It’s that time of year again when use the new year as an excuse to overhaul different aspects of our lives and make financial resolutions. For many new years resolutions involve health and fitness but many people also try to make changes to improve their financial health.
3 keys to making good Financial resolutions
To be brutally honest, I am not a big fan of financial resolutions because far too often the change is temporary. Long-term change requires a change in lifestyle. I call it a long-term change in your financial habits. For resolutions to work, I believe there needs to be three key qualities. Resolutions need to be:
- SIMPLE – If it’s too complicated, it won’t happen.
- SPECIFIC – Vague goals are useless. It’s important to be specific. For example, if you want to reduce your debt, you have to come up with a realistic amount and a time frame. If you try to do too much, it also won’t happen. You are better to one thing right than have a list of 3, 5 or 10 things that you won’t do or won’t do well.
- AUTOMATED – We live in a busy world and the best way to make sure things get done is to make it a priority. The best way to make it a long-term priority is to automate it.
Make Some Financial Resolutions for the New Year
The New Year is a chance to make some resolutions. It is like starting over and doing things differently. Some resolutions involve relationships, personal interests or lifestyle choices. Many resolutions involve either health and fitness or financial fitness. While I am not qualified to help you tone your abs, I can give you some ideas for financial resolutions and tips to help you get financially fit.
1. Get rid of holiday debt
Canadian and U.S. consumers have spent hundreds of billions of dollars on gifts this holiday season.
Debt hangovers from the holidays can be extremely painful. Not paying off your holiday debt can mean high interest payments or that your credit will be tied up while you pay down your debt.
If you're in this situation, make sure you put together a plan to pay off the debt. Don't be overly aggressive in your estimate — you need a workable plan.
- Be sure to pay more than the minimum on each card each month
- Put the most down on the card with the highest interest rate.
- Try to consolidate credit card debt using low interest credit cards or personal lines of credit.
- Curb your spending so your balances do not build up again.
- Destroy old credit cards with high interest rates.
- Once you get ahead, try not to have any balances for longer than 3 months.
Related article: 5 Ways to pay off your credit card debt
2. Create a retirement plan
People spend more time planning vacations than they do planning for their retirement. Statistics show that Canadians are just not doing a great job planning and preparing for retirement. Only 9% of all the RRSP room is being used.
With our aging population, there is going to be more pressure on government benefits for retirement. Demographics, increasing life expectancy, earlier retirement trends are all creating more pressure on Canadians to start planning for their retirement.
Related article: Understanding Government Benefits
If you are not sure how to go about this, see a financial advisor and ask questions like:
- How much do I need to save for retirement?
- What is a realistic return to expect?
- How am I doing financially?
Before you make the call, be sure you have an idea of what you are spending on a monthly or annual basis. You'll need an idea of when you plan to retire and you'll want to be able to articulate some of your retirement visions and goals.
Related article: What is a retirement plan?
The bottom line is don't wait. The sooner you start, the better!
3. Consider high interest bank accounts
Currently, there are many financial institutions that offer a newer way to bank. They pay you higher interest than your conventional bank accounts and they charge you less fees. Welcome to the world of high interest bank accounts.
Related article: How to increase rates in your bank account
The key to high interest banking is that earning money using your bank account can make significant differences. Anyone that keeps higher balances in their accounts should really consider these accounts.
One of the fears of high interest banking is the fear of change and doing things differently. In my mind, you do not have to replace your current bank account or banking strategy. The high interest bank account can complement your existing banking habits. I urge you to open up an account because there is generally no cost to open an account and no cost to close an account. ‘Test drive' these accounts for free and see if you like the idea of higher interest and lower fees. I know it has made a huge difference to my personal banking success.
4. Boost retirement savings
The savings rate in Canada has been under 5% for the past 15 year. I am always amazed at how few people buy RRSPs given the tax benefits and the pressures to self-fund your own retirement income. Most people who filed tax returns were far from maxing the total room available to them. In fact, 91% of the total RRSP room is unused. The median contribution across Canada is only $2,600.
