Financial resolutions for the new year
Happy New Year! The New Year is a chance to make some new year’s resolutions. It’s a time to think about the things that went right and the opportunity to change the things that did not go so well. Somethings are out of our control but there are always some habits and activities that can make a difference towards improvement. In some ways it’s like having a chance to start over and do things differently. Some New Years’ resolutions involve relationships, personal interests or lifestyle choices. Many resolutions involve either health and fitness or personal finance. While I am not qualified to help you tone your abs, I can give you some tips to help you get financially fit.
What does it mean to be financially fit?
In the health world, we often use weight as the benchmark. When we use weight as a health benchmark one study by Statistics Canada, suggested that 36.3% of Canadians are overweight and 26.8% are considered obese.
In personal finance, we do not have a common benchmark like weight to determine whether you are financially fit. Unfortunately, there are too many facets of financial planning like net worth, investment assets, income, life insurance, estate planning, tax planning, income, budgeting, and banking that make it difficult to find a universally accepted benchmark.
3 keys to making good new years resolutions
To be brutally honest, I am not a big fan of New Year’s resolutions because far too often the change is temporary. Long-term change requires a change in habits and lifestyle.
Related article: Key habits to financial success
For resolutions to work, I believe there need 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
Here are some practical ideas for new year’s resolutions for improving your finances and tips to help you get financially fit.
1. Calculate your Net Worth
Just like a weight is a benchmark for health and fitness, your net worth can serve as a useful benchmark for financial wealth. In order to assess your future progress of wealth accumulation, you will need to know your net worth. The calculation is as simple as taking all the assets you own and subtracting the debts you owe. If the answer is a negative one, then the first thing you will need to do is pay down your debts.
As simple as this sounds very few people actually take the time to calculate your net worth. Just like most people know how much they weigh, you should know what your net worth is. Your future goal will be to increase your net worth year after year.
Related article: How to Calculate your net worth
2. Paying Down Debts
After the Christmas season, many of us accumulate debt and especially the high-interest credit card kind of debt. There are three golden rules for paying down your debt. First, pay off the highest interest debt first like credit cards. Second, pay off non-deductible debt before deductible debt and third, don’t get back into debt once you have paid off the debt.
Related article: 5 simple steps to get out of debt
3. Life Insurance
One area of personal finance that is often overlooked is the area of life insurance. The golden rule to life insurance is to only have life insurance if you need it. There are three basic reasons why you might need life insurance. The first is to ensure your debts like mortgages or lines of credit. This way if something happens to you, your loved ones will not have the burden of debt payments. The next reason to have insurance is for income replacement. If you were to pass away, would your family continue to need your income? If so, put life insurance in place to create future income. This is the area most overlooked for proper insurance coverage. Finally, insurance can be used to cover expenses like funeral costs and taxes. Make sure you have the right amount of insurance.
Related article: How much life insurance do you need?
4. Forced Savings Plan
It is this time of year when Canadians are considering investing in RRSPs to save a few bucks in taxes. What I find amazing is that 83% of those that file taxes have an unused RRSP room and less than 15% of all the total available room for Canadians is being used. Financially fit people will maximize their RRSPs and the best way to ensure that you have money invested is to set up a monthly contribution plan.
RRSPs are not the only place to save money. Canadians should also look at the Tax Free Savings Accounts as either a compliment or an alternative to the RRSP.
Related article: the Best way to save is to pay yourself first
5. Estate Planning
The most basic aspect of an estate plan is the Will. Will ensures that your assets will be distributed according to your wishes. Proper Will planning will help you to minimize taxes and ensure that you maximize the assets that can be distributed to your benefactors. Make sure you have a Will and that your Will gets updated regularly.
It’s also a great idea to review your beneficiary designations on your RRSPs, TFSAs, and Life insurance policies to make sure they are up to date with your life circumstances.
Related article: Popular estate planning questions
6. Living Benefits
Living benefits insurance refers to insurance that protects against the risk that may occur while you are still living. Disability insurance protects you in case you get disabled and can no longer work. The newest living benefits insurance is Critical Illness. Cancer, heart attacks, strokes, and other major illnesses are on the rise and the need for critical illness insurance increases. If you do not have critical illness insurance, be sure to look into some coverage. It may not be cheap but your chances of collecting are pretty good.
