When you awake from your New Year’s Eve festivities, thinking that you had too much champagne and that blue cheese always seems like a good idea the night before, here are five other things to think about.
These five items are certain to leave you in a better financial position a year from now – especially if you haven’t been following them so far.
1. Risk-free improvements to your returns.
This is mostly related to ‘short term’ cash. When we review a clients’ financial picture, they often have cash in several different places earning nothing. Sometimes this is because they want easy access to cash if they need it. Usually it is because it just happened that way. If someone will pay you 1.5 per cent to 2 per cent on your cash and someone else will pay you 0.01 per cent – this is a pretty easy gain on your returns. For those who are able to do so, have a home equity line of credit available for short-term emergencies (if you have the discipline to use it that way), and keep your rainy day cash ‘savings’ at a very low level. High interest savings accounts from places like Manulife, Ally and ING are pretty simple and safe to use. There is nothing to fear.
In some cases, it is worth looking at the Manulife One account or similar accounts that combine a mortgage with a chequing account. This is a more efficient way to manage your cash and debts than having everything separate. The bottom line is that you want to plug easy holes in your financial world, and this is one of the most common and the easiest to fix.
2. Take what the government gives you.
If you have children, make sure to set up an registered education savings plan (RESP) account. If you can contribute up to $2,500 per child each year, you will get $500 from the government. If you have lower income, and can’t contribute, there is still an opportunity to open an RESP and get a government contribution.
If you hold assets in a taxable or non-registered account but still have extra room to contribute to your tax-free savings account (TFSA), you might as well not pay tax on the income.
If you are earning $81,000 or more in taxable income, you should definitely be contributing to your registered retirement savings plan (RRSP) or pension. There is almost no reason not to contribute if you have the cash and the room and will be receiving 39 per cent or more in tax benefit on your contributions. Even if you don’t have the cash available, you might be able to transfer securities from your non-registered account to an RRSP and do a transfer ‘in kind.’
If you have a disabled child or grandchild, look into opening an registered disability savings plan (RDSP) account. The government grants can be sizable. The point is that there are several ways that you can benefit from government savings programs. If you are in a position to take advantage and you don’t, you are leaving money on the table.
3. Have a real investment plan and investment discipline.
What I mean by this is that you want to have your overall investment portfolio lined up to achieve a goal. That goal might be low volatility and high income, it might be high growth, it might be capital preservation. If the goal is well thought out, then make sure that there is investment discipline to achieve that goal. By that I mean that if the goal is low volatility and high income, then question whether you should own gold stocks. Maybe you can do so in a low weighting, but if you want low volatility, check how much of your portfolio is in commodities and emerging markets. You could argue that it should be zero. If not zero then certainly no more than 10 per cent. We see many cases of disconnect between what people say they want to achieve from their investments and what they actually own in their portfolio. Now is probably the right time to hold your investment portfolio up to the mirror and see if the holdings are in line with your overall goals.
4. Have a real holistic financial plan that drives the investment plan.
One of the challenges with achieving No. 3 above, is whether you have the confidence to know what you should be trying to build in an investment portfolio. Perhaps you are 55 and a conservative plan shows that you will likely have $2.5-million (give or take $500,000) when you pass away. If your goal is not necessarily to leave that much to your estate, then one of your options is to take less risk on your investments.
One of the key goals from the plan is to determine how much risk you need to take in your portfolio. You may want to take more, but if you can achieve all of your goals and only need to earn 4 per cent on average, then you are able to have a fairly low-risk investment portfolio. The lower the return that you need to earn, the greater the likelihood of achieving the numbers in your financial plan. For some people, this is what is needed to allow them to sleep well at night.
Some plans help to show how much income or cash flow needs to be yielded from the investment portfolio. In some cases, the plan might show someone who is a GIC-only investor that they simply can’t afford to earn 3 per cent a year for the next 30 years. They need to achieve greater growth because their current investment approach actually increases their financial risk of running out of money. Of course, a holistic plan includes a review of taxes, debt, insurance, estate planning and other issues.
5. Pay attention to taxes.
This sounds very simple, but it is one of the most important things you can do. Here is my recommendation. Go to a website like the Ernst and Young tax calculator so that you can see at a high level how your income is taxed. Then go to a website that shows an actual tax return, and enter some information to see how it impacts your taxes.
By taking an hour you can see the impact of higher income on your taxes. You can see the impact of dividend income versus interest income (from savings accounts, GICs, bonds and some real estate investment trusts or REITs). You can see the impact of RRSP contributions, charitable donations, child tuition and other rebates and credits. This could be the most valuable hour of financial learning you spend, as it will help to motivate you to take some action to boost after-tax income and lower taxes.
Nobody knows what will happen to investment markets in 2012, but if you follow the five steps above then you will be in a position to take action over what you can control. Simply put, this will put you in a better financial position no matter what markets can throw at you.
Ted Rechtshaffen is president and CEO of TriDelta Financial Partners, a firm that provides independent financial planning advice. He has an MBA from the Schulich School of Business and is a certified financial planner. He was vice-president of business strategy at a major Canadian brokerage firm.
Follow Ted on his blog at The Canadian Financial Planner.