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Financial Resolutions for the New Year

Tuesday, January 05, 2010

It’s a New Year and stock markets have righted themselves after a disastrous 2008.Chances are your personal balance sheet is looking better in 2010 and may continue to improve as infrastructure funds around the world are deployed(creating jobs and putting money into people’s pockets where it will quickly disappear into the economy as they spend it).

Stock markets rise and fall and there is very little one can do to protect oneself, with the exception of asset allocation(having a mix of equities and fixed income within a portfolio), using alternative investments(10-15% of portfolio)and buying assets that have a low correlation to stock markets(real estate and precious metals/resources are a few that come to mind).There are a number of things you can do as part of your “financial resolutions” to improve your chance of achieving financial freedom/independence. I will outline a few of them. Keep in mind that to put away some money each month to achieve your financial independence requires some degree of sacrifice today. Your lifestyle today is slightly lower to give you financial freedom down the road. This is very tough for many, as we are bombarded daily with “great deals” and “must have” new toys. Too many people overspend due to the overabundance of credit in our society and lack of willpower or budgeting ability. The result is this eventually catches up to you and you will be forced to live within your means, although your lifestyle will actually now be lower than your income due to the interest payments to service debt. Don’t get caught in the “gotta have more stuff syndrome”. If you earn $5000/month, spend $4200, invest $650 to save tax and save for the future and put away $150 into an emergency cash fund that is readily available. Every dollar that you save in interest is another dollar you can spend or invest to make your life better.

Pay Down Debt

A crucial part of any strategy for achieving financial independence is to lower debt-especially bad debt like credit cards and lines of credit. If you have too much debt on a high interest credit card, get a lower (8-10%) credit card, move the balance and cancel the card with the higher interest. Then, endeavour to pay down the credit card debt ASAP to lower your ongoing interest payments. This will end up increasing your standard of living. Then put some of this “found” money into an RRSP or RESP to save even more through tax savings or free grant money. Good debts are usually items like mortgages (because you have a tangible asset), or even a loan for a business or investment because the interest may be tax deductible. Borrowing to invest is a long term strategy for people within a narrow profile. Refer to my November 2009 column in Fund library for further information on leveraging. Most clients I see whom I would refer to as being financially independent (or moving in that direction)have no credit card debt and a mortgage that is gone or in the process of being paid off. Don’t buy a bigger, fancier home every 5 years because only your real estate agent will end up financially independent in that scenario. Live within your means. Get one credit card for emergencies only and use your debit card fro purchases. If you don’t have the money, you will be declined. That is a good and simple way to match spending to earnings.

Save Taxes and Get Free Government Monies

Buy RRSP’s monthly to take advantage of market ups and downs. This ensures you buy in at an average price. If the market corrects by 40-50%, by all means drop another lump sum at that time to get your cost per unit down even lower. Also buy RESP’s monthly if possible & get your government grant monies. If you can’t buy RRSP’s and/or RESP’s monthly, you’d better look at your budget and make any necessary adjustments to allow you to do so. If you can’t find $200-500 month, it’s unlikely you’ll be able to save $3000-5,000 come February when you want to save taxes. Then you’re forced to borrow and the vicious cycle of debt has started again. Then you can’t put away anything monthly because you’re paying off an RRSP loan, so you are then forced to get a loan every year. That means you buy every February and even though you pay monthly, you don’t buy monthly, thus you don’t take advantage of market fluctuations. The last decade in particular has presented investors with some major market fluctuations (911, Asian tsunami, Iraq war, and the most recent credit crisis in 2008, which brought the world’s financial systems to their knees).Buy into the TFSA & use this as another tool to gain your financial freedom.
The last decade was poor for investors and by sticking to your plan and investing regularly; you can hopefully take advantage of what looks to be a much better decade ahead as infrastructure monies are put to work and China and India continue to develop.
With low to no debt plus money saved in RRSP’s, RESP’s and TFSA’s, you are well on your way to financial independence.

If you’ve looked after debt and have sufficient savings in the vehicles I mentioned, the only other pillar missing is insurance. Make sure you have adequate life insurance, disability and travel insurance. A mistake here can cost you much of your hard earned savings. Critical Illness insurance can also be a part of your plan. This insurance provides a lump sum if you “survive” a number of illnesses like heart attacks, cancer, strokes and others. In the case of disability or sickness, you live, but your finances can take a major setback as you recover. Likewise if you take a trip to the U.S. and find out your medical coverage only covers a portion of your costs and you have to come up with a large lump sum out of your savings. Cashing out RRSP’s while still working and earning a good salary can have disastrous tax consequences.RRSP depletion works well when you have little income. The further you move up the tax brackets, the more painful any withdrawals are. Mistakes here can quickly drain wealth.

Don’t Keep up With the Jones’s

Get a budget and try and stick to it. If you overspend one month, cut back the next to get it back in line. If you overspend for 6 months, now you’ll have to cut back for 6 months (or more) and that will likely be too painful. Let the Jones’s be forced to work until 70, even though health issues are becoming a concern. You’ll be spending 2 months in Mexico while they are working. Let the Jones’s live a lifestyle they can’t afford now buying all the latest gadgets and taking more vacations than their income allows, doing this on credit cards and credit lines. When they hit the wall and are forced to live below their means as they pay off interest for items they’ve long since forgotten, you’ll have you home paid off and building up your investment portfolio. By no means am I advocating not living today for a tomorrow that isn’t guaranteed. I’m saying you need a balance between living today and saving for the future. Be the person who can do what they want in retirement and golf as many times as you wish. Work as you wish, stay active in the community and your children’s/grandchildren’s lives. While you’re deservedly doing all this fun stuff, the Jones’s will still be paying off a big mortgage, still dealing with credit cards and credit line debt and have no timetable for retirement. Many of our parents worked until 65 and statistically were dead around 70.Many people wish to retire earlier these days (55-60 is common) and life expectancies continue to go up (although weight gain and diabetes are starting to slow this down now).If you plan to retire at 55 and you may live to 80, your income must last 25 years. You will need to save much more and take advantage of all the tax savings to reach your goal. Your parent’s retirement savings only had to last 5-8 years on average and they had better company pension plans. Today we must do more on our own as companies drop expensive defined benefit contribution plans. By making a limited sacrifice today and controlling our spending urges, we can have that comfortable early retirement that our parents only dreamed of. After 25-30 years of work, we deserve it.



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Personal Opinions & Recommendations Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please call the author to discuss your particular circumstances.