It’s that time of year again – when we look back on the previous 12 months and look forward (hopefully in anticipation) of what the immediate future holds. If, on reflection, you realize that by this time next year you’d like to have more money in the bank than you do now, here are five steps to creating a financial plan to help get you there in 2013.
Ditch Credit Card Debt
Holiday season credit card bills will start arriving in mailboxes any day now. Will you be able to pay off your balance in full?
If not, you’re throwing away money – perhaps more than you think. Every time you carry a balance after the due date, you’re spending in the neighbourhood of 20 to 30 per cent interest on everything on your bill, backdated to the moment they were purchased. (While there are a number of low interest credit card options out there, those rates are often only for the first few months.) Compare that to less than two per cent that most savings accounts will offer you in return, and it’s a no-brainer to put anything you have in the bank towards your credit card debt. Still not enough? Then look in to getting a line of credit where the interest rate will hover around the prime rate – three per cent as of January 2013. Now… it’s time to cut back on your spending.
Track Your Spending
The only way to really know how much money you spend each month is to track your spending activity. One way to do that is to set up a simple spreadsheet. In the first column, you list all your monthly expenses:
- Et cetera
The next column is entitled simply: monthly expenditures.
With that set up, every time you spend money, record it on the spreadsheet in Column Two next to the appropriate line from Column One. Some categories can be broken down deeper. For example, “food” can be subdivided into meals eaten at home, at restaurants, bar drinks, et cetera. As you start to do it, new categories will crop up. The more specific you get, the easier it will be to identify areas to cut back on.
Cut Back on Frivolous Spending
After you’ve tracked your expenses for a couple of months, you’ll start to spot areas where you are spending more than you thought. Take takeout coffee for example; so many of us unwittingly spend a small fortune on coffee – a couple dollars at a time – that credit counsellors refer to it as “the latte effect.” Cutting back on restaurant meals is another easy way to make a dent in your debt load.
For you smokers – if you’re still wasting money buying cancer sticks, there’s an obvious choice that’s good for your wallet and your health.
Looking for a bigger bang? Does your car sit idle most of the week? Maybe you could get by without it by using transit, taxis, and the odd rental car. The savings in gas, parking, tune-ups and insurance can add up to thousands of dollars a year. Plus, if you sell your car you get a lump sum that you can use to pay off your credits cards or line of credit.
Set a Goal
It’s one thing to figure out ways to save money. But we’ll all human, and a little incentive can go a long way to help keeping us on track. Setting up a realistic goal helps you focus. Flat screen TV, winter getaway vacation, a new bike – whatever you’ve had your heart set on, aim to get it.
Still renting? Maybe it’s time to start putting aside some money for a down payment. But don’t stress yourself out trying to do it all at once. Set a reasonable goal for the year, and then reassess how much bigger you can make your nest egg the following year.
Seek Professional Help
If you’re in an entry level, salaried position with only a couple years’ experience under your belt it’s probably not worth paying for accountants and financial planners. But once you start to accumulate assets like real estate, RRSPs, stock options, RESPs, and so on, you might be at point where professional advice can pay for itself.
And if you’re self-employed or have other non-taxed earnings such as rental income or investment gains, an accountant could likely help you find deductions you weren’t aware of it. At the very least, the fees for these professional services can be tax-deductible.