With the New Year just around the corner, it is a good time to seat back and assess your finances. How did you do in 2020, and where can you do better in 2021?
A good financial plan with specific targets and goals can help you make the New Year your best ever… financially.
And, the financial checklist items below are great for getting started.
1. Max Out Your TFSA and RRSP
The Tax-Free Savings Account (TFSA) and Registered Retirement Saving Plan (RRSP) are two of the most popular investment accounts in Canada.
They are also tax-sheltered which means you either don’t pay taxes at all on your earnings, or taxes are delayed until much later.
This tax-deferral (RRSP) or tax-freedom (TFSA) gives Canadians an opportunity to save faster towards financial goals, invest for retirement, and grow their net worth.
For a quick of overview of the accounts:
The TFSA is open to Canadians who are aged 18 and older. Every year, you get a limit you can contribute to the TFSA and you can carry forward unused contribution room to future years.
For the 2021 tax year, your TFSA contribution limit is $6,000. It was also $6,000 in 2020.
TFSA accounts are flexible and can hold a variety of investment products including stocks, cash savings, mutual funds and Exchange-Traded Funds (ETFs). Here are a few ideas on how to invest in your TFSA.
The RRSP is open to Canadians who have employment income and are under 71 years of age. You can contribute up to 18% of your income up to a specific maximum annually, and carry forward unused contribution limits to future years.
For 2021, the maximum annual RRSP deduction limit is $27,830.
Similar to the TFSA, your RRSP can also hold different types of investments.
For most people, it makes sense to use up your RRSP and TFSA contribution room before considering investing in taxable non-registered investment accounts.
Even if you are unable to maximize your contributions to both accounts for the year, start small and watch your portfolio grow over time.
2. Prepare For Tax Season
Tax season is that time of the year when you are required to file your income tax and benefit return with the Canada Revenue Agency. It is also when thousands of Canadians eagerly await a tax refund.
The tax filing deadline for most individuals in Canada is generally on April 30, and it extends until June 15 for those who have self-employment income to report.
In preparation for tax season, you should review your income sources to confirm you don’t have taxes owing. After the deadline, a penalty tax is levied on taxes that have not been paid.
Gather your tax slips e.g. T4, T4A and TS’s and educate yourself on the tax deductions and credits you qualify for. If you had contributed to your RRSP in 2020, or during the first 60 days of 2021, you can claim a tax deduction and lower your tax burden.
These days, you can easily file your taxes online using a tax return software that is either free or paid.
3. Budget and Create a Financial Plan
If most of 2020 was a blur, you are not alone. The pandemic did not help our wallets and many financial plans fell by the wayside.
That said, the New Year presents new opportunities to “right the ship” and get your financial house in order.
Create a practical budget that balances your income with your expenses and leaves you with enough funds to save and invest.
You can write down your budget on paper, use a spreadsheet, or automate it with a budget app.
4. Audit Your Investments
Is your investment portfolio in line with your risk tolerance? Is it diversified? How much are you paying in investment fees? What are your returns?
These and more are some of the questions you should be asking when you audit your investment at the beginning or end of the year.
If you are a do-it-yourself investor, you should ensure your portfolio is rebalanced at least 1-2 times a year. You should also watch your trading fees and avoid overtrading or chasing the market.
If you have a financial/investment advisor or financial planner, assess whether they are actually worth the money you are paying them.
Are you invested in expensive mutual funds? Are your investment returns comparable to or better than the corresponding benchmarks? Is your advisor acting in your best interest?
If you aren’t getting value for your money, it may be time to fire your financial and find help elsewhere.
5. Evaluate your Estate Planning
Having an updated Last Will and Testament in place should be a part of your financial plan. This is crucial if you have children or other members of your family who depend on you financially.
A Will should identify how you want your assets to be distributed, appoint guardians for your children (minors), appoint someone to handle your finances if your are incapacitated, name an executor, and include your medical directives.
Online Will-making services such as Willful have made it easier than ever to create a legal Will without breaking the bank.
They also make it pretty easy to review your Will whenever your circumstances change and keep it updated.
6. Review Your Insurance
You should review your insurance coverage at least once a year to ensure your most important assets are protected.
Important insurance policies for the average Canadian include home (or tenant), car, health, and life insurance.
When your policies come up for renewal, review whether your package is still adequate and check that you are not paying too much.
If you have just purchased a home, gotten married, given birth to a baby, or adopted a child, you should consider getting life insurance (if you don’t have it already).
Always shop around when applying for insurance to save on the costs. For example, you can compare quotes for life insurance using a rates comparison site.