11
01
2017
20, 50, 100 canadian bills

Financial Resolutions

It’s the start of a new year, and time to make your annual resolutions. Consider making a financial resolution this year. Below are a couple common resolutions and some tips to help you be successful.

I will use my disposable income wisely.

Follow the “One-Third Rule”: whenever you get extra cash, either through bonuses, gifts, or extra work, use the one-third rule to determine how you will use this money.

  • PAST: Pay down 1/3 of any debts
  • PRESENT: Spend 1/3 however you want
  • FUTURE: Put 1/3 into savings

It is recommended that you have enough savings to cover three months of expenses, in the event you are unable to work.

You should be saving about 6% of your income for retirement.

Investments are a great way to grow any extra money.

I will pay off my debts faster.

Your total monthly debt payments (including mortgage, student loans, car, and credit card payments) should not be more than 35% of your monthly gross income. Some mortgage brokers will stretch this ratio up to 40%, but that leaves you very little budgetary wiggle room.

There are a few ways you can decrease your loans faster:

  • Get a loan consolidation. It’s easier to pay back one loan than multiple loans. You can also use loan consolidation for credit card debt. Interest rates on credit cards are much higher than bank loans.
  • Stop using your credit cards. If you have trouble controlling your spending, put your credit card away (or cut it up!) and use funds you actually have.
  • Renegotiate or refinance your loans. If you are in good standing at your bank, ask about getting a lower rate. Is another bank offering an interest rate promotion? Use that as leverage, or take your loan to them. Lower interest rates mean lower payments… but you can also use this method to shave some time off your loan if you are willing to keep making the same monthly payment.
  • Sell off some assets. Get rid of that gas-guzzler! Or do some purging and host a garage sale! You’ll feel lighter, and you’ll have extra cash to lighten your debts. Note that your mortgage should not be more than 2.5 times your annual gross household income.

I am going to save for [fill in the blank].

Carry cash. The problem with plastic is that you can’t readily see your balance and track your spending. Carry cash and you’ll always know exactly how much you have left.

Cut unnecessary expenses. Do you need cable if you primarily watch Netflix? Can you do yoga in your living room instead of at a yoga studio? Review your expenses and see what you can cut out.

Drink at home and eat at home. Both of these will be cheaper in the long run than going out for food and drinks.

To retire comfortably, your nest egg should be about 20 times what you want your annual income to be. If you anticipate needing about $75,000 a year to live on when you retire, you’ll need to save a nest egg of about $1.5 million. Of course, this will vary if you retire early or continue to work longer than usual.

I will make a budget and stick to it.

Take the time to sit down and review your transaction history. Calculate a reasonable budget for all your expenses, and make sure you keep track so you stay on budget.

The Credit Counselling Society recommends the following breakdown:

  • 35%: Housing. This includes mortgage or rent payments, home taxes, strata fees, insurance and hydro.
  • 5%: Utilities such as phone or cell phone, gas (for your home), cable and Internet.
  • 10-20%: Food, including personal care and baby/pet needs.
  • 15-20%: Transportation (transit, taxi, fuel, insurance maintenance, parking)
  • 3-5%: Clothing
  • 3%: Medical costs (MSP, specialists, over-the-counter medication)
  • 5-10%: Personal & Discretionary, such as entertainment, recreation, alcohol, dining out, gaming
  • 5-10%: Savings. Plan to put aside money for unexpected expenses, retirement, and of course for any big expenses you might have planned for the future.
  • 5-15%: Debt Payments.

Still struggling? Meet with a financial advisor and get their expertise.

author: Melissa Nilan