Pay down your debt

It’s hard to get your finances in order if you’re in debt, which is why debt repayment should always be your number one priority. Generally speaking, you’ll always want to focus on the debt with the highest interest rate first. By paying this down first, you reduce the overall interest you’re paying.

While everyone would like to pay down their debt, it’s not that easy if you’re already struggling with your monthly expenses. One option is to head down to your local financial institution and apply for a line of credit. These types of loans come with much lower interest rates compared to payday lenders, credit cards and auto loans. If approved, you could use the funds to pay off your other debts. Now you only have to worry about a single, lower-interest payment.

Create or update your budget

Having a budget in place is essential since it allows you to see where your money is going. If you’re new to budgeting, all you need to do is list your income and all of your monthly expenses. Obviously, spending less than you make is a must, but you should strive for more. You’ll want to start including savings into your budget since that will benefit you in the long run.

Once you have one, you should update your budget regularly. A lot could have changed in the last 12 months. You may have gotten a raise (or had your hours cut). Some of your expenses, such as your insurance, may have gone up. Maybe you bought your first home or decided to downsize. A budget will help you keep track of all of that.

Check your credit score and report

Your credit score is a number between 300 and 900. Generally speaking, the higher your number, the more creditworthy you are. This number is important because lenders use it as one of their criteria when deciding to approve you for a loan. Since this number is so important, you’ll want to check it at least once a year.

You can find out your credit score for free via services like Borrowell. Many financial institutions and credit card providers, including RBC and Capital One, also offer free credit score checks. By knowing your credit score, you can take steps to maintain or improve it.

It’s also worth getting your free annual credit report from both Equifax and TransUnion, which is much more detailed than your credit score since it includes all recent credit inquiries made by you. If there’s something on your report that you don’t recognize, you’ll want to follow up immediately as it could be a sign of fraud or identity theft.

Start investing

If you’re not investing, you are missing out on wealth gains. There’s no need to be afraid of investing. For most beginners, a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA) are usually the best bet. You don’t pay taxes on the money you put into RRSPs until you withdraw that money in retirement, and with TFSAs, you’re not taxed at all on the profits you make.

As a start, you could set aside a small amount every month and invest in an index fund. This would instantly give you access to a diversified portfolio. Just keep investing and let that money grow. If that still sounds intimidating, you could invest with an investment advisor or robo-advisor as they’ll be able to provide additional guidance.

Contribute to your Tax-Free Savings Account

A Tax-Free Savings Account is not just a savings account. You can use it to invest in different financial products such as stocks, mutual funds, exchange traded funds, guaranteed investment certificates and more. The gains you make in the account are tax free.

The TFSA limit for 2022 is $6,000. You can contribute that amount, and any outstanding contribution room you have from previous years, at any time. Assuming you have the funds available, it makes the most sense to max out your contribution room in January. This will allow you to invest your money right away, giving your earnings more time to compound.

Don’t worry if you can’t afford to max out your account right away. Put in what you can afford now or consider setting up automatic monthly contributions. Every little bit helps.

Rebalance your investments

If you have an investment portfolio, you may have noticed the markets went on a wild ride last year. There’s a good chance you’ll need to rebalance your investment portfolio, since you don’t want it to stray too far from your intended asset allocation. That's the primary way you control how much risk you are taking with your investments.

If you manage things on your own, it’s a simple matter of reallocating your assets. Say your target is 60 per cent stocks and 40 per cent bonds. If your stocks have shot up in value, you sell enough stocks, and buy enough bonds, to get back to the 60-40 allocation. For those who work with an investment advisor, it's time to give them a call and see what changes need to be made.

Calculate your net worth

Your net worth is a simple calculation: It’s all of your assets minus all of your debts. This number is important because it tells you broadly how you’re doing financially. If you’ve been tracking your net worth over the years, you can see how you’re progressing. With that knowledge, you could make smarter decisions. For example, you might learn that your net worth has increased quite a bit and you’re on track to meet your goals. That may allow you to slow down or find a better work/life balance.

It’s important to note that having a high income doesn’t automatically equal a high net worth. You could be making six digits and have a low net worth due to outstanding debt. Alternatively, people with a lower income could have a high net worth if they’ve focused on saving and investing.

Don’t compare to others

When it comes to money, it’s never a good idea to compare yourself to others. What you see may not be reality, as any expense can be funded with debt. Who cares if your neighbour just took a trip to the Maldives, when you know they have a similar income as you? Focus on your own financial situation. By updating your finances annually, you can ensure you’re on track to meet your goals.

About the Author

Barry Choi

Barry Choi

MoneyWise.ca Contributor

Barry Choi is a Toronto-based personal finance and travel expert who makes frequent media appearances. When he's not educating people on how to be smarter with money, he's earning and burning miles and points for luxury travel.

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