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New Year’s Financial Resolutions

London Free Press

Well, it’s that time of the year again for resolutions. Move more, eat less, spend more time with my family, watch less television, and read more books.  Given my history, if I get one of these right this year, I’ll be doing well.

Given most people's history, if you get one financial habit corrected this year, you will be doing well. So let's take a look at five areas to consider cleaning up this year, and pick one at a time to work through them.

#1.  Develop a cash wedge or a rainy-day fund.   We have all learned that drawing an income from a portfolio that has little growth adds a number of years to recovery time for the balance of your investment account.  One way to alleviate the pain of withdrawing from an investment account for income is to have a cash wedge on hand.  This would vary by needs and preferences, perhaps from six to twelve months. It is not effective to have large sums of money in your cash account. Returns are usually very low and they are subject to taxation.  A source of interest rates comparison is www.cannex.com.  Before investing, always check to make sure any institution or company is CDIC insured.

#2.  Paying off debt is still your best investment.  Even with low interest rates debt can be an insidious addiction that can cause harm.  Approaching or during your retirement years, being in debt feels like a ball and chain. If debt is a problem on your credit cards, you may have a behavioral problem. Preheat your oven to 425 degrees, put your credit cards on a cookie sheet and slip them in the oven. Having all your debt paid off as you are entering into your retirement years is critical to being able to reduce consumption. It will be necessary to withdraw less from your investment portfolios as you rely on your investments to provide you with retirement income. 

#3.  Review your RSP contribution limits.  This is a good time to review your carry-forward limits. Some people in pre-retirement are amassing massive carry-forwards.  While this goes against point two, perhaps this is one time borrowing to invest can make some sense. Take your RSP tax refund to pay down that loan and create a program to pay that loan off annually. It is an excellent idea to consider topping-up to your next marginal bracket.  For example your marginal deduction for each dollar that you put into a RSP between $40,000 and $80,000 is 31%.  Under $40,000 your deduction drops to 21%, and at this point, you want to question if that is a worthwhile deduction for your RSP. There are new opportunities for tax-efficient corporate class investments which have no contribution limits, and the new tax-free savings accounts have a $5000.00 annual limit.

#4.  As mentioned above, the tax-free savings account is a very new and useful component in financial plans of Canadians.  Starting last year, Canadians over age 18 are able to contribute up to $5000 annually into their tax-sheltered account once they open an account.  The contributions are not tax-deductible but the withdrawals are tax-free. Unused TFSA contributions can be carried-forward to the following calendar year. This will continue to accumulate at the rate of $5000 every year. This will be an interesting tax tool in thinking about tax brackets and whether it makes more sense to make an RSP contribution and receive a tax deduction, or if you are in a lower tax bracket, make a TFSA contribution. Contributing to a TFSA rather than a RSP during the working years might be more useful for lower-income Canadians

#5. It's always a good New Year's resolution to dust off your Wills and Powers of Attorney just to see if they still reflect what you would like to see happen at your incapacity or death.  Make sure that your executor and contingent executor, your power of attorney (POA) and contingent POA's are the people that are able to act for you and that you want to act for you. Is the person you appointed still willing to act?  Does that person have the time to devote the necessary administration?  Have they moved out of country which requires bonding? Being the executor or POA is time-consuming, demands responsibility and it may involve liability for mistakes.  Finally, are your wishes and desires still consistent with what you wanted the last time you reviewed your will?

This should get you started on your financial resolutions along with your commitment to move more and eat less. Experts agree it is best to list small attainable goals rather than go for a lifestyle change overnight. So give yourself some small tasks from these few financial resolutions and see if you can start to work through the list over this year.