4/18/2005
Financial Fitness

By DEBORAH E. STERN, BComm, CA, Partner

We have all made resolutions to enhance our lives, such as starting a diet or getting more exercise, but how many of us put improving personal finances on our list?

While many probably don't, we should. A good place to start is to organize receipts and documents. This can be in the form of file folders or envelopes. A file folder can be set up for each category of spending, such as medical expenses, charitable donations, car expenses and home-office expenses.

Like any fitness regime, keeping your finances in shape is about discipline and healthy habits. For example, Canada Revenue Agency (CRA) requires each taxpayer to maintain a mileage log if they are deducting car expenses for business or employment. Therefore, keeping a notebook in your car so you can properly track your mileage is a good habit to get into.

Keeping a budget for your personal expenses is also a wise idea. Many people spend much more money than they realize. If you keep track each month of your personal spending, you may be able to better manage your financial affairs. Clients are often shocked at how much they spend when reflecting on monthly expenditures. Monitoring this information can help curb unnecessary or excessive spending.

Tracking your personal expenditures can also help ensure you save enough money to maximize your RRSP and RESP contributions so you are able make them at the beginning of the year rather than last minute. Proper planning is also important to pay down as much of your non-deductible debt as possible, such as home mortgage and credit card debt.

Another important part of planning is preparing cash flow statements. As you get closer to retirement, you should prepare cash flow statements that reflect the future impact of loss of employment income and receipt of Canada Pension Plan (CPP), old age security and RIF income.

These detailed forecasts will show if you have enough capital, or if you will need to reduce spending or sell assets to meet your cash flow requirements. They will also give you information you need to make decisions, such as when you should apply to receive CPP, and how much to withdraw from your RIF.

You should also review your wills on a regular basis to ensure they provide an orderly distribution of your assets in a way that minimizes taxes to your estate and beneficiaries. Depending on circumstances, multiple wills may help reduce probate fees. Life insurance requirements should also be reviewed to fund capital gains tax on death, provide replacement income for dependents or funding the succession of a privately-owned business.

Many people procrastinate about their personal finances and don't worry about their retirement. They don't see the importance of planning ahead, because retirement is so far off in the future. But, eventually we all stop working and are dependent on a fixed income. As a general rule, you should start actively preparing for retirement 15 years before you plan to retire and review your plan at least every five years.

Like implementing a fitness regime, it's never too late, but it's always easier to maintain good habits and reach your goals the earlier you start.

This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.