For a couple of decades now, I have preached the merits of high-interest banking. There are two key benefits to high-interest banking. Firstly, you start earning a much higher interest rate than your conventional bank account. Secondly, most high-interest bank accounts have no fees. If you are not earning interest in your bank account and have monthly fees, be sure to learn about alternatives.
8. Get Smart About Taxes
Understanding your tax situation is one of the most important aspects of financial fitness. If you don’t believe me, just look at your tax return to see how much of your hard-earned income goes to income tax. Add in all the other taxes like property tax, gasoline tax, GST, etc and you’ll understand why, according to CCRA, Canadians pay on average 21.6% of their income to tax.
Related article: Canadian tax brackets – Marginal tax vs average tax
9. EMERGENCY FUND
We all know the importance of having an emergency fund. 2020 reminded us of that importance. An emergency fund is a pot of money that is easily accessible. There is lots of debate over how much you should keep in an emergency fund but most commonly you will read that you should have 3 to 6 months of income in a place that you can access in case of emergencies.
10. Re-balance the Portfolio
It is so tempting to overhaul portfolios today in hope of making drastic changes to prevent further losses and downside risk. This in itself may be the biggest risk. Rather than make huge overhauls, try the strategy of rebalancing the portfolio. Simply put, you look at the overall allocation of your investments a year or two ago and compare those allocations with the portfolio today and bring the portfolio back to the original investment allocation. Re-balancing will force you to buy more of your losers and sell some of your winners. I know that may sound strange but it is a systematic approach to ensure that you win over the long term.
Related article: Re-balancing the portfolio is the key to success
11. Education funding
If you are saving for your children’s education, you should seriously consider a Registered Education Savings Plan (RESP). Next to the immediate tax deduction of an RRSP, the RESP is one of the best strategies to take advantage of ‘free’ money from the Canadian government. The RESP allows you to contribute up to $2500 per year, per child into an RESP. and qualify for the Canada Education Savings Grant (CESG), which is 20% or $500 of government money. If you have not maximized the $2500 RESP contribution in past years, you can make up for the free money this year by contributing $5000 and getting $1000 of free money.
Related article: RESP contribution rules
12. Balancing Cashflow
It sounds so basic because it is. Just like exercise and diet are the keys to health and fitness, balancing your cash flow is one of the keys to financial fitness. The formula is so simple –spend less than you make. With financial institutions so readily willing to give out credit cards and lines of credit, it is so easy for all of us to spend more than we make. The problem is it eventually catches up with us to the point where we have too much debt. No matter who you are and how much debt you may or may not have, budgeting is an essential part of life. Take the time to track your expenses for at least three months and you’ll have a pretty good idea of where your money is going.
Related article: Understand where you are spending money
There you have it – my top 12 new years resolutions for improved finances. The truth is that these are the top 12 resolutions for any year. Sometimes we try to complicate things so much when the answers are really simple. Whether you are just starting your financial accumulation or you are well into retirement, there’s something here for you. To ensure that you have some chance of success fulfilling your financial resolutions, try to work on only one or two ideas rather than trying to tackle all twelve. Your chance of success will improve dramatically.
Principles of implementation
Coming up with financial resolutions or goals is one thing but sticking with it and making it happen are another. Unfortunately, for many people, resolutions don’t work. For example, why is it that gyms are only busy for the first few weeks of the year? Why is it that home fitness equipment gets used for a month or two but then sits and collects dust for the rest of the year?
The results of financial resolutions are much like the results of fitness resolutions. Most people tend to go back to the habits and routines they are used to. This shouldn’t really be a surprise to anyone because we are all creatures of habit. That’s why most of us watch the same 10 TV channels most of the time despite having 250 choices. Or why we wear our favorite outfits over and over despite having a closet full of options. Or why we drive to work the same way every day and listen to some radio station and eat at the same menu items at the same restaurants.
