9 Personal Finance “Jobs” to Tackle in the New Year
Are you looking for New Years Resolutions? If your ideas involve financial concerns, you have come to the right place. Below are nine different options to consider for 2023. All will require a bit of work to accomplish, but equally, all will leave you in a better position once they have been accomplished. Consider this list a Christmas present for the new year.
Speaking of year-end events, this will be my last blog post for 2022. I wish my readers all the best for the new year. More blogging to come in 2023.
1. Pay off your debts
I may be accused of recommending the paying off of debt too often, but I think it bears repeating. On the weekend, Licensed Insolvency Trustees Doug Hoyes and Ted Michalos, discussed the state of debt in Canada on the podcast Debt-Free in 30. Debt declined considerably in 2020-21 when the economy was slowed in response to measures to combat COVID-19. Now that economic activity has more or less resumed, so has debt-supported spending, which is as high as it ever was in the pre-pandemic period.
Debt has its purposes, of course. We all need shelter. Although buying a home is not always a necessity when it comes to obtaining shelter, if you do choose to buy, especially for the first time, it is almost impossible without getting a mortgage. Similarly, while some communities have good public transit, if you have a job where the location and/or hours of work mean transit is not an option, then a vehicle is a necessity. Again, borrowing to buy can make sense.
However, when you carry a balance on your credit card, month after month, you are hurting your financial well-being. The aforementioned Doug Hoyes recommends paying off the debt on your credit card every time you get paid. For most employed people that’s every two weeks or twice monthly. Even though the credit card bill is due once a month, by paying it off immediately upon receiving your paycheque, you have a smaller amount to deal with. The downside to this is that you cannot automate this payment, but at least you are dealing with smaller figures.
My approach has been to set up a pre-authorized debit with my credit card issuers so that the full amount is withdrawn on the due date. That means you need to have enough money in the account to cover the full amount. The upside is that the payments are made automatically.
Resolution 1: Make a plan to pay down your consumer debt.
2. Create an Emergency Fund
A lot of times, people get into debt because they haven’t saved up anything when an unexpected expense occurs. A lot of these so-called unexpected expenses, though, are expected. You may not know exactly when your furnace will need replacing, but that the need will eventually arise is known. You may not know precisely when your car will need to have its brakes replaced or new tires put on, but that these events will happen is absolutely predictable. Building up savings that are dedicated to covering these unknown but inevitable expenses will help you and your family to take in stride those events when they occur.
Another use for this fund is to help tide you over if you lose your job. If it were not for CERB and related government supports when we were in full COVID lockdown, a lot of people may have had little to nothing to rely on. For a variety of reasons, inflation is soaring in Canada and around the world now, and the monetary policy of raising interest rates will almost certainly lead to job losses or temporary layoffs. Having an emergency fund available to cover three to six months of your household expenses, excluding taxes and savings, will give you some breathing room.
The interest rates for savings accounts at the major banks are, for the most part, pitifully low. Consider a separate account at one of the online financial institutions to build up your emergency fund.
Resolution 2: Open a high-interest savings account to build up an emergency fund.
3. Track Your Spending
This is not a recommendation to create a budget. A budget implies, at least in my mind, that you are setting limits on how much to spend and in what category. You may want to set up a budget eventually, but it won’t do much good if you don’t know how much you are spending or in what categories. This is a no-guilt exercise. You are simply going to see where your money goes. As you begin to see a pattern emerge, you will probably decide that spending money in certain areas is neither necessary nor does it bring any sense of satisfaction to you.
There are several ways you can begin the process of tracking your spending. If you have Microsoft Excel, there are several templates from which you can select. Free app-based tools include Mint, Koho, and Wally (iOS App Store only). Quicken or YNAB offer priced software options as well. Enoch Omololu, who runs the website Savvy New Canadians, also has a helpful list of alternatives that you may find worth your while to review. No matter how you do it, if you find your money regularly running out before your month does, getting an understanding of your spending is a good first step toward turning that issue around.
Resolution 3: Start your new year by tracking your spending, using whichever tool you find most convenient.
