Adopt These 9 Money Habits to Increase Your Net Worth
As I wrote in my newsletter from earlier this year:
Anyone who has glanced a non fiction bestseller list over the past few years has likely noticed a book called “Atomic Habits” . The thesis of the book is that small incremental changes to our habits (i.e. atomic units) can lead to significant changes in our lives, over time. He explains the behaviour that drives habits, provides strategies for forming good habits and helps to break bad ones.
One way to reinforce habits is to celebrate small wins. If you eat slightly less junk food or exercise a bit more, you can count it as an accomplishment. The positive reinforcement helps to make us feel better, inspire confidence and slowly build habits that makes reaching our goals a bit easier. This is particularly true with financial discipline. It is important to recognize that, like any habit, it is a process that takes time. The good news is that there are tangible metrics to measure your success e.g. when you have more in your investment accounts or a higher net worth.
Know your RRSP balances and make a plan to contribute
An RRSP is the single most effective way for Canadians to reduce to their tax bill and save for retirement. Ensuring that you maximize the your RRSP tax deduction requires some planning. Firstly, you should know how much you can contribute in any given year. This information is available on your notice of assessment from Revenue Canada (CRA) and can also be found on the main page when you log in to CRA “My Account”. It should be noted that contribution room to an RRSP is cumulative, which means that if you don’t contribute the maximum, the balance carries forward to the next year.
One of the best ways to ensure that you contribute and maximize your investment returns is to set up an automatic monthly contribution, to an investment of your choice. This helps you to smooth out your returns especially with respect to the stock market thereby increasing your overall income..
* Small business owners who only pay themselves with dividends should consider also paying themselves a salary to create RRSP room. More details on types of income that increase your RRSP room.
Contribute to your TFSA
While a TFSA does not give you an immediate tax benefit as it is not a direct tax deduction, any gains/income that accumulate in the Tax Free Savings Account are tax free. Every Canadian should use their TFSA for investing or at the very least as a savings account. Your remaining TFSA contribution room, similar to RRSP contribution room, can also be seen by going to CRA “My Account”. Automating a monthly contribution to a TFSA makes it much easier on your budget.
Set up a budget and monitor it
One of the best ways to exercise financial discipline is to set up a budget. A budget simply requires that you track money coming and money going out where ideally the former is higher than the latter.
You can either set up a spreadsheet or there are numerous free and paid software that make the process of setting up a budget and tracking your spending, very easy. It is also a great way to track your net worth and watch it increase over time.
Pay Down Credit Cards or Set Up a Line of Credit
Having access to credit is great, but interest rates on credit cards are extremely high. Ideally, you use your credit card regularly but make sure to pay off the balance every month. If not, interest starts to accumulate and you end up in a position where you can only afford to pay the interest (not to mention that it is a complete waste of money in most cases). If paying off the credit card in full is not an option, you should speak to your bank about setting up a line of credit. A line of credit is very similar to a credit card in that you only pay interest on what you borrow, but the interest rates are significantly lower. Having access to a line of credit, in general, can also be useful as emergency fund.
Automating monthly credit card payments is another step that you can take to ensure that your payments are made on time and your credit score is not negatively impacted in case you forget to pay it.
Keep track of your points programs and resolve to use them
Many of us are participants in a variety of points programs. Keeping track of them can be a hassle which often results in them expiring or simply languishing in an account. To ensure that you do make maximize use of them, it is a good idea to track them using a spreadsheet or one of the many apps that allow you to track your points.
Have a system for your tax Documents
Tax time has many of us scrambling for tax documents and receipts. Often poor organization results in missed deductions and credits. The solution is simple – set up a folder every year where you file anything related to taxes (no organization is even necessary - simply drop documents into the folder). Similarly, set up a folder on your computer for any documents that are received electronically, via email etc.
Then at tax time you or your accountant can take care of the organization. This simple step can ensure that you are not missing on any potential tax savings with the added benefit of making tax time much less painful.
See my post for a comprehensive list of tax documents.
Review your credit cards and subscriptions
Credit card issuers are constantly issuing new types of credit cards with different rewards and benefits. It can make sense to review your current credit cards for these rewards, benefits and annual fees to see if they are the most beneficial for your current circumstances. If not, there are a number of websites that compare different types of credit cards that can help you decide on a replacement. If you do plan to cancel an existing credit card, ensure that you use any remaining points/rewards prior to cancellation.
Additionally, it is a good to review your subscriptions on a quarterly or at least annual basis. We all tend to sign up for subscriptions, sometimes aspirationally or simply because they make our life easier. However, it can easy to forget them, or if we do see the charge on our credit card bills are too busy to cancel them. Netflix will always have that one show that you still want to watch but it may not be worth paying a monthly fee for one show that you’re going to potentially watch in 3 months.
Consider setting up a Will
Although not necessarily a habit, has a place here as it is an important part of money hygiene.
Most of us know that we should have a will but the act of doing it can be difficult. It is important to remember that setting up a will can save your loved ones and/or beneficiaries a great deal of hassle and costs and ensures that your assets are distributed in a manner of your choosing. Making a will has also never been easier as you no longer have to do find a notary, make an appointment, go there etc. You can simply do it online using one of the many will services that are available that can be found with a simple internet search.
Set reminders
This is probably the simplest of all tips and one that takes a few minutes to set up. Most calendar apps allow you to set recurring reminders. You want to track when each of your bills and credit cards are due. You can reflect tax deadlines for instalments if applicable. RRSP deadlines and when your year end taxes are due.
You can also set reminders about contributions which you might want to make manually rather than automating. I have a reminder to review my investment portfolio so that I can see if I want to make any changes, rebalance etc.
There are a number of actions you take to be more financially disciplined , many of which take a few minutes to set up and can results in a significant increase in your net worth.
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