Your financial spring cleaning should include simple reviews of spending activities and more strategic discussions about tax and investment planning. Your financial advisor will be an invaluable guide through this process, so here are a few ideas to get started.
Cash flow
Everyone should have a good idea of what their monthly cash flow looks like. It is the start of everything financial from saving, debt repayment and vacation planning. Whether you use financial software or simply outline it on a spreadsheet, your cash flow model will boil down to four areas:
1) Monthly income from all sources after tax
2) Fixed monthly expenses like rent and utilities
3) Discretionary/variable monthly expenses like entertainment
4) Your investment contributions
Use the spring season to go line by line here. It’s not that bad of an exercise - for most its only 30 to 40 items. If some expenses have increased, list the new amount. If there are items there that used to be important but might be worth a re-think do it! Do you really watch all 3 paid-for TV channels? When was the last time you called your cell service provider to negotiate?
A cash flow model is not a strict budget, but it is a strong guide to how much you need to earn to support your lifestyle and what you have left to spend each month. Most importantly, get long-term investment contributions on there and stick to it. Pay yourself first.
Asset allocation plan
For long-term investors, the asset allocation plan is the roadmap to retirement and the one area we truly control. Together with your advisor, look at your plan and assess where changes might need to be made. If it’s a well-laid out plan, most changes will be incremental. A little nip where profits have run and maybe a little tuck where short-term market conditions have created an allocation opportunity.
Your advisor will have an educated view on macro conditions and may suggest asset allocation changes to take advantage of them. Use the springtime as a reminder to get those discussions going and be open to new ideas.
The other part of a spring asset allocation review is ensuring you are taking full advantage of tax planning opportunities. For most, that is the TFSA and RRSP accounts. Think of the TFSA as your lump sum money, as withdrawals are tax-free and your RRSP as creating income in your retirement. Check your contribution limits on both in the spring and leverage them to your benefit.
Total Net Worth (TNW) Tally
Your TNW statement is to you what a balance sheet is to a company, a crucial list of all your financial assets and liabilities netted out as your financial worth. Consider it a snapshot that gives you a good indication if you are living below your means and accumulating wealth or just treading water. Many mark-to-market assets such as your portfolio can automatically be plugged into your tally, but other assets such a vehicles, real estate holdings etc. should be revisited in the spring to adjust values. This is your TNW view, no sense in over or understating values. Just be as realistic as you can. A well kept TNW statement is a great tool when applying for credit or indicating when you can become an Accredited Investor and get access to investments offered via Offering Memorandum to higher net worth individuals. Your advisor can provide more information on the criteria, the process and the new options it opens particularly in alternative investments.
List of accounts
We have all heard the expression “less is more”, and this is true of financial accounts. Who needs more than one chequing account? Especially if there are fees associated with each account. Use spring cleaning as an opportunity to consolidate all critical accounts into one online view so you can have a consolidated view of your finances and reduce administrative costs. This is especially true of investments so you can see your overall investment allocation in real time and full accuracy. This will enable you and your advisor to make better decisions. Having one platform also has other benefits like easy account-to-account transfer, quick settlement and fewer passwords to track!
Just like cleaning your home, managing your finances is an on-going discipline. But let’s be honest, in the winter it is more of a surface tidy since the darker days hide a lot of the dust in the corners. Spring is a great time to take a deeper look at your finances. Keep and focus on the essential accounts, investments and plans and discard the junk.
