From eating healthy to exercising, the well-known risk with New Year’s resolutions is that you won’t stick to them. But with financial resolutions, there is also another issue: you may be forgetting about important money goals that should be on your list.
Paying down debt, spending less and saving more are the resolutions of choice for most people, and understandably so. Cutting down on your credit card bill and beefing up your savings accounts is very important. But to get your financial house in order, you may need to go far beyond that, financial experts warn.
To help you start 2020 on the right foot, Global News spoke to money blogger Bridget Casey and David Dyck of robo advisor WealthBar about what should be on a financial resolutions checklist.
Spend less than you make
If you’re not already doing it, this is the money goal that should come before all your other financial resolutions, Casey and Dyck agreed. You cannot tackle debt or save in a sustainable manner until you have a system in place that guarantees your day-to-day outlays are less than the money you bring in. The good news, though, is you don’t need to pore over spreadsheets to get there.
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The first step, Casey said, is to figure out how much your after-tax income actually is. This isn’t as obvious as it may seem. Many, for example, don’t realize that getting paid biweekly isn’t the same as being paid twice a month, she said.
There are 52 weeks and 12 months in a year. If your employer is depositing $2,500 worth of net pay into your bank account every two weeks, your annual after-tax income is $65,000 ($2,500*52/2). Your average monthly income works out to $5,416. By contrast, if your $2,500 lands on the last and 15th day of the month, meaning you get paid bimonthly, your monthly net income is just $5,000.
The second step is tracking where the money you earn disappears to, Dyck said. The point of this isn’t just to see where you can cut back but to get in the habit of thinking harder about what you’re doing with your money.
“There’s this emerging trend of people being more conscious and aware of the things they put in their body,” Dyck said. “There should be also a greater amount of care that people put, and just awareness on, where they’re spending their money.”
One trusty strategy to do this is to go through a whole month paying for everything in cash, he said. The tech-friendly way to do the same thing is to download an app like Mint or YNAB (You Need a Budget) that will automatically track your spending, he added.
Once you’ve gotten a handle on the inflows and outflows, you can set yourself a hard spending limit for anything that isn’t a necessary expense like rent, groceries and utility bills.
“I never plan where my money is going to go,” Casey said.
Instead, she gives herself $1,000 a month to spend any way she likes. To do this, Casey said she uses the reloadable KOHO prepaid Visa, which shows users real-time updates on their spending.
“Then I don’t feel guilty if I spend $300 on a pair of jeans.”
The same thing can be done by putting $1,000 in a chequing account and using a debit card for all discretionary spending, she noted.
As for credit cards, Casey uses them to cover her routine bills through automatic payments. This ensures that all her routine expenses are covered, helps her build her credit and earns her cash-back rewards, she said.
Plan for the unexpected
Drawing up a spending plan is about managing the expenses you can predict. But what about the things you can’t foresee?
From emergency car repairs to the sudden loss of someone in your family, unexpected events can wreak havoc on household finances. And yet, taking steps to mitigate their impact rarely features in most people’s New Year resolutions.
For example, only 25 per cent of Canadians have “make a will” on their list of financial goals for 2020, and just five per cent are thinking about getting life insurance, according to a recent Angus Reid survey commissioned by Willful, which helps users create legal wills online.
Dying without a will means you don’t get a say on who gets your assets and can leave unpaid bills, taxes and legal battles for your loved ones to deal with at a time of grieving.
You should also think about setting up a power of attorney, Dyck said. This is a legal document that gives someone you trust the authority to manage your money and property should you become incapable of doing so. It’s also a good idea to nominate someone to make medical and health decisions for you if you become mentally unable to do so yourself, Dyck added. Different provinces have different names for this type of document, like “power of attorney for personal care,” “representation agreement,” “health-care directive” or “personal directive.”
Life insurance, on the other hand, isn’t a must for everyone, Dyck said. But if you have a family that depends on your income and a big mortgage to pay off, making sure you have adequate coverage should be a priority, he added.
Thankfully, crossing off both a will and life insurance from your to-do list is getting easier and easier if you have a simple financial situation. Solutions like Willful and Legal Wills allow Canadians to make wills and set up a power of attorney online and for a fraction of the cost of seeing a lawyer.
As for life insurance, PolicyMe helps you figure out how much coverage you need and compares life insurance quotes from some of the largest providers in Canada.
Another type of coverage that should be on your radar is disability insurance, Casey noted. The group disability benefits you get at work may not be enough.
Finally, the most basic form of protection against the unexpected is having a cash cushion you can fall back on for anything from emergency car repairs to paying the bills during a spell of unemployment.
Tackle dangerous debt
When it comes to debt, make sure you prioritize paying off the kind that carries a high interest rate.
If you’re carrying a balance on your credit card, then you’re likely facing an interest rate of 20 per cent or more, Dyck said.
“You should attack that right away,” he said.
On the other hand, extinguishing debt like student loans is less urgent. Thanks to lower interest rates and flexible repayment terms, “it’s not going to have an adverse impact on you if you just pay the minimums on a student loan until it’s eventually paid off,” Dyck said.
If you are drowning in debt, it can be tempting to postpone saving until you’re back in the black, but Dyck advises against that approach.
“The habit of saving regularly is the first step toward building wealth.”
Even if you’re throwing most of your surplus income at your credit card debt, putting as little as $25 a week into a savings account is a good idea, Casey said.
But setting money aside is only half of the work, she added. The other essential step is making sure you’re taking good care of your savings.
Casey urges every adult Canadian to set up a tax-free savings account (TFSA), which lets your savings grow tax-free and works well as both a simple savings account and a retirement savings account.
But when Canadians think about saving, they should also think about growing those savings through investing, Casey said.
“Investing is always the thing [people] are going to do later and they never do it.”
If investing is a mysterious and scary topic for you, Casey suggests using a robo advisor, an online service that professionally invests your money for fees that are often less than half of what the banks or investment managing firms charge.