A New Year and a New You! I heard that comment a few times over the holidays, usually as part of a discussion on New Year’s resolutions. A new calendar year is like a fresh start, they would say, a good time to start a new exercise routine or get your finances in order. I can understand the appeal, I tend to indulge during the holidays, lots of eating, and after that indulgence visiting the gym is a good idea! According to a study by the University of Scranton published in the Journal of Clinical Psychology 45% of Americans make New Year’s resolutions. I imagine the Canadian numbers are similar. Unfortunately the same study found that only 8% of people succeed, the vast majority of resolutions are not successful. The top resolutions are about Health (losing weight, exercising more) and Finance (getting out of debt, saving or investing more).
Well I can’t help you tame the bulge but I can provide a few financial tips. Often I find New Year’s resolutions are grand, glorified and require a drastic change from the status quo. Objectives of that nature are tough to achieve, I find smaller goals and incremental changes easier to handle. For starters in January you are allowed to contribute another $5,500 to your Tax Free Savings Account (TFSA). The TFSA is a great way to boost your savings for retirement. It was introduced in 2009 and if you still have not made use of it, your contribution room has built to $36,500. If maximizing your TFSA is challenging, start smaller, as long as you are under the contribution limit you can add any amount to your TFSA. The TFSA is an integral part of any financial plan the greater use you make of it now, the better you will be financially later on. Unlike an RRSP when you withdraw funds from a TFSA they are tax fee. There are a few government funded retirement benefits that depend on your level of income (for example Old Age Security) and since the funds withdrawn from a TFSA are not included in your income, if you maximize your TFSA now, during retirement you could be eligible for additional government benefits. This flexibility is a great asset. I strongly encourage folks to maximize their TFSA.
The start of the year also has financial significance for retirees; it is in January that the minimum withdrawal amount for Registered Retirement Income Funds (RRIF) is calculated. Some restructuring of your RRIF may be needed to create the necessary income. In addition planning your withdrawals can help minimize the tax burden and make the most of the tax free status of your money. For example if you do not require the income, defer your withdrawal until December, this allows your money to grow tax free until the end of the year, putting a few more dollars in your pocket.
For those attempting to reduce their debt burden, I suggest you start by tackling the debt with the highest interest rate first. As mentioned above, do it incrementally, a small increase of your regular payment will help you repay your debt faster and because it is a small change, it is easier to maintain. That additional payment is an automatic savings tool, every extra payment will reduce the amount you owe and save you the interest. As well in a few months many Canadians will receive a tax refund, putting those extra dollars against your loan is a great way to repay your debt faster and save the interest.
Perhaps a completely new you in the New Year is unrealistic. In terms of finances, a few strategic changes, because they are easier to maintain, will have a greater impact. Regardless of your financial goals I wish you and yours a happy and prosperous 2015!
This information transmitted is intended to provide general guidance on matters of interest for the personal use of the reader who accepts full responsibility for its use, and is not to be considered a definitive analysis of the law and factual situation of any particular individual or entity. As such, it should not be used as a substitute for consultation with a professional accounting, tax, legal or other professional advisor. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group.