Lift your wallet or purse, turn your head and cough: It’s time for your annual fiscal checkup.
Today we are going to look at some common money areas that don’t get as much attention as investments and mortgages, but are also important for good personal financial hygiene.
Net worth statement
This is simply our assets minus liabilities, or what we own minus what we owe, which boils down to a single dollar figure. We generally want this number to increase over time until we are in the decumulation phase of life. Keep in mind that with more assets, such as owning a home or a large investment portfolio, it’s possible to see our net worth go down from time to time even though we are doing all the right things in the accumulation phase.
To do: Calculate your net worth once a year to keep on top of your overall progress.
Budgets
The single most fundamental aspect of managing our financial lives, and the most loathed. Luckily there are many ways to budget beyond setting up and updating massive spreadsheets, including the use of apps or automating transfers into separate accounts on a regular basis.
To do: If you’ve never set up a budget before, find a method that appeals to you and put it into motion. If you have a budget, review how you’ve spent your money to see if it aligns with your values and goals. If not, make a change to get back into alignment.
Check your credit reports
A credit score is a number, but a credit report contains much more information held by credit bureaus about all the credit products opened in your name. You are allowed to access your credit reports for free from Equifax and TransUnion, but note that finding the free options can be tricky. The websites might try to steer you toward a monitoring subscription priced at $24.95 per month, but those are not necessary in order to access your reports.
To do: Access your free credit reports and check that the details are correct. If you see anything fishy or incorrect, follow up immediately.
Emergency fund
The traditional rule of thumb of three to six months’ worth of monthly expenses may be too much or too little for all situations. If you are low on the income spectrum or have never had an emergency fund, focus on the first $1,000 ASAP. You can dial the urgency back from a 10 to a seven when it comes to hitting three to six months’ worth of expenses as your next target. But if you are a high earner in a field in which it might take a year or longer to find your next gig, you’ll need an emergency fund to match.
To do: Figure out an emergency fund level that makes the most sense for your situation and map out a plan to get there.
Insurance
Disability insurance is rarely top of mind for people, but it should be because one of the most valuable financial assets for many Canadians is their ability to earn an income. We’re talking millions of dollars over a career. If you became disabled and unable to earn that income, what would happen? Over time, disability insurance coverage from employers has become less generous, and many self-employed Canadians have no disability insurance. While you’re at it, review your life insurance and critical illness insurance needs as well.
To do: Check your coverage, and if you don’t have any, or it’s not as much as you thought it could be, look into your options with private insurance.
Estate planning
A first child is generally the trigger for getting serious about creating a will but, to this day, I’m shocked by the number of parents who tell me they haven’t gotten around to it yet. A survey by online estate planning company Willful backs this up: 97 per cent of Canadian parents agree a will is a good idea, but only 52 per cent reported having one. It’s worth noting that estate planning is not just reserved for parents. There are many reasons for setting up a will, but you don’t have to be a parent to need powers of attorney (or an equivalent, depending on where you live) for health care and financial transactions in case you become incapacitated.
To do: For less complex situations, there are lower-cost options available online today. More complex situations will still need a human touch.
Preet Banerjee is a consultant to the wealth management industry with a focus on commercial applications of behavioural finance research.
Preet Banerjee