Metro Money Makeover: The benefits of a buffer

Metro’s finance guru Lesley-Anne Scorgie is almost out of time to help the women tackle their largest financial burdens and teach them to allocate resources.

 The Situation: Yolanda has two expensive months ahead — $500 for movers, a truck and packing boxes as she moves back in with her mother in April plus another $500 for a fun trip to Montreal in early May.Obviously the first is a need and the latter is a want — one that I believe is well deserved given her financial progress to date. When I grilled Yolanda on her plan to pay for these one-off expenses, she confidently responded.“When I stare at my budget I am happy. The numbers don’t lie. I know I can afford these upcoming expenses. But, I will have to reduce what I spend on other things like meals and entertainment for a few months,” she told me.  “I’m making a financial trade-off and I therefore don’t feel guilty.”Included in her plan is an expectation that she’ll receive a healthy tax refund of a few thousand dollars during the month of April.Certainly Yolanda will benefit from powerful charitable tax credits from her regular giving and also a tax deduction from her 2015 RRSP contributions.But, history isn’t always indicative of the future. What if Yolanda’s tax refund is slim-to-none, or worse yet, she has to pay the government? Besides cutting back on her discretionary spending, she’ll also have drain her “buffer” account that she’s worked incredibly hard to build up.And that’s the point of a financial “buffer.”The Lesson:  Naturally most 20-somethings plan their finances optimistically: a tax refund will always be there; a raise is around the corner; a house, car or other big-ticket purchase will cost less than originally thought.And dangerously, that a financial emergency, such as job loss, simply won’t happen.But, life deals a harsh hand at times and, in fact, the average Canadian experiences a financial gut-punch twice each decade.When I lived with my grandmother during university she ingrained in my head that at all times I needed immediate access to a minimum of $1,000 to get out of a financial pinch.She was right. I used that fund three times for burst pipes, a quick move and a hefty car repair bill — all before reaching age 25.I cannot stress how important it is for every modern young person to build-up a financial buffer.As a rule of thumb, if you’ve got credit-card debt, your buffer should be up to $1,000. If not, grow your buffer to the equivalent of three months’ salary.Gone are the days when Yolanda would raid her RRSPs and TFSAs to pay for minor emergencies, trips and vet bills.Amongst many other valuable financial skills such as sticking to a budget and spreading out her expenses more evenly throughout the month (easier on her cash flow), Yolanda has learned that planning for the financial worst and hoping for the best reduces stress and squashes financial guilt.Yolanda's Net WorthAssets           TFSA        $1,000RRSP        $1,100Savings     $175Pension     $4,700Total Assets    $6,975LiabilitiesVISA             $0Master Card   $0Total Liabilities    $0Net worth:  $6,975Published by Metro News March 29, 2016.