Oct. 19, 2020
Financially organized people save more money, have less debt and lower stress. Even through the financial uncertainty of 2020, these folks have their house in order; following best practices to simplify their accounts, aligning with their partner on money mindset, protecting their household from financial losses and growing savings for their family’s future.
If a financially strong household is what you want, there are a number of things you can do in the next 30 days to improve your cash flow and net worth. Follow these steps:
Get clear about where you stand financially, and then streamline
Work with your partner to track your household’s money situation. In a spreadsheet list all your accounts (banking, credit cards, loans, mortgage and investments), and their balances. If you get lost, go through your stacks of digital and physical mail and pull out all your financial statements. Lay each on your kitchen table or laptop, find the balance and then list it.
Then organize the list by categorizing each item as either an asset (what you own) or a liability (what you owe). Tally up your assets and liabilities, then subtract liabilities from your assets to determine your net worth. That’s precisely the number you’ll need to know to see where you stand. It’s also the number you’ll want to focus on growing in the long-term because it’s what will fund your eventual retirement.
If you have even the slightest inkling that you have too many accounts, reduce! The goal is to simplify your banking as a household to one chequing account, two savings accounts (one for emergencies and the other for big-ticket purchases), two credit cards (each from a different provider), one RRSP, TFSA and work pension (if applicable) per adult, and an RESP for your children. That’s it!
If you have multiple financial advisers (digital or human), pick the best one in terms of performance and fees, and focus on building your retirement savings with their solutions.
Protect yourself and your family
You’ll want to build emergency savings to cover three to six months of your essential expenses. This can take up to six years to build, so stick with it. In the meantime you can strengthen your position by reducing your consumer debts by allocating a minimum of 10 per cent of your take-home pay toward these debts, and not accumulating more. Actively negotiate the lowest rates with your lenders. Call them up, ask for a lower rate, present a competitive offer and if they don’t want to “co-operate,” take your business elsewhere. Then, plan to pay a little extra each month. This will help to reduce the principal balance.
You can also put in place an appropriate level of life, critical illness and disability insurance and draw up a will, in the event that catastrophe strikes you or your spouse. My advice is to work with a professional insurance adviser on the former, and check out the online marketplace for wills (the will-making business has been drastically disrupted by tech companies offering do-it-yourself digital wills for less than $200).
Align your money mindset and behaviours with your spouse
If you’ve never spoken about money with each other, ease your way into the conversation by speaking openly about your views on money management, where they came from and what money means to you. If the conversation gets heated, cool your jets and try to remember that a team approach to financial management is key to building your net worth. If you don’t get on the same page financially, it’s unlikely you’ll achieve your financial goals
A great way to start aligning is to set a realistic net worth goal for the remainder of 2020 and 2021. For example, if your current net worth is $10,000, grow it to $15,000 by 2021.
Another excellent technique is to start tracking your household expenses through budgeting (especially important if you have separate accounts). According to author Dr. Thomas Stanley, the majority of self-made multimillionaires keep meticulous budgets, even though they’re rolling in dough. You can download free budgeting tools from any major bank.
Only once you’ve established a preliminary budget can you comprehensively look for ways to cut back unnecessary expenses. Think about your food and shopping habits and pay attention to the small expenses as they can really add up. The key with budgeting is to spend less than you make and prioritize savings and debt reduction through automatic payments.
Get saving for your whole family, it will motivate you
Sign up for your company’s retirement savings plan (it should take less than 30 minutes to enrol). Employers will often contribute free money. If your company doesn’t have one, or even if they do and you want to save outside of their plan, sign up for an RRSP and TFSA. Across all of your plans, aim to tuck away 10 to 15 per cent of your gross salary. If that’s too steep, start with less and grow your contributions every six months. For your kids, the biggest gift you can give them is their future education. Leverage the power of the RESP, which has a free government grant that will amplify your savings by 20 per cent, up to $500 annually.
If you’ve been sitting on the fence about investing in financial advice — money coaching, financial planner or investment adviser — the tip I can offer you is this; people who make serious progress on their money always have a plan, and the best plans typically cost money to build.
Getting financially organized also means balancing having a life. So, while tidying up your financial household, ensure your efforts also support spending a reasonable amount of money on what brings you joy and keeps you healthy.