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As another year comes to a close, we begin to reflect on the past and what changes we would like to make in the upcoming year. Particularly after the holidays, a new year is important time to take a look at our financial health (especially since our bank books are probably a little worse for wear).
Finances are a great place to start fresh at the beginning of a new year. Just by starting to make some financial resolutions, it can help make financial decisions seem less daunting. Not only does getting your finances in order sound like a great idea, but keeping your finances fit can also help you to feel better by alleviating some of your current financial worries.
Here are just 6 tips that may help you to make a healthier financial start to 2016:
- Spend less.
This sounds so easy right? What makes it more difficult is that everyone has monthly expenses and you need a place to live and eat. However, even when it comes to your monthly expenses there are ways to spend less. For example, try shopping around for lower-priced cell phone service or TV/internet services. You can also try stocking up on everyday staples such as paper towels when they are on sale. The best way to spend less is to know what you are actually spending in the first place. Check out our New Year’s Cash Flow Management Sheet to see where your money is actually going.
- Save more.
Once you have looked at your spending it will be easy to see where you can save more. The key to saving more is to implement a savings plan that will help you stay disciplined when it comes to your savings goals. One of the simplest ways to ensure you save regularly is to make it automatic. For example, one great way to save is to set up a pre-authorized monthly plan that is tied to your pay cheques that way the money disappears as soon as it hits your bank account and you get used to starting with a lower monthly budget right away.
- Invest more.
Take the time this year to become an active participant in the management of your wealth. Set up a meeting to speak with your advisor and make sure your investment mix has an appropriate level of risk and growth potential. Make sure your investment mix still meets your needs and does not need to be rebalanced. Also the beginning of a new year is a great time to update your advisor on any big changes that have occurred in your life such as a new job or you moved to a new home.
- Pay down debt.
You probably have a variety of debt, like most Canadians do, consisting of a variety of things like student loans, credit card balances, car loans and mortgages. You probably have a large portion of your income already dedicated to your monthly debt payments. You should take a look at your account statements and see which of your debts you are paying the highest interest on. Try to make the highest interest debts your focus for repayment.
- Create an emergency fund.
If you are just using room on a credit card or a line of credit to use as an emergency fund, you are probably in a vicious cycle. By creating an emergency fund, you can rely on that money when something comes up (like the furnace breaking down) as opposed to relying on increasing debt. You should have at least 3 months of expenses covered in your emergency fund account.
- Stick to your budget.
Trying to navigate your financial life without a budget is like trying to drive a car without a gas gauge and odometer. You will never know if you can make it your next fill-up without running out. A budget can help you allocate your funds between essential categories such as essential spending, retirement savings and short-term savings. If you have a set budget, it will be easy to get into a cash flow routine that will help you fix your finances in the long-term.
Start off the New Year on the right track by just taking a few minutes of your time to actually look at your finances. Stop just opening bills and reading the minimum balance due every month. Take charge of your finances and start the New Year with financial peace of mind.
To help kick start your New Year, here are some additional daily reminders which might come in handy throughout 2016:
12 Daily Reminders
1. The past cannot be changed.
2. Opinions don’t define your reality.
3. Everyone’s journey is different.
4. Things always get better with time.
5. Judgements are a confession of character.
6. Overthinking will lead to sadness.
7. Happiness is found within.
8. Positive thoughts create positive things.
9. Smiles are contagious.
10. Kindness is free.
11. You only fail if you quit.
12. What goes around, comes around.
– Vex King | bonvitastyle.com
*Source: Fidelity Investments. 10 Resolutions for 2016 – and how to get started. Dec 8, 2015. Web.
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In 2009, the Tax-Free Savings Account (TFSA) was introduced by the Canadian federal government. The TFSA is a great option to help Canadians save for long and short term financial goals and the funds can be withdrawn at any time on a tax-free basis.
Unlike a Registered Retirement Savings Plan (RRSP), the TFSA is meant to help you save for any type of general savings needs as opposed to simply retirement. There is no penalty to withdrawing funds from your TFSA whereas withdrawing funds from an RRSP will have resulting tax implications. However, like an RRSP, there is an annual contribution limit. For a TFSA the annual contribution limit is not linked to your income, but rather it is set by the federal government and it is the same limit for all Canadians.
