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‘Tis the season for New Year’s resolutions and I have some ideas concerning your personal finances. And here’s the twist — these won’t cost you one penny! I’m not going to advise you to contribute to an RRSP, or top up your TFSA, or pay down the mortgage, or open a registered education savings plan for the kids.
Sure, those are all good ideas. The problem is that most people don’t have the resources to do all that, especially with the holiday bills flooding in. So let’s focus on some ideas that should leave you financially better off by year-end without spending a lot of money (or any at all).
According to the website www.practicalmoneyskills.ca , which is sponsored by Visa, only 47 per cent of Canadians have a budget. No wonder our family debt levels are so high! Setting up a budget and sticking to it is the key to financial well being. As Wilkins Micawber said in David Copperfield: “Annual income twenty pounds, annual expenditure nineteen, nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
In other words, if you spend more than you earn, you’re in trouble. In Charles Dickens’ day, it was the workhouse. Today you’ll be in hock to the credit card companies at near-usurious interest rates.
There are several free on-line spreadsheets you can use to set up your plan. Check out www.mymoneycoach.ca , www.cba.ca (the website of the Canadian Bankers’ Association), or www.fcac-acfc.gc.ca (the Financial Consumer Agency of Canada). All offer guidance in how to set up a budget that really works.
See how many of these questions you can answer off the top of your head:
The main problem with RRSPs is that people rush to contribute before the March 1 deadline in order to get the tax break and then forget about the plan for the rest of the year. The result may be a retirement plan that is invested in mediocre securities and which underperforms as a result. If your RRSP didn’t gain at least five to six per cent last year, it needs a shake-up. Take a close look at it before you invest any more money.
According to a survey published in November by BMO Financial Group, almost half of Canadians (48 per cent) have opened a Tax-Free Savings Account. However, many of these people still don’t understand the rules governing these plans (77 per cent are unfamiliar with overcontribution penalties, says BMO).
As of Jan. 1, you’re allowed to add another $ 5,500 to your TFSA but before you do take a close look at the plan. Pay special attention to how the money is invested. The word “Savings” in the name appears to have led many Canadians to believe the money must be invested in some type of savings vehicle such as a high-interest account or GIC. That is not the case – like RRSPs, TFSA assets can be invested in a wide range of eligible securities, as long as you have the right type of plan. Holding the money in a high-interest savings account paying 1.25 per cent or a GIC offering 2.5 per cent is not going to shelter much income from the tax folks.
If you are fortunate enough to have an employer pension plan, it’s probably the defined contribution type. That means there is no guarantee of how much income you’ll receive when you retire. It all depends on how much is contributed and how well the investments you select perform.
Typically, defined contribution plans offer a menu of mutual fund choices as well as portfolios and GICs. It takes time and commitment to study all the options, decide which work best for you, and put them together in a well-balanced portfolio.
But here again, it’s worth the time. If you are with your employer for many years, the plan may eventually be worth several hundred thousand dollars and is likely to be your main source of retirement income. So get it right!
With that, my best wishes for a happy and prosperous New Year.