Happy 2020 everyone!
If you’re like most people I know, the motivation to follow your New Year’s resolutions is fading by now.
I totally understand. The Christmas decorations are packed away now. Life is getting busy again, and the holiday bills are starting to come in. So it’s easy to give up on your goals and say “Oh well… I’ll try again next year.”
Do you want to know what my goal is for 2020? To keep you motivated! Why? Because it’s important to set goals and stick to a plan, especially when it comes to your money.
That’s why I’m sharing my best financial ideas for 2020. After 20 years working in the finance industry, I’ve helped a lot of people get their money on track. I’m sure these ideas can help you make 2020 the best it can be.
And don’t worry. This is not another cookie-cutter list telling you to spend less, save more. I’m sick of reading those, too. Advice like “Skip buying coffee in the morning and save that money – you’ll have $50,000 in forty years” doesn’t work in the real world.
My list has advice you can actually use. It’s intended to empower you with ideas that will help you manage your finances better.
So the question is: Do you want some real ideas to manage your money better? Do you need a boost to keep your goals on track? Then keep reading…
Get Motivated!
Many people today are stressed about money. I understand why. It seems like every piece of news out there is negative: trade wars, rising debt levels, recession fears etc.
The media likes to focus on bad things because they get more views. But guess what? There are lots of good things happening, too! The problem is most good things happen a little bit over a long period of time, so it’s hard to notice.
From a financial perspective, 2019 was a fantastic year. The job market was strong. Average home prices across Canada rose 8.4 percent. And most major stock markets were up big last year, with the TSX up 23% and the S&P 500 up 31%.
What do those numbers mean? If you own a home, or have savings in a company pension or RRSP, your finances took a big jump forward last year. Now is the time to build on that momentum.
Don’t get me wrong. I’m not telling you to double down on real-estate or the stock market. Nobody can predict what these markets will do over the next year. And like everything in life, you have to keep things in balance.
But there are some simple strategies that can work for anyone in all environments. Here are my top three strategies for 2020:
1) Pay yourself first
I get it. The cost of living keeps going up, and sometimes you need to leave a balance on your credit card to get through the month. Saving for anything seems impossible.
Let me ask you this: Would you pay your cell phone bill if it were unexpectedly $50 higher? Of course you would! (Maybe give the phone company a bad Google review, if it makes you feel better.)
People who have a hard time saving need to re-frame things. Make your new bill you. That’s the idea behind paying yourself first.
Commit to your retirement in 2020, even if it’s only a few dollars a month. There are many online options that make it easy to save and invest. The first step is always the hardest, but things get easier when you put your savings on autopilot.
You get bonus points if you set-up an automatic savings plan into a Tax Free Savings Account (TFSA). TFSAs are popular with Canadians, but most accounts are underutilized, so there’s lots of opportunity here.
How should you invest the money in your TFSA? Ideally, you should invest your TFSA money for the long-term. That increases the benefits of compounding, which helps your money generate even more money. You can also use TFSA for short-term savings goals (like saving for a down-payment on a home).
TFSAs also have a bonus feature: They can serve as an emergency back-up plan. You can withdraw your cash tax-free if something serious happens. That should give you peace of mind in the event of a hardship.
2) Save money on your investment fees
As Benjamin Franklin said, “A penny saved is a penny earned.” When it comes to investment costs, you can save a lot more than pennies.
Most people own at least one financial product, like a mortgage, GICs, mutual funds, or stocks. All financial products charge fees (i.e. interest costs, management fees). So you want to make sure you are getting the best value for the fees you pay.
Over the last ten years, investment fees have come down due to competition and innovation. For example, new competitors in the brokerage industry are driving trading commissions close to $0. Also, the growth of exchange traded funds (ETFs) is driving down fees on all investment funds, whether they are actively managed or not.
Fees are falling, but that doesn’t mean you get those savings automatically. You need to be proactive. Make sure you understand the fees you pay. Then shop around, or have your advisor shop around for you.
You get bonus points if you use a bank alternative or independent advisor. Banks are always looking for ways to increase their profits. That means they are always looking for ways to raise your fees. If you deal with one of the big banks, you always need to be on guard.
By contrast, independent advisors are not tied to a single institution. That allows them to shop around. To ensure that you get the best solution for the lowest price, work with an advisor who is also a fiduciary. A fiduciary is a fancy word for someone who always puts the interests of their clients first.
3) Take advantage of an RESP
Free money anyone? Registered Education Savings Plans (RESP) are fantastic plans that help you to save for your child’s education. But like TFSAs they are very underutilized.
They work like this: You put money into the RESP using after-tax dollars (you don’t get a tax refund like RRSPs). Money in the plan grows tax-free. When it comes time to pay for school, withdrawals from the RESP get taxed in the hands of the student (who is presumably in a lower tax bracket).
Here’s the free money part: The federal government will deposit an extra 20% on the annual contribution you make to an RESP. The maximum grant is $500 per beneficiary annually, or $1000 if there is unused grant room from a previous year.
Even more free money: All families qualify for the 20% grant. But some families also qualify for bonus grants depending on their income level. That could mean an extra $100 on your contribution.
I love RESPs because they are investments that allow you to invest in your child’s future. The money in the RESP compounds tax-free, and the investment in your child’s education compounds for their lifetime. The potential return on investment is incredible.
You can open an RESP on your own, or ask your financial advisor. Parents or grandparents of an eligible child can set up an RESP. If your child decides not to pursue post-secondary education, you can re-route the money to a sibling or even parent
You get bonus points if you invest the money in an RESP using a balanced or conservative approach. You want the RESP to grow, but you don’t want to gamble with your child’s education fund. Start with a balanced fund when your child is very young. Then switch to a conservative fund when your child is four to five years before starting college or university.
More to come
Watch for more articles this year. Wishing you all the best in 2020.
This piece was originally posted on Provident Wealth. Re-posted here with permission.
