With Christmas come and gone, many Canadians are looking to a fresh start in 2020 by making resolutions regarding money. Resolutions, like diets, feel great in the moment that you make them but it often proves difficult to implement the steps necessary to achieve success. Here are three basic tips to help get you on track for any financial resolutions you may have; from paying down debt to creating a savings plan.
Prepare a cash flow summary.
As a university student, I would roll my eyes when my father would ask me to prepare a budget, in order to receive a higher allowance. In my early 20s, I would either hit up my mother for the shortfall, or make do without, in order to avoid making one. To me, the word budget has an ugly connotation, much like the word diet. I tend to avoid both as much as possible. While I have not yet come up with a less offensive word for diet, a better phrase for budget is cash flow summary. In general, a cash flow summary is a comprehensive list of money in, versus money out of your household. The idea here is to list your “must have” expenses per month. This would be your mortgage payment, car payments, gas, groceries, utility bills, child expenses, life insurance premiums, RRSP and TFSA contributions, etc. List these underneath all your combined household sources of income (his salary, her salary, rent from the basement suite, child tax credit, etc.). The total income minus total expenses is your net (hopefully positive) cash flow for the month. Consider this a blueprint of what your discretionary spending (e.g. vacations, Louis Vuitton bags, and pricey meals out) should look like over the year. There are many financial apps and websites that can help with this, a favourite of mine is mint.com.
Minimize outstanding debts.
My general rule of thumb is the higher the interest rate on the debt, the higher on my list of pay downs it goes. For example, a credit card balance is generally at a higher interest rate than a mortgage (typically 18% on credit cards versus a current 3.5% on mortgages). The lower your debt load is, the more money can go into savings which leads to more financial flexibility down the road. You would have an easier time adapting to any anticipated or unanticipated life changes if you are not under the burden of large monthly debt payments.
Create a rainy day fund.
New set of tires for your car. Water heater damage that needs immediate attention. Child desperately needs uninsured orthodontic treatment. Many such concerns can cause the average family to go into a spiral of debt. A rainy day fund would help cushion the blow and prevent you from going into possibly high interest debt for unanticipated expenses. Many financial planning experts advise keeping on hand, in cold hard cash, three months’ worth of living expenses. Referring to the first point, this would be your total “must have” expenses per month, times three. This would help in the event of unanticipated expenses, or life changes such as loss of job or illness. This contributes to the financial flexibility and adaptability of the household.
Tracking your money, minimizing outstanding debts and saving for a rainy day are three very basic financial planning principles that are easy to apply no matter what your financial situation is. These three tips in general will help you kick-start your New Year’s resolutions regarding your money for 2020. Consider sitting down with a financial professional to clarify goals and work towards them. Here’s to a good financial future!
Bharathi Sandhu is a Sr. Business Development Specialist with Raymond James Ltd. Information provided is not a solicitation and although obtained from sources considered reliable, is not guaranteed. The view and opinions contained in the article are those of the author, not Raymond James Ltd. This article provides links to other Internet sites for the convenience of users. Raymond James Ltd. is not responsible for the availability or content of these external sites, nor does Raymond James Ltd. endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same privacy policy which Raymond James Ltd adheres to. Raymond James Ltd. member of Canadian Investor Protection Fund.