How the TFSA Works
Here is some general information on how the TFSA works:
- Canadian residents age 18 and over can save up to $10,000 (beginning in 2015) a year in a TFSA
- Contributions are not tax-deductible, but investment returns (capital gains, interest and dividends) earned in a TFSA are not taxed, even when withdrawn.
- Withdrawals are tax-free and funds can be used for any purpose.
- Unused contribution room can be carried forward indefinitely. As well, any amount withdrawn from a TFSA can be re-contributed in a future year without requiring new contribution room.
- Neither income earned in a TFSA nor withdrawals will affect eligibility for federal tax credits or income-tested benefits such as the Canada Child Tax Benefit, Old Age Security (OAS) or the Guaranteed Income Supplement (GIS)
- Investments eligible for an RRSP can generally be held in a TFSA.*
Annual Contribution Limits
If you have never contributed to a TFSA before, the contribution limits from 2009 are cumulative. Thus, if you were to open a TFSA today you could contribute a maximum of $41,000.00, and then an additional $10,000.00 per year going forward.
Year Contribution Limit 2009 $5,000.00 2010 $5,000.00 2011 $5,000.00 2012 $5,000.00 2013 $5,500.00 2014 $5,500.00 2015 $10,000.00
Rate of Return Matters
Since the funds held within a TFSA are mutual funds, the better your rate of return, the faster your savings will grow. Please refer to the below charts developed by RBC Global Asset Management for some examples as to how much your TFSA may be worth assuming the contributions are maxed out.
Who does the TFSA benefit?
As you can see from above, the TFSA is a great option (whether you are an individual investor or an investing couple), even if you cannot invest the maximum allowable contribution on a yearly basis.
Thus, the TFSA can benefit the following:
- Young people just starting out: TFSAs will stimulate more savings when starting at a younger age.
- Seniors: TFSAs can provide retired persons with a means to save on a tax-free basis; neither withdrawals nor income earned in a TFSA will trigger clawbacks on Old Age Security (OAS) benefits or the Guaranteed Income Supplement (GIS).
- High Income Earners: Taxpayers who have already made the maximum contribution to their RRSPs will have another tax sheltered savings vehicle.
- Lower Income Earners: Taxpayers in a lower tax bracket may prefer to forgo the modest tax deduction of an RRSP in exchange for tax-free growth and withdrawals of a TFSA.
- Anyone Saving for a Large Ticket Item: TFSAs can be used to fund a car purchase, vacation or down payment on a house.*
In other words, the TFSA can benefits just about EVERYONE!
If you would like more information on TFSAs or would like to open a TFSA, please contact us.
*Excerpt from Mackenzie Investments Flyer. “Introduction to TFSAs.”
**Chart complied from RBC Global Asset Management Charts: Tax Free Savings Accounts – Rate of Return Matters (Individual Investor) & Tax Free Savings Accounts – Rate of Return Matters (Investing Couple).
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In today’s face-paced world, the idea of making money quickly, and easily, is a part of a dream scenario. After all, if everyone could win the lottery we would all be in better financial shape.
The S&P Index, Dow Jones Industrial Average and even Nasdaq are all reporting record highs within the past year alone.
As U.S. Stocks reach all-time highs, investors are becoming complacent in the fundamental aspects of investing. After all, “high returns breed complacency and create a false impression of how easy investing can be.” Within today’s market, it seems like investors are focusing on short-term highs rather than achieving long-term goals.
As Morgan Housel reveals in his column on December 8, 2014 for The Wall Street Journal, there are some rules that are fundamental to investors that are often overlooked.
1: All past market crashes are viewed as opportunities, but all future market crashes are viewed as risks.
If you can recognize the ridiculousness of this statement, congratulations, you are already on the way to becoming a better long-term investor.
2: Most bubbles begin with a rational idea that gets taken to an irrational extreme.
