The 2021 Money Makeover

Looking back on the past year, the reverberations of the COVID-19 pandemic almost certainly had an impact on your wallet. Many Canadians experienced a loss of income and added uncertainty. For some Canadians, we watched our savings grow as our spending dropped.

“There’s no silver lining to 2020 because of our health emergency. But many people’s finances have endured a stress test and they have seen whether their money plans can weather financial strain or if they need to make a stronger plan,” says Bernice Marien, a High Net Worth Planner at TD Wealth.

Even if you kept your income and did not suffer any large setbacks, you probably thought long and hard about what was happening to other people around you. And whether your situation could sustain a major blow.

Marien says everybody should learn lessons from the after-effects of the pandemic and the downward pressure it has placed on the economy. If it was a tough year, getting back on your feet will be a priority. If you managed to save more money because of the lockdown, you may want to ensure that money will help you get to a goal like a vacation.

Marien points out that if you have saved a bundle, you may want to continue those good habits to see how much more you are able to put aside. Now could be an opportune time to top up your Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA) or Registered Education Savings Plan (RESP) contributions or even make an extra mortgage payment.

Marien offers 10 ideas we can all think about when we’re contemplating better times next year.

1. Get a checkup

If this year has unsettled your finances, you should get an objective view of what state you and your finances are in. This helps show any gaps in your thinking and keeps you from putting your head in the sand if your problems are making you feel powerless. It means making a visit to a financial advisor, lawyer or accountant to see exactly where you’re at, and see if you are on track to reach you financial goals. Even if you think you’re in good shape, you might have a tiny blind spot — forgetting a tax credit or not maximizing your RRSP — that could hurt you over the long term.

2. Knock down high-interest debt

Especially after the holiday season, many of us find that our January credit card statements are eyebrow-raising. Fortunately, while it may not be easy to pay the bill in one shot, there are some methods available to help lower the cost of that debt, Marien says. Although everyone’s financial situation is different, one option to consider is getting a line of credit — with a lower interest rate — to pay off high-interest credit card bills. When the weight of those high interest rates are off your back, you may want to think about paying off that line of credit as well.

3. Make a new spending plan

If falling behind on credit card payments is a constant predicament, there may be a bigger problem that needs fixing, says Marien. More money going out than coming in could indicate some trouble living within your means. The remedy can include (big breath) making a budget, tracking where the money is going, evaluating what spending is essential and what isn’t. She says it can go a long way to turning your cash flow from negative to positive. Even if it means big lifestyle changes — like forgoing an anticipated renovation — it’s better to keep yourself financially fit than to fall into an abyss of debt.

4. Re-evaluate your goals

If you have been diligently saving money in your RRSP and TFSA, don’t forget you should have an objective in mind for all this saving, says Marien. Even if retirement isn’t imminent or if you’ve had to delay retirement (or even if you had to retire earlier than expected) because of the pandemic, make a plan for yourself. Consider when you want to retire, what you think retirement looks like and whether you think can meet your goals. Same with leaving your kids money in your estate: Is this just wishful thinking or are you really going to meet those promises you made? Plus, don’t forget to compare notes with your spouse or partner on this. Your idea of the future may not jive with what your better half is thinking — better to start discussing it now rather than later.

5. Resolve to pay less tax

It may come as a surprise that there are steps you can take to help reduce the amount of tax you owe. For most of us, that means being vigilant about tax credits and deductions, and observing whether any recent life changes now make you eligible for different tax treatment. For instance, if you have had to miss work to care for someone because of COVID-19, you may be eligible for a Canada Recovery Caregiving Benefit of $450 a week. It also makes sense to keep up with any changes to tax credits that have been recently introduced.

6. Dust off that Will

You may be facing a long winter at home. One way to make you feel more productive is to look into your Will or your Powers of Attorney. If you’ve set these up, that’s great. If you haven’t or it’s been a while since you did so, now can be the perfect time to ensure they are up to date and that your instructions are still in line with recent events, says Marien. As well, if you’ve had a major event in your life — a second marriage, a new grandchild, the sale of a home — it may mean an ensuing revision to the Will. Also, double-check that your beneficiaries for your RRSPs and insurance policy still fit into your overall plan.

7. Have a money talk

While you are deciding on a financial plan, writing your Will or making an estate plan, make sure you communicate your intentions clearly to those who will benefit, usually your children. Not doing so can contribute to family conflict if people have different expectations about their parents’ money, if they think one sibling is being treated more favourably or if unexpected family secrets come out of the closet that may tangle up family inheritances. This can be especially true for second marriages or blended families. Talk to people individually and let them know what the deal is and why. It will go a long way to sooth family feelings (and avoid expensive fights in court) when you’re gone.

8. Revisit your emergency strategy

The year 2020 was a perfect instance of how an emergency fund can be helpful when the unexpected happens. Having an emergency fund of about three months’ salary for example could see you through a situation such as the loss of employment or an extended illness. Those funds may forestall having to do something drastic such as selling property or taking the first job that comes along.

9. While you’re at it, check your insurance

This year has taught us that no one can foresee the future. As part of your overall financial plan, check to see if your life and critical illness insurance coverage is still meeting your needs. If you are newly retired and no longer under a company plan, you may wish to top up your coverage. If you have a sizeable estate or a business, think about how insurance can play a role as part of your estate planning as a tax strategy when dealing with probate fees and income taxes.

10. Make a list of upcoming deadlines

Whether it’s liquidating funds in a RESP for a child’s university tuition, deciding whether to delay your Canada Pension Plan or withdrawing funds from your Registered Retirement Income Fund (RRIF), your finances are governed by deadlines and usually it’s bad news if you miss them. Familiarize yourself with upcoming deadlines and prepare your finances accordingly so that you never penalize yourself accidentally.