The new year is always a good time to reflect on the changes we want to make in life.
For many, a new year's resolution might be set on improving health, quitting smoking or travelling more. Whatever it is, the new year is always a good time to set new goals and have a fresh start. It's also important to set your financial resolutions for 2015. Many might overlook this important and exciting aspect in their life, so today's your lucky day!
Before setting your financial goals, you need to know where you stand financially, so take the time to update your personal balance sheet. Write down all your assets and liabilities and know your overall financial picture before getting started. The idea is to keep a record of your net worth every year. Once you know your net worth, you can verify if you are on target to reach your financial goals.
Knowing your net worth allows you to set your budget for 2015. Was your budget on-track last year or did you fall off course? Can you trim any expenses? While some expenses are fixed, travel and discretionary spending are more flexible and can usually be reduced . . . I know it sounds like I am ruining your fun right now, but you will thank me later in retirement! Start with your projected income for 2015 and allocate dollars to the different expense groups. Remember, like a guitar, you can fine tune your budget; the important thing is to have one . . . and I don't mean a guitar.
You might be thinking, "What do I do if I have an emergency during the year?" Good point! This happens more often than not. We recommend our clients set aside at least three to six months of living expenses. Call it your emergency fund! This should be used for an actual emergency, like your furnace breaking down or for car repairs as examples.
If you are retired, all of the above still applies and more. You should review all your income sources. Have a look at your company pension if you have one. If not, then review your government pensions, such as CPP and OAS. If you have an RRSP and need extra income, now might be a good time to convert your RRSP into a RRIF. If you are already receiving income from your RRIF, make sure you review the minimum withdrawal required for this year. The minimum changes every year and depends on your age (or your spouse's), so it might be higher or lower this year.
If you have investments, it's a good time to evaluate if 2014 was a good year for your portfolio. I don't mean ask your neighbour how well his or her portfolio performed last year and compare it with them. What I mean is, how well did your portfolio do on a risk-adjusted basis? It's also a good time to review your asset allocation with a financial advisor and determine if your investment objectives are in line with your risk tolerance. If interest rates increase later this year, how well will your portfolio perform and could you be exposed to unnecessary interest rate risk?
If you are planning for retirement or you are already retired, you should have a financial plan and have it updated every few years or when there is a significant change in your life (i.e. sale of home, death of spouse, inheritance). There are a lot of moving parts that need to be monitored on a regular basis, so having a financial plan is crucial. Establish a regular schedule with your financial advisor and review your financial goals on a regular basis.
Lori Pinkowski is a portfolio manager and senior vice-president, Private Client Group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer any questions at 604-915-LORI or [email protected]. You can also listen to her every Monday morning on CKNW at 8:40 a.m.
