CALGARY - The holiday bills will start rolling in any day now and it's the time of year when a lot of Canadians start to think about their overall financial picture. It can be scary time for those without a full understanding of their situation or without any goals or direction, say financial planners.
"For many Canadians, a lot of them find financial planning mystifying and don't put solid goals in place," says Debbie Ehrstien, a financial planner in Calgary with RBC Wealth Management.
Getting financially fit in the New Year is just as important - if not more - as those elusive resolutions to lose weight, quit smoking or just eat healthier. Canadians' household debt is now rising faster than Americans. A recent survey revealed two thirds of Canadians don't work for a company with a pension plan. Only about one third contribute to an RRSP every year.
"January is a fantastic time for people to sit down and set out some investment goals, both in the short term and the long term," says Greg Allen, divisional sales leader of retail investments for Bank of Montreal. "That's where most people fall short."
It all starts with a budget, or a "spending plan," as Ehrstien prefers to call it to remove negative connotations, and establishes a few clear goals. "Putting those dreams down on paper is really the first step to anybody realizing them," she says.
If you increase your savings - by both reducing debt and putting money aside - by 15 per cent a year, you will double your net worth every five years. One of the best ways to assess how successful you are with your financial plan is to track your net worth annually. "By taking a look at this snapshot, it's a good check to find out how they're doing," says Ehrstien.
Most banks have several online tools available to get started, and nothing beats an in-person assessment from a qualified financial planner, but here are some key things people need to think about when setting out to get in peak financial shape in 2011:
Retirement / RRSPs
It is well known that most Canadians aren't saving enough for retirement. Contributing automatically to an RRSP, instead of scrambling to find cash at the last minute, will put you far ahead. "When people start thinking about their retirement in their 40s and 50s, at times that means they have to play the catch-up game and the catch-up game is not much fun," says Allen.
"Small amounts set aside more frequently will definitely add up in the long run." It is also possible to get RRSP loans as a backup plan, but making regular contributions means less catch-up later. Make sure to explore all of your options for retirement savings.
Education / RESPs
Include your children in your financial planning so they build strong savings and financial management habits at an early age. Since planning for their education falls high up the priority list for most parents, make sure you have a savings plan in place for an RESP just like you would an RRSP for retirement.
Mortgage
Not only can you shop around for the best rates, but most mortgages allow you to make lump sum payments or increase the frequency of payments to weekly or bi-weekly. It will save a lot of money in the long run. The less money spent on a mortgage means the less you will need to save for retirement - if you start putting that money away now.
Debt
The dreaded 'd-word.' Pay down credit card debt and other high-interest debt first. "If you don't have the ability once the bills start rolling in come the New Year to pay off those Visa bills, go in and talk to your bank about a line of credit to reduce that debt," says Ehrstien.
Savings Plan
Develop a plan to put away a set amount of money at the beginning of each month instead of waiting until you've paid your bills for the month - there likely won't be anything left if you do. It's that adage: Pay yourself first.
Try to fully utilize the $5,000-a-year limit you can put into a tax-free savings account (TFSA), which not only saves money but does so without any tax paid on the investment income.
Reduce Fees
Review the service package you have at your financial institutions to ensure you're not spending more than you have to on fees related to debit card purchases, ATM withdrawals and other service fees. They can add up quickly and even if you save $20 a month, it adds up when you put that money into a savings vehicle instead of giving it to the bank.
Tax Refunds
Most Canadians get them and many of us think of it as free money. It's not - you earned it. Make sure that come tax time, you find and use every available method to get your taxes in order and use every available tool to reduce the amount you have to pay.
Any tax refund should be used to pay down credit card debt, make a lump-sum payment on your mortgage, pay down any outstanding RRSP loans, top up your TFSA or make your 2011 contribution early, says Allen.
Each individual's financial picture will vary, but make sure that both you and your spouse or domestic partner are involved in setting the objectives and creating the financial plan. If your goals are aligned, it will make it easier to stick to the plan.
"It's really important to compile a list together and make sure that both are committed to the same objectives," says Ehrstien.
Calgary Herald
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