4. Rebalance Your Investment Accounts
If each of your investment accounts has multiple assets in different categories, their relative balance is going to change over time. If you originally bought them with a specific proportion in mind to achieve an expected long-term return while accounting for the risk that you are exposing yourself to, then this past year has likely shifted those proportions around quite a lot. Both equity and fixed-income investments are down this year.
Why would you want to rebalance, anyway? Some are not fans of rebalancing because it means reducing your position in the best-performing positions in favour of the worst-performing positions. However, by choosing not to rebalance, you are changing the risk/reward expectations you had set for yourself. In most years, equities outperform fixed income. However, if you let that continue, when equities inevitably have a bad year, the resulting loss will pull your portfolio down to an extent for which you were not prepared. Periodically adjusting the balance may reduce your gains, but if you are not able to stomach the losses and sell out you are not doing yourself any favours.
Rebalancing is something that should not just occur in the mix between equities and fixed income. For example, for several years U.S. equities have outperformed any other market. In 2022, however, Canadian markets have done better. Using a price chart of Vanguard Canada-based ETFs shows that the Vanguard FTSE Canada All Cap Index ETF (VCN) had a year-to-date loss of 7.75%. However, when compared to the 13.60% loss for the Vanguard U.S. Total Market Index ETF (VUN), Canada’s stock market did quite well. Even the developed markets outside of North America have done better than the U.S. markets with an 11.81% loss, as reflected in the performance of the Vanguard FTSE Developed All Cap ex North America Index ETF (VIU).
You may not have considered a particular balance for your investments. At the basic stock/bond level, a common rule of thumb is to allocate according to your age. That is, a 30-year-old would allocate 30% to fixed income and the balance, 70%, to equities, while a 60-year-old would allocate 60% to fixed income and 40% to equities. Rules of thumb should, however, be balanced against other calculations and assessments. A source for picking an asset allocation is an investor questionnaire made available online by Vanguard Canada. Note the limitations at the bottom of the page, though. A rule of thumb and a simple questionnaire should be considered a starting point for a decision about what your balance should be. As to how you should allocate your investments within fixed income and equities, a good place to start would be to review the model portfolios provided by Justin Bender on his Canadian Portfolio Manager blog.
Resolution 4: Review the relative weighting of your investments across your accounts and adjust them back to your long-term target.
5. Set up a Systematic Contribution Plan for Your RRSP and/or TFSA
There is a tendency to make a last-minute contribution to a Registered Retirement Savings Plan (RRSP) on the 60th day of the new year, which will be March 1, 2023 for the 2022 tax year. I encourage all RRSP contributors to set up a monthly contribution plan, or if you prefer, have it synchronized to your paycheque, i.e., every two weeks or twice a month. While it would be nice to maximize your contributions, not everyone will find this possible, so regardless of the amount, I encourage taking a systematic approach so that the contributions are no longer subject to our occasionally faulty memories.
The above paragraph assumes that it makes sense for everyone to contribute to an RRSP. Canada has a progressive tax system, meaning that the higher your income, the higher the rate of tax you will be obligated to pay. Those rates vary by province and are adjusted annually for inflation. At the federal level, the 15% income tax rate applies to the first $50,197 in 2022. In 2023, that rate continues to apply up to a taxable income level of $53,359. While one of the big appeals of the RRSP is the tax deductibility of contributions, that tax refund is not going to mean as much if in your retirement years you are in the same tax bracket as when you contributed. Yes, you still get the tax-free growth, but if the tax bracket upon withdrawal is at the same rate, or even higher, which can happen, you may wish to consider the TFSA as your preferred alternative.
Contributions to a Tax-Free Savings Account (TFSA) do not give you a tax deduction upfront, but like the RRSP, assets grow tax-free while they are in the account. And, when withdrawn, no tax is owed at all.
