9 resolutions for better financial health

Zoomer | January 19th, 2012

Here are some steps you can take in the New Year to ensure a better financial future. This year challenge yourself to:

Think about the year as a whole

Ever heard of “top-down design”? It’s the process of starting with the “big picture” and drilling down to the details. According to a study in the Journal of Consumer Research, looking at the year as a whole leads to more accurate judgments. The study found that people who planned month-to-month created budgets that were lower than their recorded expenses. However, people who planned for the whole year estimated their expenses more accurately.

There are many advantages to starting at the top: You can build in potential cost increases, account for major expenses like home repairs and set priorities.

And don’t worry, it’s supposed to be hard. The study also found that people who perceived the budgeting process as being difficult tended to make an upward adjustment in their planning. In other words, by over-estimating their expenses, there were right on track. Over-confident people tended to over-spend.

Manage your portfolio

Watch enough news and it’s easy to become confused about the current state of the markets. However, experts warn that the people who are at greater financial risk are the ones who aren’t paying attention — and who assume that “everything is okay”. You don’t have to be an expert, but it is a good idea to be aware of where your money is invested and how it’s working for you.

The New Year is also a good time to review your portfolio and make sure you’re happy with your current decisions. In Canada, we have an extra $5000 worth of room tax-free savings accounts as well, though it will take some shopping around to find the best investment vehicle for your needs.

Taking charge of your investing can be tough, but a little education can help. Talk to your financial adviser and review your investments, visit the library for books on financial planning, and look for podcasts and articles online. Carefully evaluate and consider the advice that’s out there. A lot of publications are geared to audiences in different countries, and strategies that work well for one person might not work well for everyone else.

Get organized

So you already have a filing system for receipts and maybe use personal finance software — but can you find your fail-safes and back-up plans when you need them? For instance:

– Can you quickly locate your insurance policies and other vital information in an emergency? It could cost you a lot of money if you’re missing a vital piece of information — like how many days you have to file a claim.

– Do you know what benefits and discounts you are entitled to from any credit cards, memberships and rewards cards you have? Taking advantage of these cost-saving measures could save you hundreds of dollars.

– What warranties or extended coverage do you have for certain items, and where is the information stored? Knowing the details could save you paying for a costly repair.

– In the event of identity theft or fraud, do you know where to turn for help? For instance, what billing companies do you need to contact if you suddenly cancel a credit card or close a bank account?

In short, it may be time to take stock of what you’ve got… and know where to find it fast.

Review your expenses

Paying too much for your insurance, cell phone or other services? You’ll never know unless you look — and make a few calls to see if there’s a better deal out there.

Think back on last year and consider what services you used a lot versus what ones you didn’t take full advantage of and see how that aligns with your current budget. Look for ways to save — like “bundling” your communications services for a discount, or switching your cell phone to “pay as you go”. Better use of the resources you have can also lead to savings, such as using your internet connection for long distance calls through Skype.

Even if you aren’t planning to cut back right now, it’s good to have an idea of where to eliminate those non-essential costs if needed.

Develop a giving plan

In recent years, charities were hit with a double whammy: donations were down but the need for support and services increased. The holidays may be the “season of giving” but it’s also the time of year when budgets are already stretched and it may be difficult to include everyone.

This year it makes sense to plan in advance how and when to give in order to make sure your favourite causes don’t get missed. Charities need support throughout the year and consistent donations (even small ones) can help them plan their budgets. For example, instead of making an annual $100 donation at Christmas, try giving $10 each month (and give yourself November and December off).

Budgeting donations also helps you avoid spontaneous gifts to questionable (and possibly fraudulent) organizations. Take the time to do a little research as part of your plan. For more information, see Develop a family giving plan and Give, but give wisely.

Downsize your stuff

In Italy there’s a tradition where old items are tossed out the window at New Year’s to make room for the new. Dangerous in practice, perhaps, but the principle is a good one: It’s time to let go of things that are no longer useful and are just taking up space.

How does this affect your finances? Cleaning house could mean some extra cash in your pocket. There’s still a strong demand for used items because more people are hunting for bargains and being more environmentally aware. This could be another good year for that garage sale you’ve been meaning to hold, or you could sell your things online or through consignment stores. (See Ten ways to sell your stuff for more ideas.)

Donating your used items to charity is also a good way to support local causes and help out your community.

Update your estate

It may sound like a grim way to start the year, but chances are a lot has changed since you created your last will. Use the New Year as an excuse to take a second look at your current arrangements and ask yourself if they still make sense. For example, your children may no longer be minors, or there may be new children or grandchildren to include. Maybe you’ve never had a will before, or you would like to add a living will. Are there provisions to look after any minor children or to support elderly parents?

Another difficult (though very important) step is to talk to your loved ones about your plan. There’s a certain peace of mind that comes from knowing what to do ahead of time rather than trying to make important decisions when stress levels and emotions are high. Good communication now can also prevent fighting and hard feelings later on. (For advice on how to get started, see The family feud.)

You can also use the New Year as a conversation starter: “One of my resolutions is to update my will, and I wanted to update you…”

Start an emergency fund

Emergency funds have received a lot of attention from experts in the past several months, and they’re geared up to be a “must have” item regardless of your age or income. It’s the “cushion” that lets you cover unexpected expenses like emergency travel, home repairs or a job loss without going into debt or drawing on your retirement funds. Essentially, you avoid paying interest on a loan and you won’t be penalized for withdrawing money from a high-yield investment or RRSP.

How much is enough? Experts don’t agree on a number. Some suggest setting aside one month’s living expenses while others recommend at least three to six months worth. It depends on your financial situation — for example, single-income homes should set aside more — and if you foresee any major expenses in the coming year.

The point is to start a fund (or allocate funds) for this purpose and think of the money as off-limits. Cashable GICs and high-interest savings accounts are two of the ways you can keep the money invested but still have it close to hand.

In the end, the hardest thing to do may be to keep some perspective — especially because financial stress can impact your health. Remember, if you have a roof over your head and know where your next meal is coming from, you’re already in a better financial position than millions of people. It may sound trite, but counting your blessings is also a good way to start the year.

 

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