In order for resolutions to work, they need to become longstanding habits in our daily routines. These habits need to become second nature. The reason most resolutions don’t stick is simply that it is very difficult to change our habits. In order to change your habits, you need to understand these 5 principles of implementation. These are principles in my life that I try to live by.
- Find Focus and simplicity– The great late Jim Rohn, profoundly said “There are half a dozen things that make 80% of the difference in anything you do. Focus on those half a dozen things as they will make most of the difference.” Far too many people spend too much time on the 20% that has little impact on the outcome. To find focus, you need to set some goals and stay focused on those goals! There’s something to be said about keeping it simple!
- Change your lifestyle – Far too often change is temporary. You see this in the gyms right after the new year. They get really busy for the first couple of months and then things start to slow down again because too many people go back to their old habits. To be successful over the long haul, you must make everlasting changes and the only way you can do that is to change your habits. Steven Covey says it takes 21 days to change a habit. In my opinion, it takes 21 months to forever change your financial habits.
- Just do it – Nike said it best. You see, I am in the information business. I provide lots of great ideas but ideas are just ideas. The best ideas in the world are the ones that are put to work. They are the implemented ideas. You are better to do and fail then to not do anything at all. And if we think back to point number 1, you are likely to be more successful by doing fewer things that are important and do them well than trying to do too many things poorly. You can have all the information in the world but if you don’t do anything with that information, what good is it?
- Take responsibility – The hardest thing to do is to recognize that you are responsible for where you are today. It’s much easier to blame other people or circumstances but remembers, you hold considerable power. When you do hold yourself accountable, the good news it the future is yours to change! Stop making excuses, stop whining, stop blaming. Get focused on the things you need to do to change and improve and get started. If it helps you, find a friend to keep you accountable. Or get an advisor to keep you on track.
- Stay Disciplined – Life is busy and full of temptations to take us off course. The key firstly is to have a course or a plan or a road map. Once you have the plan, then the motivation to get started, you need the will power to keep it up until it becomes a habit. Steven Covey says it takes 21 days to change a habit. Given the history of new year resolutions, I think it takes longer than 21 days. Whatever the time frame is, the bottom line is changing your habits requires conscious awareness, continuous effort, and significant discipline.
- Find Support – Most things we accomplish in life, we accomplish with the help of others. If you want to get ahead financially, it often helps to have someone that supports you. Find people that have similar goals and want to get ahead financially. If you are competitive, try to find others to help you stay motivated to succeed.
Some say knowledge is power but at the end of the day, it’s up to you if you want less debt, more money, more wealth or whatever your financial goal you desire. Resolutions are great to create some motivation but challenge yourself to try to change your habits for a lifetime of wealth.
I was wondering what your opinion is regarding taking equity out of the house you own (or almost own), remortgaging and investing that equity money???
Sold the farm ,resulting in extra cash: my TFSA is maxed out~ I do not have an RRSP ~at 70 years old ,is it practical to open up a RRSP ?
Jim I have a question. I get Cpp 969 and change I still work and pay into CPP as I have not maxed out the full entitlement. I question if I should continue paying in and how will I know when it no longer in my interest to continue to pay.
Hi Barbara – If you’re already receiving your CPP retirement pension, any further CPP contributions create post-retirement benefits (PRBs). Read this article to better understand the payback of PRBs.
Hey Jim….you mentioned the importance of finding high-interest banking. That is getting harder and harder to find in this economic environment. Do you have any recommendations for reputable Banks that offer good savings rates?
No such thing as high interest savings accounts today! I believe the best rate you can get is with EQ Bank (digital) at 1.50% interest rate.
Lisa you may want to look into something like a BMO HISA (BMT104), which is currently paying me 4.10% for my short term savings. Minimum deposit amount of $1000.
Hi, does anybody know if the 25% reduction in the minimum amount required withdrawal from a RRIF that was in effect for the 2020 tax year will be extended to the 2021 tax year.? Regards…
Don’t forget to set realistic and achievable goals. Meeting and perhaps exceeding those goals, however small, will pave the way to greater success.
I have seen numerous people get discouraged and walk away from their goals and dreams because of failing to meet an early on goal that was unrealistic from the start.