Related article: The online Guide to RRSPs
If you are part of this group with unused RRSP contribution room, it might be the perfect time to develop a plan to start getting money into RRSPs. If you have not started contributing to RRSPs, start a monthly contribution plan, it will be the easiest way to start. If you've already got a monthly contribution set up, see if it's feasible to increase your contributions. If you have a Group RRSP plan through work and are not taking advantage of employer matching and the ease of having contributions deducted from your paycheque, it's a great time to enrol in that plan.
Related article: Employee benefits of a Group RRSP
5. Update your will
You should update your will at least every five years or whenever there is a major change in your circumstances. In the interim, mark your calendar as a reminder to reread your will once a year, perhaps on the anniversary of the date you signed it. This exercise may spark some personal reasons for updating your will.
Related article: How often should you review your will?
What follows is a partial list of technical matters which may have a bearing on your will review. This is a general guide only and if you have any questions you should consult your lawyer.
- Will was written before 1982 and contains a limited marital deduction clause.
- You want to add or remove a beneficiary.
- You no longer keep in touch with your executor
- Your marital status has changed, or a member of your family's marital status has changed.
- There has been a birth or adoption of children or grandchildren since the last will review.
- There has been a change in your health or a family member's since the last will review.
- There has been a change in the value of your estate.
- One or more assets has appreciated or depreciated greatly since the last review.
- There has been an acquisition or change in the ownership of life insurance, pension plans, or other retirement benefits since the last review.
- There has been a significant change in a business situation. -You want to change/add/or delete a guardian, executor, or a trustee since the last review.
- You've moved to another province since the last will review.
- There has been a change in the form of property ownership since the last review.
- You've acquired property in another country or province since the last will review.
- There have been significant tax law changes since the last will review.
6. Take stock and simplify
In the health industry, weight is one of the universal benchmarks to understand your level of health and fitness. In the financial industry, your net worth is the benchmark to use to measure your financial fitness.
If you do not know what your net worth is, take a piece of paper and start figuring it out right now. On the left hand side of the page, list all of your assets. These would be primarily your financial assets as opposed to your personal assets. On the right hand side of the page, list all of your debts or liabilities. On the bottom of the page or the backside, take your assets and subtract your liabilities and you should have your net worth statement.
Related article: Calculating your net worth
Once you have this figure, you should try to make sure you are going in the right direction where your net worth is increasing year after year. Increasing your net worth can be accomplished by either accumulating more financial assets or paying off debt.
Whatever the case may be, it will be much easier knowing if you are making progress if you keep track of your net worth on an ongoing basis. I suggest annually as a minimum.
Common Financial Resolutions
To get you started, I thought I would share some articles revolving around some of the most common financial resolutions I see.
Helping you with the basics
- The best idea is the implemented one
- 6 Financial Habits to Take Control of Your Money
- Money Tip – Know Your Spending
- Money Tip – Calculate your net worth
- Principles of implementing your financial resolutions
Helping you pay down debts
- 5 strategies to manage your debt levels
- Debt might be a good reason not to save
- 5 ways to pay off your credit cards
- Time to Get Rid of Debt
- How much debt is too much?
Helping you save more money
- Principles of saving money
- Useful Tips to Help You Save More Money
- More Tips to Help You Save Money
- The Latte Factor
Helping you with your investments
- Are you taking care of your investment portfolio?
- Practical Tips for Investing your RRSPs
- 5 Timeless Tips for Investing Your RRSPs
- It’s time to review your RRSP portfolio
Helping you protect your finances
- Three legal documents of an estate plan
- How often should you review your estate plan?
- Financial resolution – Get a will
- 10 Things To Know About Tax Planning
- Choosing The Right Executor Is Important
Do you have any other financial resolutions you want to learn about? Whether you call it a financial resolution or a change in lifestyle, or whatever you want to call it, good luck in making some positive changes to your financial affairs!