Given the extended winter much of the country has suffered through, I hope I’m not tempting fate by suggesting now is a good time for a financial spring cleaning. Just like changing the winter tires, getting the flower beds in order, and scrubbing behind the appliances, it’s about getting your whole house in order. It may not be fun, but it needs to be done.
If your family has dependents and no wills or powers of attorney, book an appointment with a lawyer to get that sorted out once and for all. Ditto for life and disability insurance. You might retire early if you win the lottery, but the likelihood of that is slim. You are more likely to die or become disabled. So if you play the lottery with its terrible odds of being a winner, you’re certainly pressing your luck if you are under-insured and lacking a basic estate plan.
Next: are you routinely setting aside some savings? You’ll need to cover the whole spectrum from short-term savings to long-term savings. Does that sound like too much? I’ve yet to hear from someone who reached retirement age and then complained about having saved too much over their life.
New Year’s resolutions may have faded into memories, but six months from now we’ll be bombarded with annual surveys on how much Canadians will be borrowing on their credit cards in order to pay for the holidays.
For those who heeded the advice about automating their savings, you should have four months’ worth accumulated in a high interest savings account. If you spent $1,200 last holiday season, that means you should have slightly more than $400 in the bank earmarked for next Christmas. I say ‘slightly more’ because you hopefully adjusted for inflation, and heck, maybe you even earned a few pennies in this low interest rate environment.
If you’ve abandoned this plan, or any other financial resolutions, it’s worth taking the time to ask why. Better now than in December. Short-term saving is sometimes referred to as planned spending, and it’s incredibly helpful for getting your expenses under control, especially since most of us have no real plan at all.
If you haven’t started to put money away for planned spending at the end of this year and you’re still paying off your credit card balance from last year, it’s time to realize that there is a problem. You should never carry a credit card balance. Not even a small amount is okay.
Some people carry balances in perpetuity because they hope things will just get better, that a raise at work will solve all their problems. Hope is not a strategy. Instead of a self-directed spring cleaning, it might be time to hire a professional that can repair your financial foundation. Consider getting a money coach to help you set up a short term game plan and get back on track.
If high-interest debt is not a problem, then after short-term savings you’ll want to continue doing something to increase your net worth. You can increase your net worth by adding to your assets - like growing your retirement portfolio- and you can increase your net worth by decreasing your liabilities - like paying off your line of credit or your mortgage. As long as you’re moving your net worth in the right direction prudently, either is generally fine.
Again, focusing on debt first is going to be your best option if you’re being charged anything other than low single digit interest rates. Otherwise, either choice between investing into a portfolio versus paying down debt is okay.
We’re still closer to the beginning of the year than the end, but that’s going to change soon. If your basic financial plans are going off the rails, now is the time to do something about it. While you still have time.
Preet Banerjee, a personal finance expert, is the host of Million Dollar Neighbourhood on The Oprah Winfrey Network and author of the new book, Stop Over-Thinking Your Money!