Happy New Year! The New Year is a chance to make some new year’s resolutions. It’s a time to think about the things that went right and the opportunity to change the things that did not go so well. Some things are out of our control but there are always some habits and activities that can make a difference towards improvement.  In some ways, it’s like having a chance to start over and do things differently. Some New Years’ resolutions involve relationships, personal interests, or lifestyle choices. Many resolutions involve either health and fitness or personal finance. While I am not qualified to help you tone your abs, I can give you some tips to help you get financially fit.

Make some financial resolutions for the new year. Here are some practical ideas for new year’s resolutions for improving your finances and tips to help you get financially fit.

1. CALCULATE YOUR NET WORTH

Just like a weight is a benchmark for health and fitness, your net worth can serve as a useful benchmark for financial wealth. In order to assess your future progress of wealth accumulation, you will need to know your net worth. The calculation is as simple as taking all the assets you own and subtracting the debts you owe. If the answer is a negative one, then the first thing you will need to do is pay down your debts.

As simple as this sounds very few people actually take the time to calculate your net worth. Just like most people know how much they weigh, you should know what your net worth is. Your future goal will be to increase your net worth year after year.

2. PAYING DOWN DEBTS

After the Christmas season, many of us accumulate debt and especially the high-interest credit card kind of debt. There are three golden rules for paying down your debt. First, pay off the highest-interest debt first like credit cards. Second, pay off non-deductible debt before deductible debt, and third, don’t get back into debt once you have paid off the debt.

3. LIFE INSURANCE

One area of personal finance that is often overlooked is the area of life insurance.  The golden rule to life insurance is to only have life insurance if you need it. There are three basic reasons why you might need life insurance. The first is to ensure your debts like mortgages or lines of credit. This way if something happens to you, your loved ones will not have the burden of debt payments. The next reason to have insurance is for income replacement. If you were to pass away, would your family continue to need your income? If so, put life insurance in place to create future income. This is the area most overlooked for proper insurance coverage. Finally, insurance can be used to cover expenses like funeral costs and taxes. Make sure you have the right amount of insurance.

4. FORCED SAVINGS PLAN

It is this time of year when Canadians are considering investing in RRSPs to save a few bucks in taxes. What I find amazing is that 83% of those that file taxes have an unused RRSP room and less than 15% of all the total available room for Canadians is being used. Financially fit people will maximize their RRSPs and the best way to ensure that you have money invested is to set up a monthly contribution plan.

RRSPs are not the only place to save money.  Canadians should also look at Tax-Free Savings Accounts as either a complement or an alternative to the RRSP.

5. ESTATE PLANNING

The most basic aspect of an estate plan is the Will. Will ensures that your assets will be distributed according to your wishes. Proper Will planning will help you to minimize taxes and ensure that you maximize the assets that can be distributed to your benefactors. Make sure you have a Will and that your Will gets updated regularly.

It’s also a great idea to review your beneficiary designations on your RRSPs, TFSAs, and Life insurance policies to make sure they are up to date with your life circumstances.

6. LIVING BENEFITS

Living benefits insurance refers to insurance that protects against the risk that may occur while you are still living. Disability insurance protects you in case you get disabled and can no longer work. The newest living benefits insurance is Critical Illness. Cancer, heart attacks, strokes, and other major illnesses are on the rise and the need for critical illness insurance increases. If you do not have critical illness insurance, be sure to look into some coverage. It may not be cheap but your chances of collecting are pretty good.

7. BANKING

For a couple of years now, I have preached the merits of high-interest banking. There are two key benefits to high-interest banking. Firstly, you start earning a much higher interest rate than your conventional bank account. Secondly, most high-interest bank accounts have no fees. If you are not earning interest in your bank account and have monthly fees, be sure to learn about alternatives.

8. GET SMART ABOUT TAXES

Understanding your tax situation is one of the most important aspects of financial fitness. If you don’t believe me, just look at your tax return to see how much of your hard-earned income goes to income tax. Add in all the other taxes like property tax, gasoline tax, GST, etc and you’ll understand why, according to CCRA, Canadians pay on average 21.6% of their income to tax.

9. EMERGENCY FUND

We all know the importance of having an emergency fund.  2020 reminded us of that importance.  An emergency fund is a pot of money that is easily accessible.  There is lots of debate over how much you should keep in an emergency fund but most commonly you will read that you should have 3 to 6 months of income in a place that you can access in case of emergencies.

10. RE-BALANCE THE PORTFOLIO

It is so tempting to overhaul portfolios today in hope of making drastic changes to prevent further losses and downside risk. This in itself may be the biggest risk. Rather than make huge overhauls, try the strategy of rebalancing the portfolio. Simply put, you look at the overall allocation of your investments a year or two ago and compare those allocations with the portfolio today and bring the portfolio back to the original investment allocation. Re-balancing will force you to buy more of your losers and sell some of your winners. I know that may sound strange but it is a systematic approach to ensure that you win over the long term.

11. EDUCATION FUNDING

If you are saving for your children’s education, you should seriously consider a Registered Education Savings Plan (RESP). Next to the immediate tax deduction of an RRSP, the RESP is one of the best strategies to take advantage of ‘free’ money from the Canadian government. The RESP allows you to contribute up to $2500 per year, per child into an RESP. and qualify for the Canada Education Savings Grant (CESG), which is 20% or $500 of government money. If you have not maximized the $2500 RESP contribution in past years, you can make up for the free money this year by contributing $5000 and getting $1000 of free money.

12. BALANCING CASHFLOW

It sounds so basic because it is. Just like exercise and diet are the keys to health and fitness, balancing your cash flow is one of the keys to financial fitness. The formula is so simple –spend less than you make. With financial institutions so readily willing to give out credit cards and lines of credit, it is so easy for all of us to spend more than we make. The problem is it eventually catches up with us to the point where we have too much debt. No matter who you are and how much debt you may or may not have, budgeting is an essential part of life. Take the time to track your expenses for at least three months and you’ll have a pretty good idea of where your money is going.

Some say knowledge is power but at the end of the day, it’s up to you if you want less debt, more money, more wealth or whatever your financial goal you desire. Resolutions are great to create some motivation but challenge yourself to try to change your habits for a lifetime of wealth.