The first couple of months in a new year is an ideal time to do some financial housekeeping, especially when the choices you make now can save you a bundle of money by the year’s end. According to two financial experts—Julien Michaud, a financial education analyst at Autorité des marchés financiers (AMF), and David Truong, an adviser at National Bank Private Banking 1859—these are some of the key items to focus on.
1) PAY DOWN YOUR DEBTS
Carrying debts with high interest rates, such as credit card balances? “Try to consolidate them (after checking whether a balance transfer fee applies) to have only one payment to make, but most importantly, at a lower rate,” suggests Michaud. “Some cards offer lower rates for an annual fee, while other fee-free cards offer standard rates. It’s up to you to see what’s most advantageous without losing sight of the fact that rewards don’t amount to much if you pay a fortune in interest.”
Because of the preferential rate (generally 1 per cent above the mortgage rate), transferring credit card balances onto a home equity line of credit might be an option, provided it doesn’t sink you deeper into debt, says Michaud. Because you can borrow up to 80 per cent of the value of your collateral, doesn’t mean it’s an option to be used, he adds. This financial availability should be viewed as a lifejacket to help get you back on your feet.
2) BUILD UP AN EMERGENCY FUND
Many Canadians often view credit cards as a safety net in the event of financial problems, according to Michaud. “They lose sight of the fact that a credit card is a payment method, not a financing tool, which can cost them a fortune,” he says.
Michaud suggests using the beginning of the year to start making small savings. “It’s easier to set aside a few dozen dollars each pay than to find $2,000 when you need it,” he says.
A study conducted at the University of Wollongong in Australia confirmed this approach. The researchers found that savers with a short-term goal were more likely to achieve it than those with the same goal over a longer period. In other words, don’t tell yourself you want to save $5,000 by December 31, but congratulate yourself every week for setting aside $96.
3) MAXIMIZE YOUR CONTRIBUTIONS
Truong points out that the new year brings new TFSA and RRSP contribution room, which you should capitalize on as soon as possible (the RRSP contribution deadline for 2019 is March 2, 2020). For those with a bit of money set aside, this Sun Life calculator lets you determine if you need to build up your RRSP or pay down your mortgage.
Parents should also contribute as much as they can to a registered education savings plan (RESP), says Michaud. “In addition to the 20 per cent federal grant, some provinces [Quebec, Saskatchewan and British Columbia] offer a top-up benefit. The sooner you contribute, the longer the amounts will grow tax-free.”
In addition, Michaud adds: “If you’re a member of a supplemental pension plan, also make sure the amount you pay in lets you maximize the contribution from your employer.”
4) OPTIMIZE YOUR MORTGAGE PAYMENTS
Even a modest increase in your mortgage payment can help boost your savings, says Michaud. For instance, increasing your bi-weekly payments from $483 to $500 will let you save more than $7,200 in interest costs over 25 years. Raising them to $525 will save you $16,262. “And you can always switch back to standard payments if your finances no longer support it,” he says.
The same applies to payment frequency. It will take you 25 years to repay a $400,000 mortgage (at 5 per cent interest) with a monthly payment of $2,035. But if you pay half that amount, $1,017, every two weeks (the equivalent of an additional monthly payment in the year), you will have repaid the loan in 21.5 years and saved $42,000 in interest.
“Check your mortgage rate,” says Truong, “and see if it’s advisable and permissible to refinance the loan at a lower rate, even if you pay a penalty.”
5) BE PREPARED FOR YOUR TAXES
Start reviewing your tax slips early and check them thoroughly, says Truong. “Don’t assume they’re necessarily accurate, even if it’s often the case,” he says. “This includes the adjusted cost base (ACB), if you hold mutual funds or corporate shares in multiple institutions. And if it applies to you, take a closer look at the capital cost allowance. Although it can be time-consuming, it’s really worth it.”
6) AVOID BANK FEES
“People pay an average of $180 each year in bank fees,” notes Michaud. In fact, an Option Consommateurs report puts that amount is closer to $220. “And yet, most banking institutions offer no-fee options, provided a minimum account balance is maintained, he adds. “The number of transactions allowed sometimes depends on this minimum.”
Other beneficial options exist as well, such as when you have several products—such as a credit card, investments and a mortgage, for example—at the same financial institution. “You have to look at your needs. Good comparison tools can help you determine what best suits you,” says Michaud.
7) SHOP AROUND FOR INSURANCE
Not all insurers offer the same rates, says Michaud. “You can really make significant savings if you shop around,” he says.
This is reflected in the annual AMF survey of premiums charged by Canadian auto insurers for 10 different driver profiles. Although the difference between the highest and lowest premiums offered—in other words, the savings to be had—is only $222 for one profile, the difference for another is as much as $2,788. The average savings across all profiles is $763.
“What’s more,” adds Michaud, “is that far too many people still buy replacement insurance for their car directly from the dealer out of convenience. The problem is that the dealer often takes a very large commission, whereas a broker could offer a better rate.”
8) STEER CLEAR OF CREDIT CARD BALANCE INSURANCE
Credit card balance insurance provides coverage that may help to pay down or pay off your outstanding balance if you lose your job, are hospitalized, become injured or critically ill, or die. However, it is expensive, says the Financial Consumer Agency of Canada.
“People often purchase this product without checking whether they’re already covered (by their other insurance) in the event of disability or death,” says Michaud. “At a cost of $1 for every $100 of your balance, it ends up being very expensive, particularly when strict conditions apply.” However, keep in mind that insurance is important, so make sure all your needs are considered, including unpaid credit card balances. Just pay attention to signing once, not twice.
9) RETHINK CAR PAYMENTS
Buyers need to look beyond the monthly payment, says Michaud. For example, the focus is put on the $400 to be paid each month, rather than the commitment being made over eight or nine years, or the total cost of the purchase, including interest. Instead, “they should look for a vehicle that fits their needs and costs $25,000, not $45,000,” he says.
Another very common mistake consumers make, according to the actuary, happens when people trade in their car and roll over the outstanding amount on a car loan into the financing of a new car. This is referred to as negative equity, since the loan balance on the first vehicle is greater than the current value of the new one.
“By doing this, consumers are dragged into a debt spiral. They should instead plan to replace their car—once it’s paid for—by saving the same monthly amount they had to pay before. It’s a great habit to adopt early in the year,” he says.
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