The start of a new year is always a time for reflection on the past year, and anticipation of the year to come. For some people, the past year has been financial turmoil, with lost jobs mitigated only partly by government support programs to get through COVID-19. For others, the year was a financial success – saving money by not commuting and no big vacations. Whichever your experience, here are some great personal finance resolutions for the year ahead.
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Learn your Credit Score
Your credit score will help companies decide whether to give you a credit card, lend you money and at what interest rate, rent you an apartment, and more. Lenders want to ensure that they work with individuals who will pay their bills on time.
Canadians can find out their credit score for free with Borrowell. I’ve been tracking my credit score with Borrowell for a while, and it’s great to see the number keep rising. Remember that you and your spouse/partner will have separate credit scores, so be sure to sign up for each of you!
Ladies, often we let our husbands take care of the finances. Or even if we pay the bills, everything is still in his name.
But this can mean you don’t have much credit history!
If this is an issue for you, get a credit card in your own name (and pay it off each month). Or put one or more of the household utility bills or cell phone bills in your own name. Even if your husband still pays the bills, you will be generating a credit score in your own name.
Still not convinced? Learn more at What is your Credit Score and Why Should you Care.
Start an Emergency Fund
The past year has shown us that even jobs we thought of as secure, might be precarious. Lockdowns led to millions of layoffs. And some corporations followed the “don’t let a good crisis go to waste” and used the opportunity to downsize some employees.
If you don’t have money set aside for a rainy day, there’s no better time to start.
Many experts recommend having 3 to 6 months worth of fixed expenses set aside where you can easily access it. By fixed expenses, I mean things that you MUST pay each month: mortgage/rent, utilities, groceries, etc.
Shopping for clothes could be postponed until better days, so this is not a fixed expense.
It can be hard to save up that kind of money from your wages or salary, but you can set aside a small amount into a savings account each month until you get to a point where you feel comfortable.
Canadians can save in a regular savings account or TFSA savings account. But don’t use your RRSP for your emergency fund, as there can be steep penalties come tax time for withdrawals.
I recommend EQ Bank as one of the top savings accounts in Canada! You’ll get more interest than at any of the major banks. And there are no account fees! Our family uses EQ Bank, so I know from experience how easy their website is to navigate.
Calculate your Net Worth
Net worth is calculated as the total of everything you own, less everything you owe.
Start by adding up the value of all your assets: bank accounts, retirement funds, other savings, and valuable assets like your home and vehicles.
Then subtract your mortgage, car loan, student loans, credit card debt, and anything else you owe.
The result is your net worth. If you are in post-secondary education or recently graduated, it’s not uncommon to have a negative net worth. Never fear, you have invested in yourself through education!
There are a few ways to increase your net worth as your new year’s personal finance resolution. Increasing your income and spending less money will go towards boosting your financial assets. Alternatively, paying down debt will decrease how much you owe.
Start a Budget
One of the most popular ways to manage your personal finances is the 50/30/20 budget, popularized by U.S. Senator Elizabeth Warren. The 50/30/20 budget rule divides your after-tax income into 3 categories: 50% for needs, 30% for wants, and 20% for saving or debt repayment.
I’ve designed a FREE custom 50/30/20 budget template, just for you!
It has many of the standard spending items already filled in for you, so you can spend less time on your budgeting. Simply save the PDF file, and print it off each month! Download your free 50/30/20 budget template now.
Looking for a different way to budget? Check out the Highlighter Budget (for everyone who hates spreadsheets!)
The highlighter budget is simply looking at how you have already spent your money. Then you get to decide if you want to continue spending it this way.
The highlighter budget is a great way to determine if you have a “spending problem” or an “income problem” in your personal finances.
Make a Plan to Pay Down Debts
Paying interest on loans is expensive. Imagine if all your debts were paid off, and you could send that money to your retirement fund! Amazing.
Learn more about the debt avalanche versus debt snowball methods of paying off debt.
Ensure you have the Right Amount of Insurance
If you have anyone in your life who depends on your income to make ends meet, then you need insurance. Even if you have life insurance through work, it may not be enough.
Stay-at-home parents need insurance too. Without you, there would be additional costs of daycare and other household help to do everything you do for free.
The general rule of thumb is to buy 6x to 10x your annual salary in life insurance. That is, if you earn $70,000, you should have a life insurance policy for $420,000 to $700,000.
Don’t forget to also add critical illness and disability insurance, too. Statistically speaking, we’re far more likely to face an injury or illness that prevents us from working. In addition to losing out on that income, there may also be additional expenses while you’re recovering. Life insurance is important, but it only pays out after death.
Check out the fabulous online insurance quotes at Policy Me or Policy Advisor. Or find the answers to all the questions you always wanted to ask about life insurance.
Decrease Expenses in your Retirement Fund
With self-directed investing, you’re managing the investments yourself. You choose what to buy and when to sell, how much of this or that. You monitor it yourself. Because you are doing all the research, the fees are lowest for this option.
Asset allocation ETFs are perfect for new investors or those who want to be self-directed but not have the hassle of monitoring regularly.
With managed investing, your money is actively managed by a team of experts. Portfolio managers adjust your investment mix to reduce risk while maximizing gains. When market conditions change, your portfolio is rebalanced to keep it on track. Advisors are available for you to ask questions.
Questrade offers you both options, at a great price. They are Canada’s fastest growing online brokerage.
With lower overhead costs than bricks-and-mortar brokerages, they can pass those savings on to you through lower fees. Questrade has a great online website to track your investment portfolio. Or trade on-the-go with the Questrade app.
They offer great support, too, with on-demand webinars and retirement planning advice.
Rebalance your Investment Portfolio
When you opt for self-directed investing, you need to periodically check in and rebalance your financial assets.
For instance, let’s say you want your portfolio to be 50% Canadian equities, 25% international equities, and 25% bonds and cash. If we have a fabulous bull market, you might see that you now have 60% Canadian equities, 30% international equities, and 10% bonds and cash!
This is far from your plan. So you need to sell some of the Canadian and international equities, and buy more bonds (or hold it in cash) in order to return to your ideal portfolio balance.
Passiv turns your brokerage account into a modern portfolio management tool. Build your own personalized index, invest and rebalance with the click of a button, and seamlessly manage multiple accounts. Passiv will notify you when your portfolio drifts out of your ideal alignment.
Learn more at Easy Dollar Cost Averaging with Passiv.
Learn More about Personal Finance
Spend a few hours reading personal finance books, or listening to audiobooks while you commute or walk the dog.
This short investment in time will help you understand money and how to achieve your own version of “being rich”. Whether this means being debt-free, a better work-life balance, or the early retirement of your dreams.
Here are some favourites!