Another year has come to a close, and many are eagerly anticipating what the new year will bring. One particular area of focus is personal finances, and with good reason.
In November, Equifax, one of the two major credit bureaus in Canada, reported that late payments on non-mortgage debt had increased by 14% compared to last year. This is just one marker showing that Canadians are having a hard time making ends meet. Here are a couple more from our other credit bureau, TransUnion:
- As a whole, Canadians now owe an astounding $2.8 Trillion in consumer debt.
- On average, each of us has a credit card balance of over $4,600.
- All non-mortgage debt rose 2.6% year of year up to $21,700.
With these numbers, it is clear why many are anxious about their personal finances. Doing a refresh of your finances now may seem daunting, but it’s easier than you expect. Here are some great tips to help you reset your finances for this year.
Why refresh your personal finances?
Is refreshing your finances really all that important? Good money habits are about more than just meeting your financial obligations and being able to buy and do fun things. Your financial health has a direct impact on your overall health. The Government of Canada released statistics saying that someone under financial stress is:
- Twice as likely to report poor overall health
- Four times as likely to suffer from sleep problems, headaches and other illnesses
- More likely to experience strain in your personal relationships
So, yes, a regular personal finance refresh is very important, and it all starts with deciding where you want to make changes. To help decide, ask yourself questions like:
- Why exactly do you want to be successful when it comes to your personal finances?
- Are you looking to change your habits to save for the future? Do you want to live debt-free?
- Do you want to start investing so you have a better retirement?
Remember, this isn’t about changing everything right now or all at once. Many habit experts say that doing small steps with consistency is much more effective than a complete overhaul when working to change a habit. This goes for personal finance changes, too. So break this main goal into smaller, manageable steps, then put it in writing. Keep that piece of writing in view at all times, so it is always on your mind. The reminder will keep you in check and motivated.
Organize files and folders
The best place to start a financial refresh is by organizing financial documents. Organizing is an essential foundation for optimal financial health.
To start:
- Go through your financial records and get rid of anything unnecessary.
- Ensure everything is backed up digitally.
- Get rid of anything that is a duplicate of something that you can access elsewhere. Hold onto any hard-to-replace or legal documents, just in case.
Once you’ve done those steps and have your documents sorted, create a single, safe place for all documents. For physical copies, use a safe. For digital copies, keep many copies on cloud storage or hard drives. Keep everything organized and easy to access and look through.
Finally, create a quick reference guide. A reference guide ensures you can easily find what you are after, and so can someone else in an emergency.
Review/create a budget
A budget is the keystone to any good financial plan, no matter how financially stable you are.
Whether you already have a budget or are looking to make one, it’s always best to regularly review and adjust it accordingly. Financial situations change, so being on top of your budget and updating it is a must.
Make sure your budget includes every expense you incur. Debts, personal purchases, food, rent, utilities, everything should be accounted for. Seeing everything might be a hard pill to swallow, but knowing where all your money goes allows you to manage it better.
If you need a guideline to get started creating your first budget or if your current one isn’t working for you, a popular option is the 50/30/20 method. This method involves setting aside 50% of your income for needs, 30% for wants, and 20% for savings. If that doesn’t feel right, there are lots of other methods to try. Experiment with different ones until you find the right one. You’ll know it’s the right one when it’s the one you use. Cliche, I know, but it’s true.
Set financial goals
Financial goals are an essential part of any financial refresh. An important step to money management that many people miss is that you have to tell money what to do. Money has a bit of a sneaky habit of doing its own thing if you don’t tell it where you want it to go.
To choose a goal, it helps to look at your past goals. Ask yourself:
- Did I achieve them?
- Have they changed?
- What’s the next step to achieving it?
If you didn’t have a financial goal before, here are a few really good ones to consider starting with:
- Building an emergency fund
- Doing a no-spend month
- Paying off your debt
- Learn about compound interest
- Review your credit reports
There are two things to keep in mind when considering any goal:
- Goals that reflect and support your values will always be more achievable.
- Break the goal down into small, consistent steps. This is way more effective than trying to do a big overhaul.
Improve your financial literacy
Financial literacy is crucial to better money management. The more you understand money management, the more you’ll be in control of your money instead of it controlling you.
The world of finances is an ever-changing one. Making it impossible to learn everything, but making an effort to continuously learn a little more will help exponentially. From finance books, online courses, podcasts, and blogs, there are countless low and no-cost resources available. Find ones you like and dig in! Just be vigilant about researching who you’re learning from to make sure they’re a reliable source of information.
Invest in your future
If there’s one place not to shy away from spending on, it’s investing in your future. That might look like saving for retirement, a home, education, or something else that leaves you better off tomorrow than you are today.
Educate yourself about investing and start investing sooner rather than later. Learn about and start contributing to investments like:
Each of these financial tools is a way to make your money work for you. Learn about them and make the most of them as best you can. As stated previously, numerous free resources can help you get started. Most of them will tell you to invest early and often. Make it easy on yourself by automating your investment contributions.
Assess your income and debt
To get ahead with your finances long-term, it is vital to deal with debt. Giving away a portion of everything you earn makes saving extremely difficult. It’s like trying to collect water in a bucket that has a hole in it.
To seal the hole, create a solid financial plan to pay off your debt promptly and stick to it. It’s recommended to look at your highest-interest debt first. These are often:
- Credit cards
- Payday loans
- Buy now, pay later loans
There are numerous effective strategies for paying off debt. The Debt Avalanche and Debt Snowball are two common DIY approaches that many people have had success with. Choose what works best for you and stick to your financial plan.
If you’re facing a situation where you need a little more support than what a DIY approach can offer, Consolidated Credit can help. Our team of expert Credit Counsellors will assess your financial situation and recommend which debt management solution would work best for you. They can then help you put the plan in motion to set you up to reach your debt-free goal.
