By Lesley Scorgie / Illustration by Malcolm Brown
Last December I found myself trapped in financial darkness with no escape route. A few years earlier I’d set financial goals such as “grow my net worth” and “pay off my mortgage,” but I hadn’t devised a clear action plan. Frustrated and feeling like I wasn’t achieving anything, I decided to carve out a specific 10-year financial plan. To jazz up the process, I rolled out a six-foot-long sheet of wrapping paper and taped it onto my bedroom wall (the blank side facing me – I didn’t want to get that jazzy).
For a week I populated the paper with Post-it notes that outlined my goals and dreams. I jotted down things like “purchase an investment property,” “buy a new car with cash,” “travel to a new part of the world each year” and “grow my investment portfolio by 10 per cent annually.” We’re talking dreams, remember. But after I summarized each of my goals, I was able to come up with a clear, defined route towards making them happen. I escaped from financial darkness.
Heading toward a new year means tens of thousands of Canadians are making resolutions to improve their lives. If you’re financially lost, it’s time to gear up and plan. The first rule is both to dream, and to get specific about what you’d like to accomplish. Clearly defined financial goals have a timeframe (usually five to 10 years), they can be measured (to see if you’ve accomplished them), and they’re realistic. An example of this might be to become mortgage free within 10 years by making two extra payments each year. Write down your goals and, as you move forward, be willing to allow
for some flexibility.
The second principle is to ensure that each financial goal increases your net worth. (Net worth is what you have left after subtracting your liabilities from your assets.) Building your personal bottom line means reducing debt and building assets. Let the measure of net worth drive the actions you take to achieve your goals. So, in year one of your plan, you might increase your net worth from $10 to $5,000. In year two, from $5,000 to $15,000.
The third rule is to increase your assets. Break down your asset goals by year; that’ll make it much easier to see what actions you need to take to make them happen. In year one set a goal of contributing five per cent of your total income into an investment program. Increase those contributions to 10 per cent in year two and 15 per cent in year three. These types of contribution goals are easily executed through automatic bank and payroll deductions.
Sign up for your company RRSP and pension plans. Most employers will allow you to select the investments within the plan and some will even contribute a matching portion. If you’re self-employed or your company doesn’t provide a plan, an RRSP can be set up at any financial institution. Increase your contributions each year until you’ve maximized the predetermined limits. Starting in January, a new savings account called the Tax Free Savings Account (TFSA) will be available to Canadians. Individuals can contribute up to $5,000 annually with after-tax dollars and can select the types of investments within the plan. The money then grows tax free. Both the RRSP and TFSA are valuable investment tools everyone should have. And within your plans, if you’ve invested in mutual funds, contribute regularly to capture an average price on the units. If buying stocks, re-invest your dividends through a dividend reinvestment plan (DRIP).
The fourth principle is to get rid of bad debt. There’s only one kind of good debt and it’s the kind that helps you grow your assets – like a mortgage or RRSP loan. The rest is bad: credit cards, store cards, vehicle loans and so on. Each year, set specific debt reduction targets. If you owe $20,000 you could set a goal to decrease the balance to $14,000 in year one and $8,000 in year two. Review and negotiate interest rates annually and use helpful accelerated payment plans to reduce debt faster.
Don’t forget to evaluate your plans to see if they’ve worked. Check in and update your goals every few months or at least every year. Record your progress, celebrate your bottom-line success and make adjustments. As you flush out a financial plan based on realistically increasing net worth, your financial goals will guide and define a lifestyle that fits with your aspirations. Though temptation to live beyond your means will always exist, focus on achieving your financial dreams. If you want your dreams to become reality, plan to make it happen. U
Category: Money, Rich by Thirty
Leave a Reply
