After leaving the longest year ever behind, it’s time to move forward and set our financial goals for a fresh and bright new year. If you haven’t considered setting financial resolutions yet, you are in luck to learn from our simple and easy-to-implement steps to set financial resolutions, align your budget and achieve your goals for 2021.
Here are our 7 steps to budget, set and achieve financial resolutions for 2021.
Set short and long-term financial goals:
If you only have long term goals, you may struggle to keep motivated towards your 10+ year financial goals. Instead of only focusing on the 5-10 or 10+ year financial goals, start with multiple time frames such as less than 1, 1-3, 3-5 and 10+. After setting up more layered goals, you can then build a clearer strategy. Want to travel after COVID is over? Set a financial goal to save enough for your dream vacation within the next 12 months.
Visualize your goals:
Your daily responsibilities may make you forget about your financial goals. To always remember them and work towards them, we recommend that you create a dream board and visualize what your financial goals might mean to you. If you are saving for your children’s college, you can put a picture of their dream school. If you are saving for a beach vacation, you can print out pictures of nice beaches with palm trees. Any image that will remind you will have a mental impact and help you achieve your financial resolutions
Manage your income and expenses:
Once you set your financial goals, it’s time to understand your income and expenses by creating a cash flow statement. Cash flow statements include monthly or yearly cash inflows and outflows which then help you to calculate your net savings. They give you a clear picture of your financial situation and how much time you will need to achieve your goals. Cash inflows consist of your income which might include salary, pension, and passive income. Cash outflows consist of all your expenses such as groceries, loan payments, mortgage payments, transportation, rent, insurance, entertainment and more. If you are not sure where to start, review your monthly bank and credit card statements to see where your money is going and how much income do you have coming in each month.
Budget and cut back on expenses:
Once you get clarity about your financial situation, you can determine which expenses to cut back on.
Most commonly, there are 3 categories within a budget. They include functional, fun and future:
- Functional category: Functional things you spend money on such as groceries, rent, utilities, transportation, phone bills and other necessities.
- Fun category: The money you spend on entertainment and wants such as dining out, shopping, daily coffees, events and more.
- Future category: The funds you allocate for future uncertainty in case you lose your job, or have short term health issue, or encounter an unexpected expense. As we experienced in COVID, many people had financial problems because they didn’t have an emergency fund to rely on. CFPs recommend saving 3-6 months’ worth of your living expenses in a high-interest saving account for any potential risk. Future also includes longer term goals such as saving for a major purchase and investing for retirement or for your child’s education.
Since functional and future categories are for necessities and safety, we recommend you look closely at the spending you allocate for fun. If you are spending too much on the fun category, you might want to cut down and save more towards your financial goals since your fun category could be standing in the way of your financial goals. Do you get coffee from a coffee shop every day? You might be spending what you could’ve saved for your dream vacation!
Pay Yourself First:
An easy way to save money for your financial future has to do with aligning your financial goals with your budget. To do this, you need to pay yourself first which means saving for your financial goals before you work on your monthly budget and pay your daily expenses. If you need to save $300 a month for your financial goals, subtract that amount from your monthly income and adjust your expenses accordingly. This way, you can consistently work towards your goal. Our recommendation is to set monthly auto payments to your saving account to ensure you are saving and living off the remaining funds.
Make your money work harder:
Other than cutting from expenses, another way to build your budget is to increase your income. In times where it’s hard to increase your income, points cards can go a long way to help you save money on your expenses. When you earn points, you can build cash you didn’t have to work for that can go towards travel, grocery, gas and many other payments. If you aren’t sure of which points cards to use, we recommend you check Greedyrates, which is a platform that compares points card benefits.
Another way to build your income is to make more money from your investments by contributing to an RSP account. In addition to tax benefits, you also get money back at your marginal tax rate from each contribution. If you make $60,000 a year and your marginal tax rate is 36%, contributing $100 would both reduce your tax payments and give you back $36.
Change your mind about money:
If you don’t feel confident about your financial situation, you might feel negative emotions towards handling money. However, it’s a new year and you can decide that this will be the year you implement strategies to build your Financial IQ and strategize for your future. If you need help with this, feel free to reach out to us and book a 30-minute complimentary “Build Your Financial IQ” Strategy session.
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