We’re about to open the door to 2017, so you might be thinking about New Year’s resolutions. What’s on your list this year? More visits to the gym? Learning a new language? Mastering the perfect Beef Bourguignon? All worthy ambitions, of course, but why not include financial resolutions?
By reviewing your needs and goals, you can identify resolutions that are particularly relevant to your own situation. Here are a few suggestions:
Build an emergency fund. If you needed a major car repair or a new furnace, or were faced with another unanticipated expense, could you handle it? If you didn’t have the money readily available, you might have to dip into those investments intended for long-term goals. Instead, build an emergency fund containing three to six months’ worth of living expenses, kept in a liquid, low-risk account.
Cut down on debts. It’s not easy to cut down on debt load. But if you can find ways to reduce your debts, you’ll help improve your overall financial picture. Many debts are not “useful” — that is, they don’t carry any tax advantages — so every dollar you spend to pay down those debts is a dollar you could use to invest for your future.
Boost contributions to your retirement plan. If your employer offers a group RRSP or similar retirement plan, take full advantage of it. Your earnings have the potential to grow tax deferred and your contributions may lower your taxable income. Most plans offer a selection of investment options, so you can choose the investment mix that fits your objectives and risk tolerance. Therefore, if your salary goes up this year, or if you think you can find other ways to free up some money, increase your contributions to your retirement plan.
Review your portfolio. Is your investment portfolio still on track to help you meet your long-term goals? If not, you may need to make some changes. You’ll also want to study your investment mix to determine if it still accurately reflects your risk tolerance. Over time, and often without your taking any significant actions, your portfolio can “drift” to a place where you are taking on too much risk — or even too little risk — for your needs and long-term objectives. If this happens, you may need to “rebalance” your holdings.
Avoid mistakes. None of us can avoid all mistakes, in life and in our investment activities. But as an investor, you’ll clearly benefit from minimizing your errors. For example, it’s generally a mistake to jump out of the market in response to a period of volatility. If you wait for things to “calm down” before investing again, you might miss out on the opportunity to participate in the next market rally.
Think long term. Keep this in mind: You’re not investing for today or tomorrow, but for many years from now. Try to keep a long-term focus when making all your key investment decisions. By doing so, you can avoid overreacting to short-term developments, such as a sudden drop in the market or a “momentous” political event that decreases in importance as time goes by.