5 steps for getting your financial house in order this year

Now that we are well into January, you’ve probably had many possible new year’s resolutions running through your head…lose weight, quit smoking, exercise more, spend more time with family…the list goes on. Where do you start?! My belief is that “getting my financial house in order” should be on, if not at the top of, most Canadian’s new year’s resolutions lists for 2017, and here is why.

As Canadians find themselves dealing with ever-increasing debt levels, a greater and greater portion of their monthly paycheck goes towards servicing this debt.  With grocery and gas bills on the rise, it’s predicted that the average Canadian family could spend $1,600 more in 2017 than 2016. So, now is the perfect time to review your financial health and set a plan for the coming days, weeks and months.

Step 1: Determine your personal net worth.

Review your current financial situation by creating a personal net worth statement. This should be done annually so you can see if you are gaining ground or not. List all your assets (e.g., home, car, investments) and give a realistic value for each. Then list all your debts (e.g.,mortgage, car loan, credit cards, lines of credit, etc.). File this away for next year so you can review your progress year over year

Step 2: Plan to pay down debt.

Review your list of debts from your personal net worth statement and create a debt reduction strategy.

Higher interest unsecured debt should be attacked first.
By reducing this debt first, you will free up more of your monthly income to be used to reduce other debt, or create savings. Paying down high interest, unsecured debt is a two-pronged approach:

1. Stop (or limit) the future use of the unsecured debt.
2. Pay more than the minimum the lender requires.

This seems simple in theory but can be difficult in practice because “life happens”. The budget you create should have some provision for unexpected expenses which can help with reducing the tendency to use the debt for such unexpected expenses.

Use cash on a go forward basis
Plastic (credit and debit cards) is very convenient and can lead to unanticipated or overspending. Leave the cards at home (in a safe place) to limit your access. Get receipts for everything you spend. Remember you are now using cash and without the receipts you have less ability to track where the cash went.

Step 3: Create a budget.

A budget is not a four letter word and it is not something to fear. A budget is merely a plan for how you want to spend your money. There is the old adage: If you fail to plan, you plan to fail. Nothing could be more true!  A budget is key to improving your financial health. If you already have a budget, pat yourself on the back. If you don’t, the beginning of the year is a good time.

The best way to create a budget is to review your spending patterns over the previous months because where your money has been going is probably a good indication of where it will go in the future.

• As a starting point, look at your bank statements, credit card statements, etc.
• It doesn’t matter what form your budget takes (pen and paper, Microsoft Excel, software, online), as long as it done in a method that you are comfortable using regularly.
• It doesn’t matter what form your budget takes (pen and paper, Microsoft Excel, software, online), as long as it done in a method that you are comfortable using regularly.
• Some resources to check out include the online budget calculator offered by the Federal Consumer Agency of Canada, and the budget tool and free mobile apps at Mint.com. Software for purchase such as Quicken can be useful, however, they come with a cost to purchase.
• Look to online tutorials to help you create the best budget for your situation.
• For your budget to be most effective and to be most successful achieving it, be sure to involve your spouse and your children (they will need to learn this as they get older) in the process .

Step 4: Create savings.

Pay yourself first.
Your budget should also have a monthly savings amount built into it. An effective way to do this is through payroll deduction. This way you aren’t tempted to dip into any savings you planned for at the end of the month.

Automatic Money Transfer
Another method of “forced” savings is to have your money automatically transferred from your checking account to your savings account according to your pay schedule. Start small and after a few months if you can handle slowly increase the amount. Out of sight is out of mind – over time you won’t even miss it!

Use a piggy bank
Collect your loose change. Loonies and Toonies can add up quite quickly!.

Step 5: Track spending.

An often overlooked step, you need to track your actual spending and compare it to your budgeted amounts. Review your budget at least monthly to see if your spending compares to your budget. If you find you are spending more in a category then the budgeted amount, you either need to increase the budgeted amount or decrease the amount you are spending.

Getting your financial house in order an important resolution. Create a plan and work towards achieving your plan. Don’t try to change everything overnight as you are more likely to give up and return to your old ways. If you find you are in over your head reach out to a professional such as a Licensed Insolvency Trustee for help.