Happy New Year! Christmas and the holidays have come and gone, leaving us with fond memories, full bellies, and hopefully a well-rested start to 2019.
Top on the list of many people’s New Year’s resolutions is to get their fitness and health in check, but few fail to consider the health and wellness of their personal finances. The end of 2018 has been particularly trying for investors as the markets have struggled to digest a potentially weakening global economic growth as well as increasing worries of trade conflicts between the US and China. In the words of Benjamin Graham (one of the greatest investors of all time), “the market is a pendulum that forever swings between unsustainable optimism, and unjustified pessimism.” However, there is no better time than right now to check up on your financial fitness, and to make sure that your actions are in line with your long term savings and investment goals. Remember, investing is a marathon, and not a sprint.
Through this article, we’ll highlight some easy things you can do to work off some of the excess “fat” gained over the expensive holiday season, and also compare two of Canada’s most popular registered savings plans; the TFSA and RRSP, and which one is optimal for your current situation.
Here are a few suggestions on steps to get financially “toned”:
Make changes to your diet: Finding places to save money.
There are some low hanging fruit where we can find a few hundred dollars of savings that we can use to pay down debts or put away into investing. Rob Carrick from the Globe and Mail wrote a great little article on Christmas day 2018 on “Money tweaks to help you save $2400”. Check it out here.
Work off the fat: Pay down high-interest debt.
Canadian’s top 2019 New Year’s resolution is to reduce their debt. Unfortunately, that was their resolution for 2018, 2017 and every year before that for the last several years. However we’ve hit the highest level of household debt, with the average Canadian owing $1.70 for every dollar of income they earn per year, after taxes, according to the Bank of Canada. Think about that for a second.
Before starting a savings plan, paying down any consumer, non-mortgage high interest debt should be the priority for the new year. There is another school of thought here, and it’s often called the “snowball effect”, which is to pay down your smallest amount of debt first, then taking that payment amount and chipping away at the next smallest and so-on, working up to the largest amount. From a behavioural/psychological standpoint, I agree with the concept, but from a strictly numbers-based perspective, it makes little sense. I recommend that you take the largest amount of debt from an interest charged standpoint, break it up into smaller chunks (write it out as part of your debt repayment plan!) and then work towards paying off each chunk. You’ll get the same sense of accomplishment, and you’ll also know that you’re not just throwing money away to the banks and lenders. If you would like an evaluation of your current financial situation, we’re happy to help you out.
Debt really only makes sense if it increases your overall net worth in the long run (think a reasonable home purchase, or if an investment in the markets yields more than the interest being charged on debt; and right now, finding a greater than 18% consistent yielding stock on the market is as rare as hens’ teeth).
Build muscle: Think about budgeting.
I hate the word. Budgeting. It reminds me of tracking every last penny and putting money away into jars. But if you’re currently living paycheque to paycheque and can’t find the money to pay down your debts or to stash money away into savings, then it might be a worthwhile exercise to examine your spending habits over the past three months and then make slight tweaks to free up some coin. Like any good fitness regime, it’s about the small changes in your habits that will snowball into the biggest growth.
Treat yo’self: Live a little, but don’t forget your goals.
Munching away on salad every day (or as my future father-in-law calls it, “rabbit food”) is a sure-fire way to ensure that a long term, sustainable diet and fitness regiment will fail. The key word here is sustainable and psychology plays a huge role here. If you’ve managed to get your personal finances and consumer debt in check, then it helps to have a “cheat day” now and then to keep you on track. Indulge in something that brings you joy. Do you like to travel? Take that trip. Do you like eating out at nice restaurants? Go and have that expensive meal. Want that new pair of shoes? Go for it! However, it is important to make sure that you immediately get back on the routine afterwards, and that the splurge doesn’t entirely wipe out everything you’ve worked so hard to gain up to this point.
It’s a marathon, not a sprint: Set it, and forget it.
It takes years of hard work and dedication to reach financial independence. It is not an overnight phenomena. However this isn’t just a crash diet to shed off the weight for beach season and then quickly pile it back on over the next holiday with more debt. It is never too late to start building good savings habits. After paying down the high interest debts and freeing up some money, it’s time to start an automated savings plan. Contribute anything that you can, even if it’s only $50 every week (that’s only one fancy coffee a day). It’s best to coincide the transfers on your pay day so that it immediately comes out of your bank account. In the words of the Wealthy Barber, “pay yourself first”. I promise you won’t even miss that money coming out of your accounts.
So where do you put all that new found money? In Canada, there are two great products available that will allow you to save and take advantage of tax savings. The tax-free savings account (TFSA) and the registered retirement savings plan (RRSP). Which one is best for you? Let’s run some numbers and find out. Check out our next post here.