Happy New Year!!!
With the new year comes a flurry of New Year’s Resolutions. Year after year, along with losing weight and quitting smoking, improving your finances is one of the most common resolutions. And year after year, by mid-January or so, gym memberships start going unused, and most people abandon any hope of actually living up to those resolutions.
So – is this year going to be different?
1) Create a snapshot
Imagine for the moment that you’re a passenger in a car, and the driver hands you a map and asks you to give directions. No matter how good you are at reading maps, you’ll probably find it an impossible task, because he hasn’t told you where he’s trying to go. So you ask. Even after he has identified the destination, you’ll still have a hard time of it if you don’t know your current location. The same holds true with personal finance – you need to know the current situation before you can start making plans to achieve your financial goals.
So, get out a pen and paper, and your bank statements and credit card bills… And create two things:
a) a net worth statement – in which you list all of your financial assets (stuff that IS money, or could be quickly sold to GET money) and all of your financial liabilities (any money you are morally or contractually obliged to pay someone). In short, what you own, and what you owe. Your net worth (assets – liabilities) is what would be left if you sold everything, and used the money to pay off your debts. Ideally, there’s something left. Realistically, there may not be.
b) an income statement – in which you identify all incoming money (on a monthly basis – after tax salary, investment income, government payments, alimony…) and all outgoing money (also on a monthly basis – rent, utilities, car payments, gas, groceries…). Ideally, there’s more coming in than there is going out.
What was the point to all this? Well, one thing is that you can create another one in a year, and see whether you’ve made progress, financially speaking. I’ve been doing this for decades (it doesn’t take that long), and statistically-speaking, this is a common habit of financially successful people. Give it a shot.
The other reason for doing this is because this will be useful in navigating your financial future (remember the car/map scenario above?)
2) Clearly identify your goals (AND your motivation)
So, tell me what you want, what you really really want (sorry – no more quotes from Spice Girl songs).
Sit back and think about this. What changes would you like to see that would make your life much better? Do you want to buy a house, because you HATE renting, because it puts you at the mercy of landlords who don’t do repairs and keep raising the rent? Do you want to buy a new car, either because your current car is on its last legs and you’re never sure it’ll get you home at the end of the day, or because the public transit connections are really bad near your house, and it takes you ages to get to work every day?
Come up with a list (not more than about 5 items) of things you’d like to achieve. This could include short-term (replace that broken dishwasher), medium-term (buy a new car or house), and/or long-term (be able to retire comfortably by the time you’re 75). Be detailed. And include your motivation.
Oh – and check out this cool and relevant article by Richard Branson.
3) Come up with a plan
Here’s where you create a road-map to get you from where you are NOW to where you want to be (bridging the gap from (1) to (2) above). There are two key ways of planning for things – action-oriented and results-oriented. In the end, results may be what matters, but actions are what’ll get you there. I recommend coming up with a plan that specifies both.
So, if your goal is to buy a $20000 new car (with cash) in three years, and you currently have no money saved up, then it can be fairly easily determined that you’ll need to save an average of $555 per month for the next three years. Your plan may be: save $600/month. But that’s a pretty vague plan, and odds are good it will fail, unless you can come up with specific actions that will support that plan. Like:
- set up a high interest savings account for my new car savings
- set up automatic transfers from my chequing account into my new car savings account (get paid bi-weekly? transfer $275 immediately after pay-day)
- start bringing a bag lunch to work 4 days per week (saving $40/week on restaurants)
- car-pool to work (saving $50/week on gas and parking)
- start a home-based dog-walking business to walk neighborhood dogs (earning $50/week)
4) Keep track – of your actions, and of your progress toward achieving your goals
Planning is all well and good, but now it’s time to follow through. Keep a written record. Spend ten minutes at the end of each week and identify whether you followed through with your planned actions, and what the results were. Consider if there are any additional actions you could take which will help get you there.
When it comes to planning, and tracking – take a look at this post I wrote last year.
5) Earn more money
Start with the assumption that the amount of money you earn at your job is in some way related to the amount of value you’re providing. On that theory, if you provide more value, you’ll be worth more money.
