot of debt, it may be better to use that money for debt payments.
   
   
7. Discretionary Spending. We can all benefit from spending a little on ourselves for non-essential items like entertainment, makeovers, or our hobbies. However, it’s important to not spend too much on discretionary items since splurging can easily lead to racking up debt. Keeping discretionary spending to 5% of monthly earnings can help with keeping yourself entertained while avoiding excessive debt.
   
   
8. Clothing. We all need new threads from time to time—whether for work or just for hanging out with friends. However, most of us don’t need to buy clothes every month, which makes adding clothing to the monthly budget a bit challenging. When you average out the cost of new clothes over the course of the year, it should account for about 2.5% of your monthly budget. Though, some people may need to spend more on work clothes for certain high-wear applications.
   
   
9. Healthcare/Medical. While Canada’s healthcare system is great, there’s still a need to set aside some money for certain costs like eyeglasses/contacts, dental work, and over-the-counter medicines for everyday illnesses. Though costs can fluctuate, setting aside 2.5% of your budget for medical costs can be a good idea.

It’s important to note that the percentages listed for each cost category are only suggestions, not hard rules. Depending on where you live, what kind of work you do, and even your personal preferences, you might want to tweak your budget so that you spend more on one type of living expense and less on another.

For example, say that your workplace requires you to maintain a certain standard for appearance. You might need to tweak your spending to buy more work clothes and beauty/hygiene products to meet your employer’s requirements.

Or, if you find a nice place to live where you can split the cost of rent with someone else or is just plain less expensive than the average for your area, you may find yourself spending less on housing and can put the extra money towards other expenses.

Budgeting Tips for Dealing with the Rising Cost of Living

With the rising cost of living in Canada, it’s more important than ever to start budgeting your money to avoid racking up debt. To help you out, here are a few tips for setting and sticking to your budget:

1. Don’t Just “Guesstimate” Your Expenses!

One of the most common reasons why budgets might not work is that the budgeter assumes they know how much they’re spending on different things without actually tracking their expenses.

For example, food is an easy-to-underestimate expense. Most people think they have a good grasp of how much they spend each month on food, but they might forget about all of the little fast food visits and snack purchases that add up over time. If you eat out, you could easily spend $15 on a single meal. Do that just ten times a month, and that’s $150 missing from your budget that you might not have kept track of!

So, when setting up a monthly budget, it can help to really dig into your expenses to see exactly how much you’re really spending. If you primarily use your debit/credit card for purchases, this can be as easy as going over your monthly statements and seeing how much you spend at different stores or on different bills each time. In fact, this is a good idea for avoiding fraud since it can help you spot purchases that you didn’t make—a common problem with identity theft scams.

2. Focus on Your Debt Over Savings

If you’re currently holding a large amount of debt, it may be better to focus it down by diverting funds from other expenses like savings. Why? Because, in the long run, debt will typically cost you more than what an equivalent amount of money in a savings account would accrue.

For example, if you have a credit card with a 28% annual percentage rate (APR), $1,000 of debt would grow to $1,280 of debt by the end of the year. Actually, it would be more since credit card interest compounds more frequently than once a year, but let’s say it would be $1,280 for simplicity’s sake.

Meanwhile, a savings account might have an annual interest rate ranging between 0.05% and 1.8%. So, that same money, if put into savings, would only grow to $1,018—if you applied that money to the debt from the credit card, you’d still owe $262. By paying off the credit card first, you can save that $262 for other expenses—including putting it into a retirement fund so it can grow.

Investing in a Registered Retirement Savings Plan (RRSP) or a Tax-Free Saving Account (TFSA) would yield better returns than simply putting the money in a standard savings account, but they still might not match up to the speed at which credit card debt can grow. So, it may be better to pay off debt first and then save up money for the future.

3. Seek Out a Financial Coach

If you find yourself having a hard time setting and sticking to a budget, it can help to seek out financial coaching or advice from someone with experience managing money. Remember: you don’t have to go it alone.

Looking for help, whether it’s from a friend or from an experienced counsellor, can help you get an outside perspective on your spending. They might be able to call out a few expenses that you can cut back on or tricks you can use to make your money stretch a bit further.

4. Find Ways to Cut Costs

To deal with inflation and the rising cost of living, many are turning to some “inflation hacks” to try and cut their costs as much as possible. Some things you might want to try to cut costs include:

• Downsizing your home by moving to a smaller/less expensive one—especially if you rent.
• Avoiding automobile ownership if you live in an urban area with good public transport, work from home, or can get around with a bicycle. Some have even switched to electric vehicles to minimize the impact of gas prices while still maintaining the autonomy a motor vehicle provides (though this does require a major investment of money).
• Creating a meal plan to control food costs. This can also help you eat healthier by avoiding high-calorie fast foods.
• Using coupons at the grocery store. Looking at coupon sites for savings on items you were already planning to purchase can help you get more out of your grocery budget.

Get Debt Management Help Now!

If you’re facing an excessive amount of debt, then you may want to find some debt management help. A certified credit counsellor can help you control your debt by placing you on a debt consolidation program (DCP) or, if necessary, recommending you to a licensed insolvency trustee (LIT) for insolvency services.

There’s no shame in looking for help when you need it. That’s why Credit Canada exists—to help people in need get out of debt and get their lives back on track.

Should you need help dealing with debt, setting up a monthly household budget, or weighing the benefits of different debt management strategies, reach out to us. We want to help you.