The TFSA is a good choice when you are in a lower income bracket. It is also a good choice for retirees without earned income since you do not need income from earnings to create contribution room. Another good reason to use a TFSA is that you are under no obligation to withdraw from it if you do not need to. Many retirees who have turned 71 complain about the mandatory maturing of their RRSPs and the consequent requirement to convert the RRSP into a Registered Retirement Income Fund (RRIF). This forces them to take annual payments beginning not later than the year they turn 72. No such requirement applies to the TFSA.
Until recently, the TFSA was not as highly favoured as an investment account since the annual contribution limits were relatively low. However, as of 2023, the annual limit has been raised to $6,500. If you have never contributed to your TFSA before and you have been eligible since it came out in 2009, you have accumulated contribution room of $88,000.
Most, if not all, financial institutions will allow you to set up systematic contributions to your TFSA as well as your RRSP. If you have the wherewithal, then contributing to both is probably the best idea, but if you are in a lower income bracket, the flexibility of the TFSA is beginning to outweigh the value of the RRSP.
While systematic contributions can be set up quite easily, a contribution does not necessarily mean an investment. If your investments are in mutual funds, you can invest in dollars, not shares or units, so systematic investment plans are more easily arranged. You can put $500 per month into your RRSP and/or TFSA, depending on your contribution room, and have that money go straight into the mutual fund or funds in your account. However, if you are buying stocks or Exchange-Traded Funds, while the contribution can be done automatically, the purchase must be done by you. While there are commission-free investment options available on several self-directed investing platforms, if you are a DIY investor, you may have to consider the commission cost when making the purchase. I would be personally reluctant to pay a $10 commission on a $500 monthly investment. In that case, you may wish to contribute periodically, but only invest when your cash balance has reached $1,000 or more.
For those who use robo-advisors or online portfolio managers, as they may be more properly called, the investing is done for you, so your only obligation is to get the money into the account.
Resolution 5: Contact your financial institution and arrange for a systematic contribution to your investment account(s).
6. Review the Adequacy of Your Sources of Retirement Income
If you use an investment advisor, you should reach out to them and ask for an estimate on whether you are on track to meet your retirement needs. Some advisors, however, are not able to do that as their only training is in investment management. If that is the case, you may need to go elsewhere.
If you are entirely self-directed, the Government of Canada has a helpful calculator for estimating your retirement income here.
Another choice is to consider engaging an advice-only financial planner. This service is especially useful if you are either self-directed or your investment advisor does not provide financial planning services. You may also want to consult an advice-only planner if you want to get an opinion that is not biased by product sales. You can find well-vetted lists of such planners here or here. Globe and Mail columnist Rob Carrick is fond of referring people to a list of Fee-Only Planners* created by John Robertson, author of the excellent investing book, The Value of Simple. However, Robertson’s list is unvetted and many may engage in a mix of services or compensation methods.
*I am on all three of the lists mentioned in the paragraph above, but you should feel free to contact anyone on the list who appeals to you.
The information about your estimated CPP monthly income as provided by Service Canada makes some assumptions that are not always warranted. One of the members on the lists mentioned above, advice-only planner David Field of Papyrus Planning, has developed a CPP Calculator that addresses some of those shortcomings. Dave worked on the calculator with Doug Runchey, an expert on the Canada Pension Plan. For a modest fee, Doug will calculate your estimated CPP benefit taking into account more complicated factors like the child-rearing dropout provision and periods of disability.
Resolution 6: Make use of the available resources to estimate your retirement income.
7. Review Your Life Insurance and Disability Insurance
There are other forms of insurance that one should consider, but these are my top two. Life insurance is valuable for your loved ones. If you have a spouse or child who depends on your ability to earn an income, at least in part, you must protect them financially in the event of your premature death.
Life insurance is especially important in your early years as part of an independent household as you will not likely have generated much in the way of financial assets and yet, your home may be at its most financially vulnerable. The lower-cost way to deal with this situation is typically with term life insurance. Term insurance expires after a set number of years on the assumption that the risk of financial harm in the event of your death will lessen over time. The mortgage is paid off. Children have become independent. You have amassed significant financial wealth.
