Two years after the global financial crisis began, signs of an economic recovery have just started to emerge. How does it affect you? Here are 10 tips on how to manage your personal finances during an economic recovery.
1. Continue saving – “Keep saving your money, because there will always be another economic downturn,” advises Chartered Accountant Debby Stern, a partner with Soberman LLP in Toronto. “Don’t go back to your old spending ways.”
2. Establish a contingency fund – “As a first priority, set aside liquid funds to cover three to six months’ worth of expenses,” says Chartered Accountant Christine Clarke of First Affiliated Holdings Inc. in Collingwood. “This will cover emergencies such as large house repairs or can even pay the bills if you find yourself out of work during a future economic downturn.”
3. Diversify your investments – “When you diversify your investments, you diversify your risk,” explains Stern. “Invest in bonds as well as equities. The general rule is that you should invest in interest-bearing securities inside your Registered Retirement Savings Plan (RRSP). Invest in preferred or common shares in your non-registered account because you will be eligible for preferential tax treatment such as the dividend tax credit and capital gains.”
4. Review your investment forecasts – “In a properly executed investment strategy, you would have taken advantage of the economic downturn by purchasing more assets at cheaper prices, leveraging the growth in asset values within your portfolio during the recovery,” says Clarke. “In addition, given the likely slower and longer pace of the recovery, you should expect lower overall returns from your assets than we have seen in the past 15 years or so. Therefore, you should re-evaluate your long-term forecasts and revise your strategic financial plan accordingly to ensure your cash flow needs can continue to be met.”
5. Maximize your contributions to savings vehicles – “During the economic downturn, many people weren’t able to make their maximum RRSP contributions,” says Stern. “If you now have sufficient cash flow, this is the time to use up any RRSP room and to also maximize contributions to Registered Education Savings Plans (RESPs) and Tax Free Savings Accounts (TFSAs).”
6. Pay down existing debt and avoid new debt – “Pay down non-deductible debt first, such as your mortgage, credit card debt or car debt,” says Stern. “Pay down the debt with the highest interest rate. But if you use your car for business, don’t pay it down first because you can deduct part of the interest payments. And before making a pre-payment on your mortgage, be sure to look into what penalties might apply.” Try to avoid incurring new debt for consumable purchases if you can. “If you must buy on credit, don’t buy anything that you cannot pay off within one or two months,” adds Clarke.
7. Update important documents – “If you haven’t been able to afford to update your will or other important documents over the past few years, do it now while your cash flow is better,” suggests Stern.
8. Upgrade your skills - “Even though the economy is improving, there are still more people going after fewer jobs,” explains Clarke. “Refresh your resumé by staying current with appropriate training and credentials, and consider upgrading your credentials to improve your qualifications for employment in growth sectors.”
9. Establish a financial plan and budget – “The economy moves through repetitive cycles of expansion and contraction,” says Clarke. “If you have a long-term strategic financial plan that anticipates difficult times and you follow it with discipline, you will be less susceptible to anxiety and poor financial decision-making, no matter what the state of the economy.” A budget is an important part of your financial plan. “Break your expenses down into fixed ones, such as your mortgage, phone and taxes, and variable ones, such as entertainment and gifts,” advises Stern. “Once you know how much you must spend on fixed expenses, you will know how much you have left over for discretionary items.”
10. Talk to a Chartered Accountant – “A CA can help you prepare a budget and financial plan,” says Stern. “Your CA can also help you determine the most tax-efficient amount to invest in your RRSP, RESP or TFSA.”
Brought to you by the Institute of Chartered Accountants of Ontario