Just because Dot-com companies did change the world, land is limited and precious metals can hedge against inflation that doesn’t mean that paying outlandish prices for stocks, houses or gold is acceptable. But bubbles create excitement in the market. However, bubbles can fall so easily because, at least in part, they are based on solid logic.
3: “I don’t know” are the three of the most underused words in investing.
With the tap of a few keys on the keyboard, everyone can become an “expert” on anything. However, the one thing that is mostly is ignored is the “I don’t know” factor. I don’t know what the market will do next month. I don’t know when interest rates will rise. I don’t know how low oil prices will go. NOBODY DOES. By making the mistake of listening to people who “do know” will cost you in the end. Unfortunately there is no consulting fee for gaining humility.
4: Short-Term thinking is at the root of most investing problems.
The average investor is focused on the next five months of their investments, however most financial advisors are focusing on the next five years. Markets reward patience more than any other skill.
5: Investing is overwhelmingly a game of psychology.
In large part, most people are emotional investors. They invest based on feelings as opposed to long-term strategies. Success has less to do with your math skills – or your relationships with the in-the-know investors – and more to do with your ability to resist the emotional urge to buy high and sell low.
6: Things change quickly – and more drastically than many think.
Today, the falling oil prices are wrecking havoc on investor’s returns and causing government agencies to take another glance at their budgets. Fourteen years ago, Enron was on Fortune magazine’s list of the world’s most-admired companies, Apple was a struggling niche company, Greece’s economy was booming and the U.S. Congressional Budget Office predicted the federal government would be effectively debt-free by 2009. There is a tendency to extrapolate the recent past, but 10 years from now the business world will look absolutely nothing like it does today.
7:Three of the most important variables to consider are the valuations of stocks when you buy them, the length of time you can stay invested and the fees you pay to brokers and money managers.
These three items alone will have a major impact on how you perform as an investor.
8: There are no points awarded for difficulty.
Nobody cares how much effort you put into researching a stock, how detailed your spreadsheet is or how complicated your options strategy is. For many people, a diversified buy-and-hold strategy is the most reasonable way to invest. Some find it boring, but the purpose of investing isn’t to reduce boredom, it is to increase wealth.
9: A couple of times per decade, investors forget that recessions happen a couple of times per decade.
When recessions come, stocks tend to plunge. This is an unfortunate, but perfectly normal, part of the process – like a Florida hurricane. You should get used to it. Be ready to ride the waves, but if you are unable to stomach declines, consider another investment strategy.
10: Don’t check your brokerage account once a day and your blood pressure only once a year.
Constant updates make investing more emotional than it needs to be. Check your brokerage account as infrequently as necessary to prevent you from becoming emotional about market moves. You should know how your stocks are doing, but don’t obsess over tiny changes.
11: You should pay the most attention to the investor who talks about his or her mistakes.
Avoid those investors who don’t – their mistakes are likely to be worse.
12: Change your mind when the facts change.
Admit when you are wrong. Learn from your mistakes. Ignore those who refuse to do the same. This will save you untold investing misery.
13: Read past stock-market predictions, and you will take current predictions less seriously.
Markets are complicated and human emotions are unpredictable. Unless you have illegal insider information, predicting what stocks will do in the short run is unimaginably difficult.
14: There is no such thing as a normal economy … or a normal stock market.
Investors have a tendency to want to “wait for things to get back to normal,” but markets and economies are almost constantly in some state of absurdity, booming or busting at rates that seem (and are) unsustainable.
15: It can be difficult to tell the difference between luck and skill in investing.
There are millions of investors around the world. Randomness guarantees that some will be wildly successful by pure change. But you will rarely find an investor who attributes his success to luck. When you combine a market system that generates randomness with a belief that your actions reflect your intelligence, you get some misleading results.
16: You are only diversified if some of your investments are performing worse than others.
Losing money on even a portion of your portfolio is hard for some people to swallow, so they gravitate toward what is performing well at the moment, often at their own expense. It’s better to look at the long-term returns, then a momentary blip of good performance.
Housel, Morgan. “16 Rules for Investors to Live By.” The Wall Street Journal. 8 Dec. 2014: 1-3. Web.