The Bank of Canada has made it very clear that its agenda is to break the inflation cycle and try to reduce the odds of a recession. Interest rates are high and the expectation is that they will continue to increase while we wait for those rates to work their way through the system to reduce demand, increase supply and lower the inflation rate.
In the meantime, we continue to pay more for just about everything. It is estimated that the average family needs an extra $400 per month to cover the cost increases associated with inflation according to Laurie Campbell, Director of Client Wellness at Bromwich + Smith.
"While you can’t control the economic environment,
you can control how you respond."
If you are a member of HOOPP, you are automatically contributing to a plan that will provide you with a stable and secure income when you retire, which may reduce your need to save and invest for your retirement through other means. That said, understanding and implementing the following five key financial best practices will help you better understand your short-term financial health and make it easier to build your long-term retirement security.
My top five financial opportunities you may be overlooking:
1. Get your money working for you:
When you let your money sit idly in a low interest savings account, you are earning next to nothing and in fact, losing money after taxes and inflation are taken into account. Start to explore your options and develop a plan today. There are many things you can consider doing in support of that, including talking to a financial advisor, and preparing your investment strategy.
2. Never fall in love with your money:
Money will never love you back so you need the emotional intelligence to sell your chronically underperforming investments. I get it. No one buys a stock, piece of real estate or any investment with the thought it will decrease in value however, it can happen. There is an opportunity cost for holding on to a loser too long. In other words, consider if and when you should cut your losses and move on.
3. Automate your financial life:
I’m a big fan of taking the guesswork out of our financial life. We have set up pre-authorized contributions to our investment savings accounts. It happens on the first of every month when money comes right out of our account automatically. We also gradually draw down our investments in the same way. You can do this by setting up an online investment account or by asking your financial advisor to set it up for you. Trying to time the market is extremely difficult even for the experts. It is tough to know which sector, market or investment will outperform at any given time. When you buy good quality investments – companies with real earnings that are leaders in their industry and pay a dividend, you are thinking more like a long-term investor versus a short-term speculator.
4. Be razor sharp with your financial numbers:
Focus on the money you get to keep in your pocket. Once you appreciate the impact of compounding, taxes and inflation, you can start to ensure these variables work for you and not against you. The power of compounding – earning income on top of income – should never be overlooked. Compounding works wonderfully when you are saving money and can cost you dearly when you owe money. Unnecessary taxes can eat away at your returns and inflation reduces your purchasing power. To minimize their impact you can save for large-scale purchases, pay off high-interest debt and use registered plans strategically when possible.
5. Compile your net worth statement:
A net worth statement is a snapshot of your financial life at a point in time. You list everything you own and everything you owe and confront your household’s financial facts. You may find you are better off than you realized and able to identify areas where you can free up some money to ease the pressure in other areas. It is also a great way to establish financial goals for the next year.
I think it is safe to say that many Canadians are financially fatigued and worn out. Debt levels are climbing and financial stress is very real. Controlling what you can financially in your household will help you get through these difficult times.
Bottom line: Placing the focus on your household's financial data points and not the headline economic news is a big step toward financial freedom.