New Years Resolution
Happy New Year!
As with every year, many of us have made promises to ourselves to improve this year. Most of us plan to join a gym, lose weight, or just be more physically fit. Another very popular New Year’s Resolution is to become more financially fit. Here are some tips on how to succeed.
Make a plan:
Write it down and stick to it. Just saying you’re going to do it isn’t enough. Write out what your goals are and how you plan to get there. It may be easier to focus on the smaller steps you’re going to take, since the bigger goals can take a while to reach and you may become discouraged. By focusing on each step, you know you are getting closer to where you want to be every month.
Do not pay more tax than you need to:
Canadians are still not taking advantage of RRSPs the way they should be. Every dollar that goes into an RRSP earns money, tax deferred, from that date forward, AND the government will also send you back the taxes already paid on it, based on your current tax rate. So for example, if you are taxed at a rate of 30% and your goal was to save $10,000 this year, by saving it in an RRSP you will pay $3,000 less in taxes, which you can use for further savings, or towards reducing your mortgage or other debt.
Make it automatic:
Many banks and financial companies have been trying to sell their automated savings programs lately. These are not new products: Actually, they’re not products at all. Whether you are saving a specific amount in your RRSP, maximizing your TFSA, or setting up an Emergency Fund, you can have an automatic withdrawal from your bank account deposited into virtually any savings product. Its fast and it’s easy, and most importantly it’s smart. Regularly scheduled, pre-authorized payments reduce volatility (see our article "Who Should Invest Every Month? Maybe You!"). They are also more likely to be viewed as necessary bills, therefore ensuring you will have the money available. If you plan to just save “whatever money is left at the end of the month,” you will probably find there never seems to be any and your New Year’s resolution will not last very long.
Treat bonuses as bonuses:
Many of you have jobs with a set salary, but are often entitled to, or fortunate enough to receive, a bonus. This is not part of your current cash flow and should not be used when creating your financial plan. If you create a plan excluding bonuses, they will truly be bonuses when you receive them. When a bonus is received, you should refrain from splurging on consumer goods; use it to reduce debt, set up an emergency account, or top up your TFSA or RRSP.
Buy your TFSA EARLY:
Even more under-used than the RRSP is the TFSA. This plan allows Canadians to contribute $5,500 annually(up from the original $5,000) to a savings account and never pay tax on any of the growth. Most Canadians have not started taking advantage of this great opportunity and many of those who do take advantage, do so late in the year. The thing to remember with a TFSA account is that, unlike an RRSP, there is no tax advantage on your deposits; the advantage is on your growth. With that in mind, you should have the money in the TFSA account as long as possible so you can earn as much as possible to maximize your tax savings.
Build an emergency account:
Most experts agree that every family should have an emergency fund of 3-6 months expenses. This is to protect you against the unexpected. It should also be noted on your 2011 financial plan what you consider an emergency: You should not be dipping into this money because your favourite band is coming to town or your tan is fading and you need to head south. This is for real emergencies; your car breaks down or you get laid off from work. When an unexpected obstacle stands in your way, an emergency fund will allow you to step around it and keep your New Year’s resolution on track.
Have the right insurance in place:
The best laid plans of mice and men oft go awry. If you do not have proper protection in place, it does not matter how good your intentions were or how perfect the rest of your financial plan was, it can all be lost. There are many risks to your new financial plan. It is usually cheaper and easier to transfer these risks to an insurance company than try to prepare for them by yourself. A disability, critical illness, or untimely death of a loved one can all have serious financial consequences on top of the obvious emotional burdens. Make sure these issues have all been addressed. You want to be able to take care of what matters most during a difficult time without having to scramble to fix your financial plan.
Following these steps can help ensure that on December 31, you will look back, smile and say, “I succeeded at my New Year’s resolution.” The first step is always the hardest. The professionals at Langlois Financial Services can help you to create your own written financial plan and start implementing it. Who knows, maybe next year you’ll dust off the weights in the corner and give them another chance.