Monday 5 January 1998

Resolve to control your spending

Some tips to help you get started in 1998

Michael Kane
The Vancouver Sun

The Ottawa Citizen / Quick access to bank accounts these days makes it easy to spend money. But try to spend less, or you will be mortgaging your security for things you could live without.

VANCOUVER -- It's a wonderful life, if you can stay out of the poorhouse.

Here are 12 resolutions to help you take control of your finances in the coming year -- one for each month. Pick the order that works best for you.

1. Take care of your health. Doctors say good health comes down to eating the right foods, exercising regularly and getting plenty of rest. You not only feel better and look better if you take your doctor's advice, you also save money and improve your earnings potential.

2. Draw up a net worth statement. The start of the year is a good time to tally your assets and liabilities. Knowing what you are worth when the bills are paid -- also known as your horizontal value -- is necessary to measure your progress.

3. Pay yourself first. Hard-earned cash will slip through your fingers unless you save a fixed percentage for long-term wealth accumulation. Take advantage of payroll savings plans or talk to your banker about a pre-authorized chequing plan to sock away money before you can spend it. Start by saving 10 per cent of after-tax pay and resolve to add at least half of all future pay increases until you are at 10 per cent of gross.

Ultimately, you will achieve financial independence. Meanwhile, you will have a cash reserve for emergencies.

4. Spend less. Are you mortgaging your security for stuff you could live without? Draft a family budget but keep it flexible. Consider it an exercise in communication and goal setting, rather than a financial straitjacket. The first step toward financial security is figuring out where the money is going.

5. Pay off the plastic. If you are one of an estimated six million Canadians who carry a credit card balance from month to month, ask your financial institution about a low-rate card to reduce the interest cost. Don't be too eager to take advantage of debt consolidation or an equity line of credit because you will likely start accumulating new debt in the same old ways. Consider cutting up credit cards and closing charge accounts. When the credit card is tamed, work on other non-deductible debt such as consumer loans and mortgages.

6. Review your insurance. Read your policies and check for overlapping protection from your employer, union, motoring association or credit card issuer. Consider boosting deductibles to lower the cost of premiums. Life insurance is vital if you have dependents and, generally speaking, term insurance is the most effective way to maximize protection. You and your loved ones also need protection if disability could prevent you from earning a living. Don't be sold an investment program when you want the most insurance protection for the least cost. When you have built some assets, permanent insurance can help with estate planning and business succession.

7. Make a will and then review it at least once every three years. The trend to common-law relationships makes a will even more important for those who may be unprotected by provincial succession laws. Traditionally married people should be aware that assets that could be used by your survivor to provide for your children may be frozen under provincial intestacy law until those children reach maturity, if you die without a will.

8. Maximize your RRSP. Most Canadians don't contribute as much as they should each year, passing up tax refunds and, more importantly, the long-term advantage of saving in a tax-sheltered environment. The government is willing to let us use its money to build our security, but we're missing the boat to the tune of $203 billion in unused contribution room at last count. Few, if any, investments offer the same potential as a registered retirement savings plan. Consider borrowing if you have unused room.

9. Understand your pension plan. There are crucial differences between defined benefit plans, defined contribution plans, deferred profit sharing plans and group RRSPs. Read your employee benefits booklet and endeavor to compensate for shortcomings such as increased investment risk or lack of portability. Understand that government programs are being scaled back. Although the Canada Pension Plan is being put on a sounder footing, it pays less than $800 monthly to those receiving maximum retirement benefit, and if you lose time from the workforce, you probably won't get the maximum.

10. Learn about investing. Read the business pages regularly and buy or borrow books that show how the money markets and investment vehicles work. Above all, try to honestly evaluate your own risk tolerance -- your ability to sleep soundly while your savings are at risk. Most Canadians are conservative investors who are more concerned about the return of their capital than return on their capital. The less risk you can handle, the more you must save.

11. Invest in yourself. Add another string to your bow. Take a course that will make you more valuable to your employer and may open doors to other opportunities. Put together a current resume, with references, in case you lose your job. Take time to catch up on old contacts and to foster new ones. You are far more likely to find a job from an insider than by mass mailing potential employers. Consider turning a hobby into a part-time business. Look for ways to generate income from your home and vehicle to offset your expenses. Do something non-work related that will stretch you in new directions.

12. Support your favourite charity. An investment in community pays dividends for years to come and saves money at tax time. Ask your financial adviser or institution about planned giving strategies that can improve your income in retirement, leverage your support for a good cause and safeguard savings for your heirs. The downside of planned giving? You will likely leave less to the government.