The start of the New Year is a great time to reflect on 2023 and set goals for 2024. No better time than now to set yourself up for a successful 2024 than by setting some financial goals. January is a popular time for investors to review their savings strategies and ensure they are making the most out of tax-sheltered accounts. In this article, I will review four important financial goals to consider having as part of your New Year’s Resolutions. Each goal is meant to serve as a general guideline for managing finances and cash flow, and my objective is that everyone can take away one piece of valuable information after reading.
Pay Off Debt
High-interest debt can eat away at your income faster than you might expect. It’s paramount to prioritize paying off debt first, especially when interest rates are at record highs, as they are currently. Individuals can take on different kinds of debt, known as Good vs. Bad Debt, which is essential to understand first:
Good Debt: Generally, debt that is used to help you build future wealth can be considered as Good Debt, because of its long-term ability to be profitable for you. A popular example of this is taking on a mortgage to buy a home, because although you may go into debt with a house purchase, you’re also building equity by owning a home. Depending on your personal financial situation at the time, having a mortgage can be favourable to renting, because you’ll be building value in real estate, whereas renters aren’t given the opportunity to benefit from a growing asset value. Good Debt can also be used to build your human capital, like taking a loan to fund your education or learning a valuable skill.
Bad Debt: Borrowing money to purchase a depreciating asset or a consumable good is often regarded as taking Bad Debt. This kind of debt is not helping to build your net worth and can trap you into frequent high-interest payments, that will eat away at your income every month. High levels of credit card debt, that is not paid off monthly, can accumulate interest at exceptionally high rates and negatively affect your credit score. Luxury goods like an expensive car that you finance or lease can have high monthly payments, which will quickly cut into your income. Most cars are depreciating assets and you may end up with a vehicle that is worth a fraction of the money you paid for it initially, and a continuous stream of money leaving your account to pay off the vehicle.
Paying off bad debts first and foremost is the first step to accumulating more wealth long-term, while keeping some good debt is healthy for most people and completely normal.
Take Advantage of Contributions to Registered Accounts
Registered accounts offer great tax advantages for investors, and should be utilized to the best of their abilities. This means checking your yearly contribution limits for TFSA’s, RRSP’s and for some, their FHSA’s. For those still in the workforce, extra cash savings can be used to maximize TFSA and RRSP contributions. An additional $7000 of contribution room has become available in 2024 for investors with a TFSA. Those of you still working can use the tax-deferral benefits of contributing to an RRSP, and contributions made until February 29th can be used to reduce your taxable income for 2023 Tax Returns.
Anyone turning 71 years old in 2024 will have to open a RRIF account this year, which forces a minimum amount be taken every year and doesn’t allow for additional contributions to be made. For everyone who already has a RRIF, it’s a good time to review your payment schedule to ensure it’s best suited to fit your lifestyle needs for the year. Remember that when taking additional amounts above your minimum from your RRIF, it will be subject to federal taxes, so the gross amount taken will be higher than the net amount received in your bank account.
Keep a Healthy Cash Reserve for Unexpected Needs
This is a staple for any retirement plan because without a constant inflow of money from working, taking care of unexpected expenses can become difficult. The amount you decide to keep in readily available cash should be dependent on your short-term goals; whether that be a large purchase or vacation in the coming year, having the cash available can relieve the burden of taking from your investments at an inopportune time. Preparing an appropriate cash reserve that fits your short-term needs in retirement is crucial and will prepare you for any unexpected circumstances.
Review Your Monthly Income Needs
Reviewing your personal finances will give you a clearer picture of your lifestyle expenses, and how much needs to be withdrawn in retirement to fund your goals. Knowing how much to withdraw on a monthly or yearly basis is one of the hardest steps in planning your retirement, but can be made easier by categorizing the different types of income needs. This means making the distinction between discretionary or non-discretionary income, to separate the different kinds of expenses you incur.
Non-Discretionary Income: Income used to pay for necessities and typical expenses incurred to maintain your basic standard of living. After-tax money is used to pay for these expenses, but priority is given to them over non-essential costs, like luxury goods or savings. Having an idea of how much you need in non-discretionary income every month can help you build a plan around how much money you want to have left over to fund your extra-curricular goals.
Discretionary Income: Refers to the income left over after paying for all necessities and taxes, which can be used for non-essential expenses like vacations, luxury items or goods. Your essential expenses include food, healthcare, housing, transportation and utilities to name a few. These are the compulsory costs that must be paid first from your income because they are needed to maintain a basic standard of living. After paying these costs, you can make decisions on how you want to allocate your discretionary income, which can be used for any purpose you see fit (vacations, saving, charity, etc…).
Prioritizing money decisions by your various needs can simplify making your financial goals for the New Year, and will help you achieve them. There’s lots to consider, which is why we’re here to help you along every step in your financial journey. If you would like to inquire about getting in contact with an advisor, please don’t hesitate to reach out by clicking on the "Contact Us" button below. Here's to a great year to come and everyone hitting their financial goals for the year!
All the best,
iA Private Wealth Inc. is a member of the Canadian Investor Protection Funds and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
This information has been prepared by Mike Holyk who is a Senior Investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.