Many are still looking ahead to what the next twelve months might bring us for those who are still reigning in the New Years' magic. We try to plan for these next 12 months in the form of New Year's resolutions and hit the refresh button on their financial budgets, incorporating new goals and objectives to carry them through. It would help if you used the dawn of a new calendar year to get your financial checklist in order.
Financial Steps to take in 2021
A lot can happen in twelve months financially, some things expected and some things unexpected. Debts like car payments and mortgages will likely stay intact. But you may need to tweak in other places if you anticipate a raise at work or a need to make some cuts to afford that dream vacation later this year. Perhaps it's time to up your investment contributions or consider a new insurance policy to protect your assets. Here are some things you should consider on your financial checklist for 2021.
- Pay Off Your Debts
- Contribute to your Tax-Free Savings Account
- Audit Your Investment Portfolio
- Contribute to your Registered Retirement Savings Plan
- Contribute to a Registered Education Savings Plan
- Filing Taxes
- Estate Planning
It is always a good start to focus on your liabilities first before concentrating more on your assets. Understand what debts you paid off in 2020 and any new debts you are carrying over into 2021. Are you committed to paying the minimum, or is it in your best interest to pay down debts early and aggressively? Will your mortgage payments stay the same, or do you expect new rates on taxes and insurance that will impact your monthly income. Perhaps check in with a broker to learn more about reliable life insurance in Hamilton, Ontario to see if they can lower your home insurance premiums. Either way, it's essential not to over leverage your debt portfolio so you can invest more in other places.
It is up to you how you choose to pay down debts. If you feel you are pretty good at controlling your spending, consider a snow avalanche approach where you pay down debts with higher interest rates so you can save more money. If you feel you struggle with debt, consider a snowball method to tackle your smaller debts first so you can feel more accomplished faster. Debt consolidation is a consideration, but it does not always pan out from a financial perspective, so be careful.
While many want to see their equity investments grow over time, it's always essential to have money set aside to cover any emergencies. It is good practice to have three to six months saved up so that if you were to lose your job suddenly, or a significant unexpected expense came out of nowhere, you can be covered so that you don't have to fall further into debt.
This money should always be placed into a Tax-Free Savings Account. (TFSA) While a TFSA won't have a great return (anywhere from 0.05% to 2.3%), this money is not meant to be invested because of the inherent risk in the market. No matter the economic conditions, money put in a TFSA is subject to guaranteed interest in the balance. More importantly, any interest collected in this account is tax-free. It's important not to consider this money as an investment, but rather an insurance policy against yourself to not get set back.
Before you make any significant changes to your investment strategy, you should take a good hard look at your past year and review your activity and performance with your invested assets. Look against your debts and future income to understand if you can increase your contributions. Look at your performance, see if you are invested in the right funds based on your age category, and see if you need better returns in riskier equities or safer returns with dividends in more conservative equities.
It would help if you also considered how real estate factors into your portfolio as well. Paying down the mortgage faster to build more equity into your house is a safe and effective mechanism for increasing your net worth, as homes with large principal balances will come with larger interest payments. A paid-off home means no interest leaving your net worth and having a paid off asset in your portfolio that usually appreciates over time. You can also consider moving some money towards a rental property for guaranteed cash income.
After you've done a comprehensive audit of your entire investment portfolio, it is usually a good idea to go ahead and increase contributions to your Registered Retirement Savings Plan. (RRSP) These traditional retirement plans are prevalent because you can defer tax liability till retirement age by depositing pre-tax dollars into your account while your investment grows over time.
For 2021, the limit is 18% of your annual gross income and a maximum of $27,830. You are eligible to contribute to this account until age 71, which at that point, you will need to close the account and convert it to either an annuity or a registered retirement income fund (RRIF). In exceptional cases, you may be able to withdraw specific amounts of money from your account. You can withdraw money tax-free to buy a house or go back to school.
Speaking of going back to school, if you have children who have not yet gone to college, you will want to make sure you are saving money in a Registered Education Savings Plan. (RESP) As many are already aware, the cost of secondary education is continually rising, and you don't want to stick yourself or your child with a large student loan debt to be able to invest in your children's future.
RESP's are excellent instruments earmarked for education, and you can invest up to a maximum of $50,000 per child over the lifetime of the account. More importantly, the federal government will match 20% of whatever you invest in the account, up to $500 per year. You can also receive a Canada Education Savings Grant of $7200 if you proceed with the maximum. More importantly, although the money you invest is not tax-deductible, any of the compound interest that accrues is tax-exempt when you withdraw it for a qualifying education event.
One of the more dreadful tasks that many people hate that comes with a new year is filing their taxes. While some might see themselves receiving a friendly refund depending on their withholdings, others who may have had a great year financially will find themselves having a large tax liability and need to write a check to the government.
You must read thoroughly the tax code each year to see what tax deductions you might utilize to lower your tax liability. For example, if you do any freelance activities, you might write off your home office as a place of work. Or, if you don't contribute to a pre-tax account automatically through work, make sure you are taking these into account when adding up your income and investments. It is encouraged for you to hire a tax accountant who understands the tax code more thoroughly to minimize your liability and potentially receive money back from the government.
When you've considered everything that you can do up to this point for 2021, you can finally turn your attention to things you can do that will impact your life for decades to come. It is good practice to look at your entire estate, and determine how you expect it to grow, and ensure it is protected. Make sure you have ample insurance on your assets.
Having reliable life insurance in Hamilton, Ontario can also help you with other ways to protect your future, such as wills, power of attorney, and Whole Life Insurance. Reliable Life Insurance Hamilton, Ontario can also protect your entire estate, whether its investments, real estate, or other valuable assets that you wish to leave with your family when you pass. It's crucial to protect what you own, and it's important to revisit this every year to account for such changes.
Conclusion
So when a new calendar year begins, unfortunately, it is not a time to relax, but a time to think ahead for what the next year and the future hold in store. Taking some time to see how well you've done and how well you can do is critical to building the financial future you want and reaching your goals and objectives faster. So be sure to take these seven steps early this year, so you will be in an even better situation when 2022 hits again next year.