Last week I had this little conversation with myself in my head:
“I really need to come up with a good idea for an article to kick off the new year.”
“Greg, you are way too busy wrapping up the 2021 fiscal year and preparing for the financial year ahead to be spending time thinking about what to write next.”
“But Greg, I really do need to come up with a subject for a new article. All this year-end/new-year financial stuff floating around in my head is really clouding my thinking process … I am at a total loss … oh, right … DUH!”
And so … my thoughts on wrapping up 2021’s finances and getting 2022’s finances off to a start on the right foot.
Wrapping Up the Just Finished Year
The following is my approach to wrap up any fiscal year. Most of this happens in the first week of the new year.
Review Budget – I fire up Quicken where I’ve been tracking our expenses all year and review the final numbers. These include our income and expenses for the just completed year. The first thing I do is look for any anomalies where I may have mis-entered something … this does happen occasionally. More importantly, I look at every budget category to see if we spent more or less than what we budgeted. If the answer is more, I give some thought to whether to increase the budget for the following year or how we can ratchet back on spending in that category.
Print Out Budget – Although I don’t really need to do this, I do like to have a paper copy on hand to refer to. Each budget I create for every new year remains in Quicken in perpetuity… unless I stop using the application somewhere down the road.
Filing – The last thing I do is move all the documents related to our various activities in the just completed year … financial or otherwise … into the “back-files” housed in file transfer boxes in the basement. At the same time, I set up new file folders for the year ahead.
Review Investments – This is something I typically start in October as the end of the calendar year comes in to view. I do this because there are typically decisions that need to be made that will impact the following year. These might include: do we want to move equities we hold in our general investment account into our TFSAs, or should we be purchasing some new equities ahead of the year end in preparation for transfer come January? Do we want to sell something to secure a capital gain or loss? Lots of things to think about.
And that is it, not a ton of work, and not terribly time-consuming. I would like to think that most retired folks are doing something similar themselves.
That said, some of you might be having this little conversation with yourself:
“Geez … my approach is even simpler than that, I have no budget and don’t track our expenses so nothing to review or print out … easy peasy.”
“Secondly, I don’t really file anything anymore because all my bills and statements come electronically. What, are you some kind of Luddite that you’re still having paper statements sent to you … sheesh?”
Fair enough, let me address all of that.
The New Year Financial Kickstart – Key Steps
First, let’s revisit the idea of keeping files to begin our look at our new year undertakings. It is more important than it may seem.
Set Up New Files – There is a very good reason that I keep paper files related to all of our financial activities (e.g. bank statements, credit card statements, household utility bills, and maintenance expenses, etc.). The Government of Canada requires us to retain our financial records.
I am not sure that everyone knows this, but if you ever have your taxes audited you will have to have readily available documents related to your current year’s financial activities as well as the previous six years. This applies to individuals as well as businesses.
The simplest way to ensure that you have all these ducks lined up is to simply keep paper files for every year. As you will have probably noticed, most financial institutions really don’t want to send paper documents to you anymore. They want you to incur the expense of printing them out. I suspect most people don’t bother to, and they are either deleted or linger there somewhere on the hard drive.
You may be thinking, well I’ve been receiving electronic documents for years, what should I do with them? If you read the “Where to keep your records…” page you will see part way down that there are links to electronic recordkeeping information that you could refer to. My suggestion would be that if you are going to continue to simply store electronic files you should at least get them organized into folders for each taxation year. You should probably also read through the government’s recommendations to see if they have any suggestions.
If you get audited and don’t have paper files or saved electronic files easily available, it will be an immense amount of work to retrieve them from financial institutions if necessary. If we get audited, I simply take them down to the basement and point to the boxes in the attached photo and say, “help yourselves”.
Think about it. It may be a good idea to set up paper files for 2022, even if you’ve been doing it the other way for years. At the very least, get all your electronic files organized for the coming year and for previous years.
Strike Budget for New Year – Based upon the previous year’s budget, I set up a new budget for the year ahead and enter our expected incomes or expenses for each category. Our budgets do vary from year to year, so it does require some thought. Striking a budget is all well and good, but, the most important “piece” is to track your expenses to see how you’re actually doing in comparison to your budget.
Start Tracking Your Expenses – Here we go, the most important thing you can do at the beginning of the year if you are not doing it already, is to start tracking your expenses. When I started to do this for our family several years ago it did not take me long to figure out that this was one of the best and simplest things you can do to maintain your family’s financial health. You get a very clear understanding of where all the money is going.
It’s very easy once you get your framework set up and get in the habit of recording all your expenditures. It might seem like a bit of an overwhelming task and a big commitment, but once you get things set up it should become very straightforward.
If you have been reading my blog for a while you will know that I published a three-part series on budgeting a couple of years ago … which is still available for your reading pleasure of course. At the end of it all, I was struck with the thought that what I was offering to people was based upon years of use and development, and that my suggestions might be far too much for someone who has not done budgeting and tracking before to wrap their heads around.
My thought now is that I would encourage you to start with something simpler. I just went through our budget for 2022 and noted that we will be tracking 84 different expense items. That is way too many for most people to begin with. What I am suggesting to you is that you consider starting with about 15 or 20 different core categories.
