Written by Joe Snyder
Monday, October 14th, 2019
The closing of one year and the start of a new year provides a great opportunity to take inventory of both the positive (beneficial) and negative (harmful) financial decisions we've made in the past year. While it's too late to course correct for the previous year, it's a perfect time to plan for the upcoming year's financial decisions.
So let's start with a review of the past year. Here's a handful of questions to consider:
- Did you maximize RSP and/or TFSA contributions?
- If you have children, did you make RESP contributions and enjoy the gift of free money from the 20% match?
- What about any debt you might have – did you pay it down? Did you consolidate any high-interest debt into a lower-cost solution?
- Is your emergency fund fully funded to cover 3-6 months' worth of expenses?
- Have you taken steps to reduce your investment fees as much as possible by switching from higher-cost, actively managed solutions to lower-cost solutions such as index-based funds?
TFSA and RSP Contribution
As we look toward the New Year, one of the first things to prioritize is a new calendar year for TFSA contributions, and of course, the ever-busy RSP and tax planning season. How do you decide which to contribute to?
If you're looking for the corresponding tax deduction of an RSP contribution because you're in a higher tax bracket, then consider setting up regular monthly contributions rather than making a one-time lump sum contribution. It's smart behaviour, and it eliminates the last-minute rush.
If you're in a lower tax bracket and imagine you'll be in a higher one during retirement, then TFSAs might be the way to go. TFSAs continue to grow in popularity and are all-around helpful accounts for saving for both short-term and longer-term goals.
New Reports for Investors
In 2017, the final phase in the series of CRM2 regulatory changes was implemented with the launch of two new reports: a personal performance report and a report on dealer compensation and charges. Investment dealers now send these two reports to their clients in the spirit of transparency and cost disclosure.
Investors now have visibility into their personal rates of return (important to make sure you're on track toward reaching your goals) as well as dealer servicing and account charges. The latter is important because it will create a way for investors to compare the services they receive from various investment dealers they might have accounts with, and will put into dollar figures the amounts that you're paying those dealers for things like trailer fees and deferred sales charges (DSCs).
Tips for Financial Fitness in the New Year
Here are a few final tips to make sure you'll be financially fit in the upcoming year:
- Always choose your accounts and products after asking yourself what you're saving for. If your answer is something short term, like a vacation next year or a new car, then you'll want to stick with products that are built for short-term goals. These include savings accounts and shorter-term GICs. If you're saving for a longer-term goal like retirement, you'll want to choose a product that will give you the greatest chance of reaching that goal. This would likely be a market-based investment like mutual funds.
- Cost is key. If you're an investor, make every effort to reduce your investing costs. The difference of a 1.00% savings in management fees on your mutual funds could mean the difference of working an extra year or two or retiring a year or two early.
- Pay off any high-interest debt you have.
- Make sure you have a fully-funded emergency fund. A rule of thumb is to have between 3 and 6 months' worth of expenses saved. I'd suggest a savings account that's a TFSA for this goal.
- Make it automatic. Saving and investing is much harder if you have to make one-off lump sum deposits. Instead, set up automatic contributions bi-weekly or monthly. This is not only smart investing behaviour, but it will save you from the temptation to time the market.