The Cure for Holiday (Financial) Overindulgence

One simple remedy for getting back on track financially is to write down some general goals, like saving for a special purchase. Then make a plan, set priorities, assess your resources, and determine how long it will take to save up to pay for that purchase in cash. (Jupiterimages/Photos.com)

Have you been naughty this holiday season? Financially, at least, many of us tip over to the “naughty” side, overextending our spending and maxing out our credit cards. I won’t get into other kinds of overindulgence here, but you know what they are.

With the financial kind, there are some fairly simple remedies to get you back on the straight and narrow, and get your New Year started off right.

Set Some Goals

Sure, everyone tells you to “set goals.” And most of us fall into the equally overindulgent trap of setting unachievable goals. That’s a surefire way to frustration and the collapse of your New Year’s financial resolutions before you even get started.

So, for example, instead of promising to abandon all credit card use for the next year, promise yourself to set aside some manageable fixed amount from every paycheque, and put it into an investment account. Make it an automatic transfer from your bank account.

I say set aside whatever you can comfortably afford to, but do it consistently. That’s the real trick: Done regularly, setting aside even $25 or $50 per week can really add up over time. That’s all about the magic of compounding.

Make a plan, Stan!

Don’t worry! I definitely do not mean you have to fire up an Excel spreadsheet and creating a complicated cash flow statement. Yuck! I mean just write down some general goals, both short term and long term. Are you saving for a downpayment on a home? Are you setting funds aside for retirement? Do you need funds for a vacation? Or a new car?

All of these goals need a plan of some sort—even if you start with a list on one of those kitchen “to-do” pads. That way, you can set priorities and assess what resources you have available. It’s pretty simple really.

On one side of the page, write down your goal—say a Caribbean cruise. And let’s say it’s going to cost you $2,500. On the other side of the page, write down how much you can set aside from every paycheque to put toward that goal. Divide the bigger amount by the smaller amount to see how long it’ll take to save up to pay for that cruise in cash.

You might look at that drawer or shoebox full of slips and bills, just laugh out loud, and pay for your cruise on “the card.” Sound familiar? To me, it just sounds like a plan to dig a deeper hole. Who could ever set priorities out of something like that?

So maybe you could use a financial planner. This is someone who is an expert at this sort of thing. If you want to go beyond that kitchen notepad list and make sense of that shoebox full of slips, find a Certified Financial Planner who can help you out.

If you’re looking for more…

If you already have some investments, say an RRSP, a Tax-Free Savings Account, or a non-registered brokerage account, make sure your overall investment holdings match your tolerance for risk. Clients have come to me claiming to be ultra-conservative investors, but with portfolios chock full of equity mutual funds. Hardly low risk!

It’s a fairly simple matter to fix, with a questionnaire I use to draw up a realistic risk profile.

It’s not complicated. I just ask a few questions to get at what you really think about risk. Often, there’s a lot of bravado involved, and people will tell me they’re okay with investing in junior mining penny stocks or speculative high-tech companies because they know a neighbour or relative who “made a killing” in such things.

There’s often a lot of embellishment to those kinds of stories. Better to ask yourself what level of loss you can stand in your portfolio over a given length of time.

Are you okay with a drop of 10 percent over three months? Or a year? On a $50,000 portfolio, that’s $5,000. Remember, 10 percent is how much the stock market loses when it’s going through what’s called a “correction.”

Are you really, truly comfortable losing that $5,000 in a short period of time? Maybe not!

Creating a true risk profile will help you rebalance your portfolio in the New Year to just the right mix of safety, income, and growth assets that will truly meet your needs—and let you sleep nights.

Courtesy Fundata Canada Inc. © 2013. Robyn Thompson, CFP, CIM, FCSI, is president of Castlemark Wealth Management. This article is not intended as personalized investment advice. Investment vehicles mentioned are not guaranteed and involve risk of loss. This article has been edited from its original version.