Taxes Are Done - Perfect Time To Get Your Financial House In Order
David Christianson, CFP, R.F.P., TEP
The calendar claims it’s May, even if the weather outside suggests March. That means that (with luck) you have completed your 2008 income tax filing. Quite likely, you know more about your personal financial situation right now than you have in a while.
Let’s take advantage of that knowledge and build on the momentum, by developing a specific plan of action to reach your financial goals.
A reader wrote to me this week looking for help developing a plan to move out from under a small mountain of student loans and other debt. Another reader wanted to find a way to decrease income tax withholdings on RRIF withdrawals. Still another was attempting to determine her optimal asset mix, realizing she is more risk-averse now than she realized a year ago, but still wanting to take advantage of the long-term growth prospects for equities.
No matter what your specific issues, Step One in any financial plan is to set specific, measurable goals. Remember we have talked many times about SMART goals - specific, measurable, achievable, relevant and time-bound. You will also remember that I like you to also set big huge scary goals, that will only be achieved if you totally change the way you do things, but we will leave that for another day.
A goal may start out with a statement like, "I wish I did not owe so much money; I am so tired of making monthly payments and feeling like I am getting nowhere."
The SMART goal statement might be, "I will be completely out of debt other than my mortgage in 24 months from now."
That leads to the plan of action. If the debts total $24,000, then the principal payments must be $1,000 per month, plus whatever interest charges apply. How do you free up $1,000 per month from your spending plan? (Some people call this a "budget".)
Step Two is to examine options and alternatives to reach your goal faster or more efficiently. If several debts, especially credit cards, can be consolidated into a loan at a lower interest rate, this will decrease the interest costs. Perhaps you have low interest savings bonds or other deposits that are earning almost nothing, which would be better used to pay down high interest, non-deductible debt.
If your goal is a savings or investment objective, or another long-term aim like retiring early, use the same process. Decide what really counts for you, and then get specific about what is needed to reach that goal.
If financial independence at 55 is your target, try to estimate how much annual income you will need from investments and other sources to allow you to feel comfortable that work is now an option. Will all of this income come from investments or properties initially, or will you develop a business that can ultimately be run by other people and provide you with income?
Now, the action plan - how much invested capital will be needed to provide the income you want? That’s the goal. Now, using a conservative estimate for rate of return and inflation, determine how much you have to save each month and how you will invest it.
In all cases, the single most important thing after writing down your goal is to start implementing the plan. I do not care if the plan is half-baked or inefficient - just start! You can always refine the plan as you go along, assuming you have not committed to some unchangeable product.
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David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column, ‘Dollars & Sense’ appears Fridays in the Winnipeg Free Press.