I've heard it said that the New Year is an opportunity for a new start on old habits. It's not the case for me this year. My resolution is to make progress in getting back into shape. Last year, my resolution was to drive by the new gym that opened in my neighbourhood at least three times each week. I kept that resolution, although I didn't actually look at the gym when driving by. This year, my resolution is to actually stop at the gym.
If you're short on ideas for your own New Year's resolution, make a commitment to improving your life financially. Not sure how to do that? Here are what I consider to be the top five opportunities for anyone looking to get their financial house in order.
1. Create a pension.
Not everyone has the luxury of participating in a pension plan at work. And even those who do are less likely today than ever to have a defined-benefit pension plan. The bottom line? Having enough money to retire is less of a certainty today than ever. You've got to take responsibility for answering the question, "How much will I need to retire and how am I going to accumulate it?" Treat this like a project, and if you need help, consider contacting a trusted financial adviser. Understand that creating a pension may have to start with creating a budget if you're spending more than you're earning each year. Think about your registered retirement savings plan (RRSP) and tax-free savings account (TFSA) as the vehicles to use to get started.
2. Own a home.
Past surveys by Statistics Canada have shown that those who do not own their homes were much more likely to claim to have inadequate resources to retire. You might think that it's because these folks don't have adequate resources that they don't own a home. Experience has shown, however, that home ownership is an excellent forced savings program. With every mortgage payment you make, you can build equity in your home. That equity only increases further if you own the property for the long term and it increases in value. Renting may be necessary or appropriate in the short term, but home ownership should be a long-term goal for most.
3. Pay down debt.
A recent Canadian Financial Capability Survey showed that two-thirds of Canadian households had outstanding debt that averaged $114,000. It's important to realize that every dollar of debt you pay down does create a return equal to the after-tax interest cost you've been paying. For example, if you have a non-deductible loan at, say, 5 per cent, then paying down that debt will effectively achieve a 5-per-cent after-tax rate of return. And that return is guaranteed. Where else can you achieve guaranteed rates of return like this? Pay down your "bad" debt first. This is debt with a high rate of interest, where you've borrowed for personal consumption, and the interest is not deductible. Credit cards come to mind here.
4. Start a business.
I'm not suggesting that you should give up your day job to become self-employed. Creating a successful business that will fully provide for your costs of living is a tough thing to do. But even a part-time business can create the opportunity for extra income that could be very tax-efficient. How so? You'll be entitled to claim a deduction for any reasonable costs incurred for the purpose of earning income, including things you're paying for anyway, such as car expenses, and home costs such as a portion of utilities, maintenance, insurance, property taxes and mortgage interest. Starting a business will also allow you to split income with family members by paying them salaries or wages to work in your business.
5. Stay married.
Okay, I realize that this can be tough if there has been a break-down in your marriage. Talk to anyone who has been through a separation or divorce, though, and it won't come as a surprise that Statistics Canada shows that these folks are far more likely to feel inadequately prepared financially for retirement and do in fact have significantly greater financial struggles. While it may not be easy work to stay together, give thought to what you might do to help create a marriage that works for the long term. There are all kinds of potential benefits, and the financial benefits are just one.
What will be your New Year's resolution this year? Getting in financial shape may be the best priority for 2015.
Tim Cestnick is president of WaterStreet Family Offices, and author of several tax and personal finance books.
Tim Cestnick