Twelve tips to help you cut debt and build wealth in 2013:
1. Start a habit of deleting one present for your young kids, grandchildren, nieces or nephews every holiday season and substituting an RESP contribution. The past year has seen a big increase in the attention given to young adults and the challenges of high tuition fees and a weak job market. Now, it's time for families to take action by putting more money in registered education savings plans. There's a matching 20-per-cent federal grant on RESP contributions of up to $2,500 a year.
2. Use your tax refund to pay down your debts. Pick the debt with the highest interest rate and use the entire tax refund cheque to pay it down. Just do it.
3.) Lock down a five-year fixed-rate mortgage. I explored the benefits of a variable-rate mortgage in this recent column (http://tgam.ca/DknK), but I'd go five-year fixed if I was buying right now. At around 3 per cent, the rates are laughably low to anyone with a long-term perspective on mortgages. Heck, I'd even check into a 10-year mortgage (read more on 10-year mortgages: http://tgam.ca/DlCe).
4.) Plan for higher interest rates. Rate increases aren't imminent, but when they do occur they will have the same impact as a pay cut for many borrowers. Figure out now how you'll afford higher mortgage or line of credit payments. Don't resort to cutting the amount you're saving. Find fat elsewhere.
5.) Recognize that the housing market is weakening. That's w-e-a-k-e-n-i-n-g. Not crashing, U.S.-style. First-time buyers who plan to stay put for at least 10 years, watch what happens in the usually brisk spring selling season. If it's a bust, get a 120-day mortgage rate commitment and stay alert to emerging bargains. Boomers, check out my column from earlier this week on how demographic trends will weigh on housing prices in the years ahead: http://tgam.ca/DlAq.
6.) Stop basing your expectation on what's going to happen in the stock markets in 2013 by looking backward. Canadian equity mutual funds on average lost 1.3 per cent annually over the five years to Nov. 30. Does this (a) make you optimistic about the next five years or (b) tell you stocks are a trap? I vote for (a). Look forward, not backward.
7.) Get back into the stock market. Option One: Take the money you've been hoarding in do-nothing cash and divide it into four chunks that you will invest in early January, April, July and October. If the market falls during the year, you'll have the comfort of knowing you kept some money safe. Read here about the dangers of playing it too safe as an investor: http://tgam.ca/DiOS.
8.) Get back into the stock market. Option Two: Invest your cash all at once. Studies (including this one from the U.S. fund giant Vanguard: http://bit.ly/RAilwT) show lump-sum investing is likely to produce higher returns than gradual investing.
9.) Commit to judging your investing success not by how you're doing a few months from now, but where you are in 10 years. I'd like to be able to say five years, but that may not be long enough for market ups and downs to blend into the kind of returns you're looking for. The S&P/TSX composite index was up just 0.7 per cent for the five years to Nov. 30 (including dividends), but 9.1 per cent for the 10-year period.
10.) Make saving money automatic: You won't miss $10 or $20 a week, so arrange to have that money transferred automatically into a high-interest savings account. There – you've just paid for at least some of next year's holiday season shopping.
11.) Buy a car – but finance it over five years at most. Car dealers are dealing, and you can finance your purchase with extraordinarily low rates right now. If your car is used up, there won't be a better time to buy. Handy affordability gauge for cars: Only buy if you can carry the payments on a loan with a term of five years, max. If you have to stretch your loan out for longer, you're overspending. Read here for more on the down side of long-term car loans: http://tgam.ca/DjHm.
12.) Ignore the bubbleheads. There is no bond or dividend bubble. Bonds and bond funds will fall in price when interest rates rise, and dividend stocks could be shoved aside by more speculative investments if the stock markets take off. But neither is about to explode. Bonds will still pay interest, regardless of what rates do, and dividend stocks will still pay cash to shareholders each quarter. This column on bond basics from last January still applies: http://tgam.ca/DlCf.