Key financial planning principles and resolutions for the New Year
This year will go down in the books as one of the strangest, and perhaps most stressful, on record. The Covid-19 pandemic and resulting disruptions to our normal lives has been challenging for all of us. For many, financial plans have been up-ended, especially for those who find themselves unemployed, needing to rely on emergency savings (that’s what it is for, after all!) or the variety of sometimes complex and confusing government relief programs for individuals and businesses.
For investors, it’s been a roller coaster ride, but perhaps not so surprisingly, the major stock indexes have rallied significantly from their March meltdown lows. In fact, the major U.S. market gauges have gone on to post fresh record highs in recent weeks, buoyed by a tidal wave of easy money. Central banks in effect print money by keeping rates near zero percent and buying bonds in an effort to provide liquidity and support the economy. Governments have abandoned any pretense at fiscal restraint, engaging in massive relief and stimulus programs, raising national debt and budget deficits to eye-watering levels.
All this has had the desired effect on investor sentiment, of course, bolstered by the advent of effective Covid-19 vaccines, which are now being administered, and which are expected to inoculate most Canadians by next September. In the U.S. and the U.K., vaccine administration is further advanced than in Canada and is expected to achieve “herd immunity” coverage by the summer. Stock markets have risen strongly, as a result, with the S&P 500 Composite Index on pace for an annual gain of over 11%. The S&P/TSX Composite Index is likely to edge up only about 4% this year, held back by the stronger U.S. dollar and flat performance in both energy and financials on the year, both of which dominate the index.
As for what comes next, we at Castlemark avoid falling into the crystal ball trap. It’s always wise to remember that a crystal ball simply shows you a highly distorted image of the surface it’s sitting on, and nothing more. Instead, we prefer to stick to our proven principles of financial planning and prudent investment management – principles that have served us well for over 10 years.
Year-end is a good time to revisit some of those principles. The year 2020 has brought with it many financial challenges for individuals and families. And it has highlighted the crucial importance of comprehensive financial planning as a way to cope with financial emergencies and plan for future contingencies – looking at everything from goals and objectives to cash flow management to investment portfolio management and estate planning.
It all sounds complicated. And without some expert advice, it might be. But as a start, it might be simpler to make some of these financial planning principles in the form of resolutions for the New Year. It’s a way to help you get your financial life back on track after a year that saw plenty of derailments. Think of it as an effective vaccine against personal financial chaos.
Resolution #1: Set a goal. Don’t just promise “not to spend more,” for example. You’ll soon be disappointed. Instead, set an actual financial objective. For example, resolve to set aside a fixed amount from every paycheque (or if you’ve been generating extra cash because of reduced spending during the pandemic), and put it into an investment account. Make the amount realistic, and set aside whatever you comfortably can, but do it consistently. Over time, it can really add up.
Resolution #2: Make a plan. Assess your financial priorities. Write them down. Are you saving for a down payment on a home? Are you setting funds aside for retirement? Do you need funds for a vacation? Or a new car? Or are you using every last cent to live on during the pandemic? All of these need a plan. Whether it’s cash flow management, debt control, or investing and saving, you need set priorities and assess available resources.
Resolution #3: Budget. Believe it or not, budgeting isn’t that difficult. We’re not talking Miss Grundy looking over your shoulder, wagging her finger every time you fork out a couple of bucks for a latté. It’s more basic than that. You probably know what you earn every month. Well, simply deduct what you spend from what you earn every month. If you come up with a negative number, you’re “over budget,” and you have a problem. If you have money left over, you’re on the right track. Find out where you stand! Simply record every expense for a month. It won’t kill you, and believe me, it’s going to start solving a lot of problems for you.
Resolution #4. Pay off your credit cards. We live in an instant-gratification, consumer-driven culture. You can get what you want right now with a tap and a beep of your smartphone. Over the past year, it’s even easier to do online. But unless you can pay that debt back at the end of every month, you’re not tapping and beeping at all. You’re digging a hole, one that’s difficult to get out of unless you stop digging. Pay off that credit card debt first. And do it now!
Resolution #5: Allocate assets properly. This is a must for those who already have some investments, whether in a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA). And that is: Make sure your overall investment holdings reflect your tolerance for risk. If you tell me that you’re an ultra-conservative investor, but your portfolio consists only of equity mutual funds, you’ve got something mixed up. This is fairly easy to fix with a questionnaire I use to draw up a realistic risk profile for all my clients. Using this profile helps you rebalance your portfolio for the New Year to just the right mix of safety, income, and growth assets that reflect your true risk tolerance – and let you sleep nights.
Resolution #6: Open an RRSP and a TFSA. If you already have these tax-advantaged registered investment accounts, good for you! But if you don’t, resolve to open them this year (this month for an RRSP, so you can get a tax deduction for contributions applied to the 2020 tax year), and start contributing regularly. Both the RRSP and TFSA shelter investments within the plan from tax and are essential long-term savings and retirement planning vehicles. You don’t need a lot of money to open a plan, and regular contributions from then on will get the power of tax-free compounding working for you right away.