Financial New Year’s Resolutions
Submitted by Sara Worley & Brendan Donahue
Investment Advisors, Manulife Wealth Inc.
For many, the new year brings new financial resolutions. Unsure of how to go about it? Here’s how to get started.
Set SMART goals
When people fail to reach their goals, the reason why isn’t always due to a lack of effort, or a deficiency on their part. Often, they fail due to the nature of the goal itself.
The key to success in any endeavour is to set SMART goals and see them through. A SMART goal is one that is specific, measurable, attainable, realistic and time-sensitive. A vague goal like “save more money” or a potentially unrealistic one like “become debt free” lack focus, and if insurmountable, guarantee failure. A SMART financial goal might be to save $3,000 by the end of the year by saving $250 per month, rather than simply deciding to “save more”.
The Lay of the Land
Before making any new financial decisions, consider writing or updating a personal budget and net worth statement. This will spell out your current income, expenses, assets and liabilities and provide necessary framework for making financial decisions.
Unsure about where money goes? Consider using a spreadsheet or an online program like Mint to track spending. This will help highlight adverse spending behaviour and how much money is available for other financial goals.
It’s important to remember that even with a budget in place, it’s easy to become complacent about finances. Even when regulating spending, attempting to save money through everyday activities is worthwhile, and that spending for the sake of spending is a poor mindset.
Debt reduction
Few people think of paying down debt as a form of savings, but in actuality, payments over and above one’s minimum “earn” a risk-free rate equal to the interest rate charged on the debt. This “return” comes in the form of cost savings; paying interest on a smaller principal portion than before.
Further, high-interest debt “earns” more than low-interest, so there’s an incentive to pay off credit cards and lines of credit sooner than one’s mortgage.
Make no mistake, except for in certain circumstances, debt reduction is an appropriate solution for every Canadian and should be a part of their financial picture.
Savings goals
Those who have their debts under control should consider setting savings goals and strategies in which to achieve them. First, identify the goals you most want to achieve, such as building an emergency fund of at least 3 months income, maxing out an RRSP or TFSA, or contributing to an RESP. Those who aren’t sure what they should do are encouraged to speak with their financial advisor.
Consider income
When it comes to financial management, many people are disproportionally focused on controlling expenditures. However, with many costs of life being fixed, it’s just as prudent to analyse one’s level of income, and more specifically, whether it can be boosted in 2020.
To do this, consider a career change, an extra part-time job or starting a small business. Sometimes, time is better spent earning more money than obsessively cutting back on spending.
Final thoughts
There are many things other than budgets that need reviewing on a regular basis. These items include ensuring that one’s Will and personal directives are current and up-to-date. In the age of increased fraud, one’s credit report should be checked annually to ensure the information is current and all items on it belong to them.
Failure to plan is one of the biggest reasons why people struggle against financial headwinds. Start from the bottom up: set SMART goals and commit to them. Once this framework is in place, let consistency and dedication do the work.