So – what can you do to provide more value? Would some additional training/education be useful? Will your employer pay for it? Is it just a matter of changing your attitude/mindset?
Also worth considering – the best way to get a substantial increase in pay tends to be to leave your current job and find a new one (not in that order – find the new one first, and THEN leave your current one). Statistically speaking, people who change jobs regularly earn a lot more money (because you can negotiate a 10% increase in salary with that new job – how easy would it be to do the same with your current job?).
6) Start up a side business
Is there something you enjoy doing that other people would pay for? Personal shopper? Landscaper? Dog-walker? Home-decorator?
Consider setting up a home-based business (ideally, one that doesn’t require that you buy stuff for your business, at least not up-front). You can bring in some extra income (and possibly deduct some expenses against that income, making it effectively tax-free).
Don’t quit your day-job (at least not right away) – this is something you’ll do in your spare time.
For more information – take a look at this post I wrote a while back.
7) Look at the interest you’re paying on debt
Interest rates are at all time lows, but is that reflected in the interest you pay on YOUR debt? Probably not. Credit card companies charge upwards of 20% interest. An unsecured line of credit, on the other hand, can cost more like 6%. If you have the discipline to not abuse it, consolidating your debt into a low-interest line of credit can be a great move.
8) Look at your ongoing expenses
I’m talking about the expenses that get paid monthly, whether or not you actually buy something. Rent, utilities, gym membership, magazine subscription, cable-tv, cell-phone bill, car payment…
Ask yourself a few questions:
- Can I cancel it? Gym memberships and magazine subscriptions – is the amount you’re paying worthwhile? Do you use it? Do you value it?
- Can I decrease it? Negotiate a cheaper cell-phone bill (drop some bells and whistles – less data? less day-time calling?) Cut back on cable (or change providers)? Move to a cheaper apartment?
I have a friend who changed to a new gas/electricity provider – they gave him a $100 gift card for switching, AND he dropped his monthly cable bill by $50. Took him less than an hour, and he’s going to be ahead over $700 this year alone.
Check out these 10 Tips to Save Money.
9) Start up an automated saving plan
Out of sight, out of mind. For each of your goals (2), set up a separate savings account.
(I’ve used Tangerine – Open a Tangerine account with my Orange Key 33438052S1 and get a $50 bonus! When you open an Account with a minimum balance of $100, you’ll get a $50 bonus! (and so will I) They’re also offering 2.4% interest for the first six months.)
Setting up automatic transfers at the beginning of the month (or right after your paycheck, whenever that is) guarantees that the money will make it into that savings account – waiting til the END of the month pretty much guarantees that there’ll be nothing left to put into the savings account. Pay Yourself First! Also, by having a dedicated account for each goal, you’re MUCH less likely to spend the money if an unexpected spending opportunity comes up (that opportunity will be weighed against the new car – which do you want more?)
10) Put your money to work
OK – this one assumes that you’ve got money sitting around in a chequing account or something. If you do, then your money is already hard at work – earning more money for your financial institution. Wouldn’t you rather it was working hard for YOU?
There are a number of possibilities here.
- Do you have high-interest debt that you’re able to put additional payments against (credit card, line of credit, mortgage)? Owing $1000 and paying $20/month in interest, while having $1000 in a chequing/savings account earning $1/month interest is kind of crazy, right? Consider applying that money to the debt.
- Is that money your ’emergency fund’? Then put it somewhere safe and accessible where you’ll earn maximum interest and pay minimum taxes – which is probably a high-interest TFSA (Roth IRA if you’re in the US).
- Is it money that you have no short-term need for? Consider investing it (still in a TFSA, if you’re not maxed-out; this is an easy way to avoid having to pay taxes on your investment earnings). I’m a big fan of dividend-paying blue-chip stocks, but if you’re a nervous investor, then you could consider a stock-index GIC (offered by most banks – if the stock market goes up, it goes up, but if the stock market goes down, you don’t lose anything). Or go with high-quality bonds.