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What is Your Financial New Year's Solution?

A new year is a blank canvas—an opportunity for a fresh start. Why do we believe this to be true?

A recent study from the University of Pennsylvania found that people were more likely to stay the course and achieve their goals when they were initiated outside ‘the seemingly unending stream of trivial and ordinary occurrences.’ In these moments, researchers contend that we are able to separate our past from our future selves, leave our mistakes behind, and regain control of our situations.

Inspiring, isn’t it?

Each year, many of us resolve to live a healthier lifestyle in the coming months, but this commitment is about more than just our physical health. While we tend to privilege the former, working on our financial health can be just as important and deeply fulfilling. Fortunately, there are many strategies one can adopt to start on the road to better financial health today!

Here are just a few ways that you can make your financial health a priority in 2022

Make a Budget

Budgets are a frequent topic of conversation on this blog, but they are one of the best ways to control spending and get ahead, no matter who you are. Budgeting is a great way to find areas where you can save during the month by tracking your spending habits and adjusting accordingly.

There is a simple formula for designing a budget: take your net monthly income and subtract all fixed expenses—mortgage or rent payments, utility bills, and loan payments which largely remain constant. From there, you can begin to list variable expenses—groceries, dining out, clothing, entertainment, and gasoline—which are more flexible.

While adjusting fixed expenses can be complicated, reducing your variable expenses is a great and easy way to save each month. One of the most common budgeting frameworks is the 50/30/20 rule. The goal is to spend 50% of your net income on essential costs, 30% on variable expenses, leaving 20% for savings—building an emergency fund, contributions to retirement savings, etc.

There are many great digital tools out there to aid in designing a budget and tracking your monthly spending. Nearly every major Canadian banks, including RBC , TD , CIBC , and BMO , have introduced a suite of budgeting tools to help their customers set short- and long-term budgeting goals, as well has the Financial Consumer Agency of Canada (FCAC), which can be accessed here .

It is also important to reassess your budget regularly—once a month for the first few months, at least. Doing so not only allows you to adjust in areas that aren’t currently working, but also presents opportunities to increase your savings goals so you can get to where you want to be faster!

Set Savings Goals

Setting short-, mid-, and long-term savings goals goes hand in hand with designing a budget. Studies show that people who set specific, measurable, achievable, relevant, and time-bound goals are more likely to reach their objectives and develop better long-term money habits . Here is a great exercise from the personal finance experts over at The Balance :

  • Write down three or four things you want to accomplish in the next 5-10 years. Do you want to buy a home? Start a family? Open a business?
  • Write down two things you want to accomplish in the next year. Maybe you want to pay off debts, go on vacation, build an emergency fund, or start a new career?
  • Write down one thing you want to accomplish in the next month. This could be a simple as saving a certain amount of money or reducing or eliminating credit card use.

Each of these is something that is entirely within your reach—you’ve just got to plan, plan, plan!

Create an Emergency Fund

To quote Oscar Wilde: “To expect the unexpected shows a thoroughly modern intellect.”

In today’s world, it is perfectly reasonable to expect that each and every one of us will be affected by an unexpected financial emergency or drop in income at some point in our lives. But there is no reason why we can’t be prepared for when that day inevitably comes.

Setting up an emergency fund allows us to manage unexpected expenses when they come without incurring additional debt, lets us retain control over our financial situation, and provides us with much coveted peace of mind. Most institutions suggest saving 3-6 months of expenses in case of emergency. While this might seem like a lot, stick-to-itiveness goes a long way! 

To begin, the Financial Consumer Agency of Canada (FCAC) suggests setting up a savings account which is separate from your day-to-day chequing account, has little or no fees for withdrawal, and preferably, allows you to earn interest on your savings. And don’t be afraid to start small. Remember—anything counts!

$5 a week is $260/year,

$10 a week is $520/year,

$20 a week is $1040/year

$50 a week is $2600/year

$100 a week is $5200/year!

If you think you might forget, consider setting up automatic transfers, creating savings reminders on your computer or smartphone, or if you’re old school, put sticky notes in your wallet or on your mirror or refrigerator. These tips are also useful for ensuring that bills are paid on time as well and prevent you from incurring nasty late fees that are not a part of your savings fantasies.

Pay down those debts!

These great tips come from the gurus at Investopedia ! Create a list of all your debts and rank them from highest to lowest by interest rate. From there, you can allocate a more significant portion of your resources to the debt with the highest interest rate until it is fully paid before moving onto the next highest.

Another great method for attacking debt is the debt snowball . In this scenario, you pay off your debts in order from smallest to largest, thereby increasing the sense of accomplishment gleaned from eliminating each debt. No matter which approach you take—getting control over your debts is an essential part of reaching financial nirvana.

Invest in retirement

It is never too early to begin saving for retirement. As a rule, it is wise to try to save at least 10-15% of your pre-tax income for retirement. While this may sound like a lot, doing so will afford you the security of not having to rely on the Canada Pension Plan (CPP) while also allowing you to deduce your annual contributions on your income tax.

Additionally, find out if your employer offers a defined contribution pension plan. In these arrangements, you and your employer pay a defined amount into your pension plan each year. This money is then invested in one or more products on your behalf and the amount you receive when you retire is determined by how well these investments perform.

So, what will your financial New Year’s Resolution be?

Remember—it is never too late to retake control of our financial health. If you’re ready to make a change, consult our website and speak with one of our Licensed Insolvency Trustees (LIT) today!

The Crawford, Smith, and Swallow team would like to wish you all a warm, happy, and safe holiday season. Happy New Year to all and see you in 2022!

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