There are analyses that an insurance representative will go through to determine how large the death benefit should be. You can also create estimates by looking online, using search terms like “capital needs analysis” or more simply “life insurance calculator.”
You may think that you have sufficient life insurance based on the group policy provided by your employer. This is seldom the case, as most group policies offer little more than the equivalent of one year’s salary, although they may offer more and especially if they offer you the opportunity to buy a supplemental level. Unfortunately, with mortgages of half a million dollars or more, a group policy of even double your salary is unlikely to provide the necessary protection.
Again, many people rely on group disability insurance policies, which will be of help, but not every job offers these benefits, nor are they always adequate. Disability insurance is important because the odds that you will be disabled for at least a period of your working life are much higher than the probability of your early death. As with life insurance, this is important to have because you will need replacement income for your family if you can no longer work. You will also have valuable replacement income for yourself if you are single and without dependents because you will still need an income to support yourself.
There are disincentives to purchasing privately arranged disability insurance policies, though. Many group benefits providers will reduce your group disability coverage dollar for dollar from any outside sources of disability income, whether privately purchased or as part of your CPP Disability Pension benefits. At the same time, this is somewhat understandable since disability insurance policies are designed to support your return to work, not disincentivize you from doing so.
Resolution 7: Review your group and private insurance policies. Contact your employer’s Human Resources department and/or an insurance agent to review the adequacy of your coverage.
8. Start Collecting Information to File Your Taxes
Many people don’t file their taxes annually. This may seem reasonable if you earn too little money to pay taxes. Unfortunately, failure to file may cause you to lose advantages available to Canadian tax filers. You may not only reduce your taxes payable, but the government may also give you money you did not know was available to you.
Getting your tax filing done right also saves you from paying tax penalties if you did not pay enough, or cost you refunds you are eligible for when you paid too much in taxes.
If you have a computer, a good idea would be to create a separate folder and move every relevant tax document in there. Paper documents can also be scanned and moved in as well.
You may wish to create a spreadsheet to categorize your relevant tax documents. For example, if you have multiple sources of income, you may have several T-slips (T3, T4, T4a, T5, T5008, etc.). If you have significant medical expenses, you can collect the relevant information to claim the medical expense tax credit. If you have made donations to a variety of registered charities, collecting them in a separate subfolder can help you to claim your full credits. Don’t forget RRSP contribution receipts either.
Developing a system like this cannot but help you out and keep you on the good side of the Canada Revenue Agency and the law.
Resolution 8: Organize your relevant tax documents from 2022 so that you can do your taxes efficiently when the time comes.
9. Review Your Will and Power of Attorney
Several years ago, I spent part of a year studying what was called Clinical Pastoral Education (CPE) at the London Health Sciences Centre. The supervisor of the program told all of us that he would assume that we all knew we were going to die. Denial was not a useful strategy to change the unavoidable. If you have assets and/or people who depend on you, you need a will. Do not pretend it is not going to happen. Your family will be having a hard enough time dealing with your death. You don’t need to change their grief into frustration and anger because you didn’t take care of things in anticipation of your inevitable death.
Power of Attorney
A will is a document that deals with your estate and your financial matters after your death. Power of attorney documents are in operation while you are alive. Their value is in appointing a trustworthy person to take care of your financial needs when you cannot take care of them yourself. Usually, a lawyer or an online will creation service (e.g., Willful or Epilogue) will take care of both items. A third but related document goes by various names depending on the province (e.g., Ontario: Power of Attorney for Personal Care; British Columbia: Representation Agreement) but empowers a person to make personal care decisions for you when you cannot. A so-called “living will” or “advance directive” may provide additional guidance as to the extent extraordinary measures should be taken in an attempt to preserve your life.
Again, recognizing one’s fragility may be challenging, but if you have not yet taken steps, addressing these matters should assume a high priority in your life.
Resolution 9: If you have a will and power of attorney, review them to confirm that they still meet your circumstances. If they are out of date, or if you do not have these documents in place, contact a lawyer or online will service to get a new will and power of attorney.
This is the 177th blog post for Russ Writes, first published on 2022-12-19.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.