The new year has arrived and brought with it a new virus variant and inflationary pressures to add uncertainty to your 2022 financial outlook. Now may be a good time to take financial snapshot. Kim Parlee speaks with Nicole Ewing, Director, Tax and Estate Planning at TD Wealth about ways to manage rising household costs, prep your investments for growth, and ensure you’re positioned to deal with any unforeseen situations.
Nicole, great to have you with us. Happy new year. Let's talk about where we actually start. What are some concrete steps people can take to try and get things, get some semblance of order, at least in their financial life?
- When we think about getting control over our situation, the best place to start is to understand what our situation is. So doing something about financial snapshot, looking at what your current financial circumstances are. So what are your income sources? What are your expenses, both fixed and discretionary? We think about what is our debt? What are our balances? How often are we paying them?
And our long-term expenses, are they different this year than they were last year? Perhaps, we have kids going off to school this year, we need to be anticipating that. We can even do things like looking at our points balances and seeing some of those credit cards that we maybe had anticipated using points for holidays. Maybe we want to redirect those and use them for paying down some bills.
You know-- where do we currently stand will allow us to make decisions for the future and identify what may have changed. Perhaps, we have benefits through our work. And the program this year might make some different decisions than we made last year, if our circumstances have changed significantly.
So really the best place to start is to understand fully what our circumstances are, and only we know that best. So taking stock is a good first step.
- Yeah, and taking stock right now is pretty important with a lot of volatility that we're seeing out there. Let me ask you about inflation. We talk about it academically. But is it something that we should also be preparing for in the next little while?
- And I really think about inflation from two different lenses. So firstly, what can we do on the spending side so that we're not getting that hit as prices are going up and we're starting to feel that inflationary pressure? Do we have the opportunity to perhaps reduce some of our discretionary spending?
And what may have seemed a reasonable expense in the past might no longer seem reasonable, if it's going to be increasing, even just a little bit. And I think to myself, I signed up last year for a subscription service and fully intended on keeping it. And when the bill came due for this year, it didn't quite fit in with my budget the way that I had anticipated it would so I'm able to cut that off. And so any time that we can reduce our discretionary spending, or even delay some of that spending, that will allow us to offset some of that inflationary pressure.
On the other side, we have the opportunity to invest in an appropriate way to perhaps keep up, keep our growth going along with inflation. And we do that by ensuring that we're appropriately invested.
So we look at our RSP balances, we look at our TFSA balances. Our contribution room starts again in 2022, we have more room. Are we able to make some different decisions with respect to our portfolio to allow us to be dealing with those inflationary pressures?
We can even think too about some of that volatility that you spoke about, has that shifted us off side a little bit? Are we still in the balanced position that we thought we were going to be in? And do we need to make some shifts on that side?
So when we think about inflationary pressures, we can offset it both on the spending side and on the investment side. And if you don't know where to start with that, certainly getting help. Some of the decisions that we may have been making in the past were with certain knowledge that we had then, and as the world changes around us, we might need to reach out to those who have a broader perspective or who have more information on certain strategies and be able to tap into their knowledge as well.
- Yeah, it's a very good point. Ask for your expertise when you need it.
What about-- what can we do to prepare for an emergency situation that will require financial resources, losing a job, unforeseen emergencies? I mean, we are more prone to that now in this environment than we've ever been.
- And there's two sides to that coin as well. So if we have the opportunity to prepare for some of that emergency, those emergency needs, we want to ensure that we're putting aside some savings. That doesn't mean that we need to be doing that through a savings account. We can be doing that through our TFSA, which allows us some more flexibility in terms of the growth opportunities.
And we're able with a TFSA account to pull some of those funds out when we need them. We don't have an immediate tax hit. So we're not being penalized from a tax perspective, and that room will regenerate next year as well. So if accessing our TFSAs is going to be a solution that we want to have available to us, so we need to ensure that we're setting up those balances in advance.
Thinking about preparing for the emergency but then once-- if we're in an emergency situation, we want to be sure that we're thinking through where we're accessing those funds from. And so perhaps we have RSPs, and that's where we're going to be thinking of pulling our funds out from. But an RSP, unlike a TFSA, is going to have an immediate tax hit. We are going to lose that contribution room. So it might not be the best place to go.
And some of that traditional thinking in terms of, we don't want to take on debt, it might actually be a wiser financial decision to take on some temporary debt and leave our RSP balances alone. And so as we think about preparing for that, perhaps we want to make sure that our line of credit is available to us so we don't need to use our high interest credit cards. And just really thinking through sort of doing a bit of-- taking our financial snapshot and seeing where the gaps might be, and if we have an opportunity to be able to prepare ourselves by anticipating what some of those challenges might be.
And again, getting that expert advice. If what we think of as sound and true is don't access, don't utilize debt, when in fact that might actually be the better strategy for you in your particular circumstances, we want to make sure that we're hearing from the professionals.
- Nicole, always great insight. Thanks so much for joining. I appreciate your time today.
- Oh, my pleasure, Kim.