Take control of your finances with these easy financial planning guidelines
The new year is well underway and it appears 2017 will be a year of considerable change, beginning with the U.S. presidential inauguration. It seems daunting and certainly beyond your control. But why not see it as a motivator and resolve to identify what you can control by making a commitment to improve your financial situation this year?
The first step is figure out your net worth – your assets less your liabilities – as well as your after-tax cash flow, which is the money available to pay for expenses, savings and any debt repayment.
To calculate this, add up the value of all your assets, including the balances in your bank and investment accounts, RRSPs, TFSAs, pension assets, real estate, and others assets such as cars, boats and jewelry. From that, subtract from your liabilities, including outstanding balances on mortgages, car loans, lines of credit, student loans and credit cards.
You’ll now know where you stand and can start planning. Ask yourself some tough questions: Is my net worth what I thought it would be? Do I have enough assets to retire? It’s likely the answer to both may be no, and you will have to focus on savings and paying down debt.
The next step is to calculate your after-tax cash flow. Your most recent tax return will provide some answers. Subtract your taxes paid from your total income and the result will be a rough approximation of your after-tax cash flow. For Quebec tax purposes, don’t forget to include the refundable tax abatement in this calculation.
From your after-tax cash flow, subtract:
- Amounts set aside as savings. List the amounts you saved during the past year, including contributions to your RRSP, TFSA, employer pension plan and investment accounts.
- Debt repayments. Tally up amounts paid against your mortgage, line of credit or other debts. Although not savings, this represents amounts you have been able to put aside to reduce your debt, which improves your net worth, while reducing the carrying cost of interest expense.
- New or increased debts. List any increases in your debt from the prior year (including the balances you are carrying on your credit cards or lines of credit) that not specifically tied to a purchase of an asset that you have included on your net worth.
If this analysis suggests you are spending too much and saving too little, you are not alone! To keep to your resolution and effect change, you need to figure out how to reduce those expenses and/or increase your income.
Where to start – easy financial planning strategies
A good place to start is to limit major purchases, such as household electronics or appliances, vacations, entertainment and dining out. Make do with the five-year old television, take a shorter vacation and eat out once a month instead of two or three times. Reduce some of your fixed costs by downsizing your housing, shopping around for better home and auto insurance deal, and reviewing your telecom packages including telephone, television and internet.
For recreation activities, perhaps take advantage of more community programs that can be easier on your budget. Even fitness activities could be reviewed, such as ditching an under-used gym membership and instead pay as you go – or work out independently at home along with outdoor running or walking.
Cut weekly expenses by taking transit to work instead of driving, if possible, and bring a lunch to work instead of hitting the food court.
Of course, you can make a big difference in your cash flow by increasing your income, such as looking for a better-paying job or gunning for a promotion? Maybe it’s time to consider starting your own business, which might not improve your finances immediately but could make a difference in your after-tax income within a few years. (However, don’t overlook the cost of replacing employer-assisted benefits.)
Once you have increased your cash flow, make sure you pay yourself first and properly allocate the additional money. By making regular, automatic payments to your investment or savings accounts, you will increase your chances of success.
More savings – where to prioritize
The last step is to decide where to put your new-found savings. To set priorities, here are a few things you should discuss with your financial advisor:
- Pay off high-interest debt: The first thing you should do is prioritize paying off any balances you are carrying with a high interest rates like credit credit-cards or personal lines of credit. Create a schedule and make regular monthly payments until the balances are reduced to zero.
- Contribute the maximum to your RRSP: If you haven’t been making the maximum contribution to your RRSP, you should begin doing so – particularly if you anticipate being in a lower tax bracket during retirement. Contributions are tax-deductible and the money and income earned on it within your plan is not taxed until you make a withdrawal.
- Take advantage of tax-free growth with a TFSA: The lifetime contribution room for a Tax-Free Savings Account in 2017 is now $52,000 if you were over age 18 when the plan was introduced in 2009. With a TFSA, you contribute after-tax income and income within is received tax-free.
- Make loan interest tax-deductible: Interest paid to earn investment income is tax-deductible – unlike interest paid on mortgages and credit cards. Depending on your circumstances, you may be able to restructure your assets and liabilities to make your debt tax-deductible. Deductible interest will reduce the carrying charge of your debt and could even help you pay it off faster.
The strategies you choose will depend on your specific situation, in consultation with your financial advisor. By reviewing and tweaking your finances, you may be pleasantly surprised by the progress you make.