We’ve gone through financial decluttering and building the 3 pillars of financial self-sustainability. In this last post of the “Get Your Finances In Order” series, let me walk you through the 10 things we should do to optimize and maintain our finances for the long run.
I believe the self-sustaining setup will bring us an effortless wealth in the long run. However, we’re living in a fast changing world where nothing stands still. There are a couple of more things we need to do to optimize and maintain our financial setup.
1. Maximize employers’ matching programs
A surprising number of Canadian employees are not taking advantage of their employers’ matching programs, leaving free money on the table. In these programs, employers usually match 50% to 100% or even more for their employees’ contribution (up to a certain amount). The funds usually go to the purchase of company shares or go directly into employees’ retirement saving accounts.
What else can you do to get an automatic 50% to 100% investment return?
2. Optimize your contribution to tax-advantaged savings plans
The most common tax-advantaged savings plans in Canada include TFSA, RRSP, and RESP. Contribution to RESP even comes with government matching, free money again!
Optimizing your contributions and appropriately allocating your investments to these accounts can save you thousands of dollars annually in tax or defer paying tax to a more advantageous time. Watch the annual deadlines and monitor your remaining contribution rooms in your tax-advantaged saving accounts if applicable.
3. Hunt for the best rates
Financial institutions are in a huge competition in these digital days and frequently have to adjust their interest rates on savings as well as on lending to keep up. Some even offer personalized rates to their customers after analyzing customers’ financial behaviors as part of a marketing campaign.
Instead of being a passive mouse in the lab, we should take advantage of their advanced analytics and competition to hunt down the highest savings rates and lowest borrowing rates available to us.
4. Avoid cash payments
The common advice out there tells you to cut your credit cards and pay by cash to feel the pain that will make you think twice before spending. Personally I don’t buy that shallow quick-fix. It might help you cut a few minor expenses here and there but may cause more harm than good to you in the long run.
I would recommend the otherwise: avoid cash payments, use your cards and online transactions as much as you can. Cash payments and paper receipts are so much outdated. Using credit cards, debit cards, and online transactions helps keep track of your expenses electronically. You can easily access this information, analyze your spending patterns, and further optimize your budget.
If we long for personal finance success, we should think with the mindset of a business owner not a passive consumer.
5. Go paperless and organize your financial life digitally
Help save the trees and declutter your life by signing up for e-statements and opting for e-bills whenever you can. If paper receipts are unavoidable, scan or take photos of the important ones.
Organize all your finance related files digitally and systematically. This helps you keep track and search for things effortlessly. Remember to have your data backed-up frequently.
6. Monitor your credit report and credit score
Reviewing your credit report helps identify any incorrect information about your credit behavior. Knowing and improving your credit score make you a financially responsible person.
Besides, a strong credit score can bring some important financial powers. For example, you may be able to negotiate a preferred rate on your mortgages and loans, convince your landlord that you’re a perfect candidate, or get approved for good credit cards with more convenient credit limits.
7. Protect your financial identity
Financial identity theft are more active and sophisticated than ever. Although you can’t totally prevent data breaches, you still can do many things to reduce the risk of identity theft such as
- protect your Social Insurance Number (Canada) or Social Security number (US) or the equivalent elsewhere,
- monitor your credit card statements and credit reports for fraud transactions or fraud credit applications,
- beware of scamming/phishing emails/phone calls,
- change your passwords/PIN regularly,
- secure your electronics and online accounts,
- avoid logging into your accounts while on unsecured public networks,
- shred documents containing your identity or financial information before throwing them into the garbage.
8. Buy insurance to protect yourself and loved ones from unfortunate events
It’s not fun but have you thought about unfortunate or extreme events? What if your house caught fire or got flooded, your car got smashed in an accident, you fell and broke your hip, even worse, you were diagnosed with a terminal illness, and at its worst, you lost your life.
It’s very hard to picture yourself or your family in these situations, especially when you’re young, healthy, and happy. Sad truth is, there’s always a risk of experiencing these events at any moment in anyone’s life. Having an insurance in place can significantly reduce the financial losses incurred from these situations.
Money may not bring you health and life but surely can take care of your loved ones financially if you no longer can.
9. Make an official will
Again, it’s not something particularly enjoyable to think about mortality when you’re loving your life so much. But let’s face it, you never know when it happens. Nothing is more sure than death and taxes.
It’s never too early to prepare for that no-return trip, and you actually should always be prepared for it. Having a will directing how to allocate your money and possessions is a way to protect your loved ones from confusion, strife, costly legal fees, and excessive taxes.
If you have kids, it’s non-negotiable to have a will naming the beneficiaries of your estate and the legal guardians of your kids in case something happens to both parents.
10. Regular financial checkup
Regular checkup is critical to maintain and improve your financial health, just as with your physical health. We should do self financial assessment no less than once a year.
A good time for the annual checkup is right before the year-end holiday season. It can help you factor in your big fat year-end bonus wisely, take advantage of any tax-saving strategies, and rationalize your holiday budget to stay out of the mass spending hysteria.
If you already missed the year-end, another good time for financial checkup is the year-start. In the checkup, we should at least revisit our short- and long-term financial goals, evaluate debts and past spending/savings, adjust budgets, rebalance investment portfolios, minimize income tax, declutter and cut costs.
Sources show that in July 2018, the Canadian household debt-to-disposable income ratio is 171.31%, meaning on average, with every after-tax dollar earned, a Canadian household has over 1.71 dollars in debt. The same sources also show that in July 2018, the Canadian household saving rate is 3.4%, meaning on average, with every after-tax dollar earned, a Canadian household saves 3.4 cents.
How on earth this almost negligible saving can ever pay back that far-off debt, leave alone building a nest egg?
In a CIBC poll in Feb 2018, surveyed Canadians estimated they would need an average amount of $756,000 for their retirements. However, the average amount they had saved for retirement was $184,000. Even worse, 32% of surveyed Canadians aged 45-64 didn’t have any retirement savings.
These numbers pretty much speak for themselves.
It’s never too early or too late to start planning for your retirement. People usually associate retirement with an old age. Retirement only means ceasing to work. You can actually retire early if you prepare well ahead. The time to take action is NOW!