By Elizabeth Summers CFP, FMA FCSI
It’s a new year, clean slate, exciting times – more or less. It’s time to eat less, exercise more, watch less TV, get more fresh air…. 2011 is brand spanking new. How can you take control and make it your year?
Well, it all starts with a plan.
If you have a well documented plan, you will know “Where you are now?” You can plot out “Where you are going?” Then figure out “How you will get there?”
And, since every one of us is different, every plan will be unique.
An important step in the process is to recognize your financial personality and use your strengths as you go. Are you an analytical person? Or perhaps, the spreadsheet king or queen? Are you a Rock Star spender and try in vain to explain to others why it means so much to have the very best? Or are you a person who needs security and becomes concerned when your finances seem out of balance?
The first step is to understand “Where you are now” because it’s important to have a snapshot of where you stand financially. For example, you need to know much you have in your chequing and savings accounts. Do you have investments? How much in RRSPs? Are you using a tax-free savings account? Do you have investments or savings that are not in a registered plan? If you have children, do you have RESPs? If you (or a dependant) are disabled, have you opened a Registered Disability Savings plan? If you own your home how much is it worth? This gives you an account of what you own. List everything here under the heading ASSETS.
What do you owe? Credit card debt, car loans, mortgages. List all of the outstanding balances and indicate both the interest rate you are being charged and the monthly payments you are obligated to make. These are your LIABILITIES.
You can get a clear picture of what you are worth by adding up all of your assets and subtracting the total of your liabilities. This is your NET WORTH.
Sit back and take a look at this picture. Is it so messy that you seem to have lost control? Do you have money or loans in a number of different places? If so, you can start with a bit of financial housecleaning and take back control. Too many accounts? Consolidate to the place you feel most comfortable. Too many loans? Talk to your bank to see if you can consolidate them into one loan with a lower overall interest rate and make it a priority to pay this off.
Note of warning though – don’t consolidate credit card debt and keep the credit cards open. If racking up credit card debt is a danger (rock star spender), only keep one credit card and plan in advance for your expenses. One of the biggest excuses for using a credit card is “unexpected” car repairs. If you have an old car, plan to set aside a dollar amount each month in a savings account because you know that your car will need regular maintenance and repairs.
If debt consolidation is not an option, work at paying off the smallest debt first. Achieving this first goal will give you a sense of accomplishment and you will feel empowered to tackle the next debt.
Next step to success is to answer the question, “Where are you going?” If you need an incentive, visualize where you are going. Start with a picture, nothing more. Where would you like to be financially in five years and in ten years? You can draw this picture, cut images out of magazines, or write it down in words, anything that will help you to visualize your goal. Write down two dates, 2016 and 2021 on a piece of paper and start to think about what may happen to you in the years in between.
You may not have control over where you get posted, but you still have choices about how to manage your finances. With this exercise complete, you are in a better position to answer the question “Where are you going?” Remember, this is a journey and as you get closer to the five year and ten year mark, you will need to re-evaluate.
Now you are ready for the exciting part: “How are you going to get there?”.
How are you going to get to your goals? You need to answer two questions. How much do you spend in a year, and does your budget allow you to save on a regular basis? Most people answer these questions with “Don’t Know” and “I Doubt It”.
Do you want to be debt free in five years? How much can you afford to increase you monthly mortgage or loan payments? Do you want to save one million dollars by the time you are 55? Calculate what your monthly savings should be to achieve this goal. If you need help with any of these calculations, a financial planner can help.
There is one more consideration when looking at “How are you going to get there?” It addresses the question, “what if something goes wrong?” You need to make sure that you and your family are protected in case you pass away or are unable to work in the future. It may be prudent to review your insurance coverage to ensure that you and your loved ones are protected.
2011 is a new year and the power is in your hands to build a strong financial future for yourself and your loved ones. It takes a bit of resolution, but you can do it. As your financial plan takes shape, you will be empowered through owning your decisions and taking steps towards true wealth.
This article was prepared for Elizabeth Summers, who is a Financial Planner with TD Waterhouse Financial Planning, a division of TD Waterhouse Canada Inc. and a subsidiary of The Toronto-Dominion Bank. TD Waterhouse Canada Inc. – Member of the Canadian Investor Protection Fund