So, here is a challenge: identify the 15 or 20 categories of things you know you should be tracking and set up a system to do so. You do not have to use a fancy financial tracking software application like I do, a simple spreadsheet will work as well. For the old-school purists amongst you, you could simply do this with paper and pencil. A good friend of mine tracks their family expenditures in the same detail I do, but he does it all on ledger sheets. Chacun à son gout!
Below are the 15 general categories under which we track various subcategories of expenses. I think if you look at them, you will see that what I am suggesting is not too far from what you are thinking you would need to track.
Beside each our core 15 expense categories I have indicated the sorts of spending areas that take place in each. Most of these areas are individual subcategories that we track, but you certainly do not have to break them all out separately. Stick with the big picture for your first year. As I said, many of yours should be like your own, but some will not be, and you will want to combine some. Develop your own group of core expense categories and run with them.
Our Core Expense Categories
Here they are… assume there is an “etc.” at the end of each line. 🙂
3) COMPUTERS & OTHER DIGITAL EQUIPMENT: – Computers, Cell Phones, Tablets, Peripheries, Printer Paper, Ink Cartridges, blank CDs/DVDs,
4) CONSUMPTION-FOOD – Groceries, Restaurant Meals, Take Out
5) CONSUMPTION-CLEANERS and CONSUMABLES – Paper Towels, Kitchen Wraps, Toilet Paper, Kleenex, Garbage Bags, Laundry Detergent, Dish Soap
6) FINANCIAL – Bank Charges (safety deposit box, e-transfer fees, monthly account fees, etc.), Fees (charge cards, income tax preparation, financial advisor, etc.), Life Insurance.
7) HEALTH CARE – Services of Health Professionals (dentist, massage therapist, optometrist, etc.), Prescription Drugs, Over the Counter Medications, Health Aids, Glasses; anything related to the ongoing maintenance of family members’ physical and mental health.
8) LIFESTYLE – My “Lifestyle” category was one I felt I really needed to flesh out a little more than all the others because it covers so many aspects of our spending. Some of these you may want to make “core” expenses to be tracked.
I went looking for definitions of “lifestyle” for this little write up, but the only one I found relatively useful came from that infinite source of all knowledge, Wikipedia, which stated that lifestyle should be looked upon “as a way or style of living”. It is the secondary, not necessarily necessary spending, that we do that enriches our lives. The fun stuff in other words. Your fun stuff spending may vary from ours of course, but here are the types of things that we track.
Books – fiction and non-fiction, e-books Booze – beer, wine, liquor; does not include alcohol gifts for others, alcoholic drinks purchased in restaurants or bars; deduct funds from bottle returns from this category Fitness & Recreation – fitness equipment, health club fees, sports equipment and play, lessons, rentals Gifts-Others – gifts, cards, wrapping paper, gift bags Gifts-Selves – gifts, cards, wrapping paper, gift bags Home Entertainment – streaming services, movie purchases or rentals, music downloads, CDs, DVDs Lotteries & Betting – lottery tickets, sports pools and other betting Newspapers & Magazines – home delivery, purchased, or online Outside Entertainment – movies, musical events, sporting events, theatre and cultural events Stationary, Stamps, Photos – envelopes, stationary (not printer paper), postal & courier charges, photo printing or photo paper for printer
9) PERSONAL CARE & COSMETICS – Cosmetics & Spa (cosmetics, non-hygiene related body products, visits to spa or beautician), Hair Grooming (haircuts/styling, washing, colouring, hair sprays, combs, or brushes), Hygiene (hand or liquid soap, shampoos and conditioners, toothpaste, deodorant, shaving products, mouthwash, sanitary napkins)
10) RESIDENCE-Fixed – Cable TV, Internet, Home Phone, Gas, Hydro, Insurance, Cellular Phone Fees, Taxes, Water Heater Rental
11) RESIDENCE-Variable – Cleaning Service, Operating Consumables (light bulbs, water softener salt, batteries, furnace filters, items used for ongoing mechanical operation of the home), Furnishings & Equipment, Yard-care and Landscaping, Renovations or Improvements, Repairs or Replacement, Maintenance, Equipment Service
12) SPENDING MONEY PERSONAL – track for each household member and “Joint” for shared use (cash taken from bank account for personal use, purchases not recorded in any other category)
* This is the only category that we use that remotely approaches being a miscellaneous one. We don’t want to have to make notes about all our small personal cash purchases because the amount of effort to do so would greatly outweigh any benefit. It typically involves about $150.00 each per month, so not a large percentage of our expenses. Virtually all our other expenditures are done by credit card. Yet another important topic, for another day.
13) TRANSPORTATION-fixed – Car Loan or Lease, Insurance
14) TRANSPORTATION-variable – Fees, Fares, & Fines (road tolls, CAA/AAA, tickets, license renewal) Fuel, Car Wash, Repairs & Maintenance, Rental
15) TRAVEL/VACATION – Accommodation, Restaurant Meals (if forced to eat in restaurants because of travel), Transportation (e.g. plane, train, taxi), All Inclusive Fees
Good luck with your new financial tracking efforts if you decide to embrace this concept. I do not think you will be disappointed with the level of understanding it will provide you with.
The New Year Financial Kickstart – Also Important
TFSA Contribution – January is when you should be making your Tax-Free Savings Account contribution. That way, those funds will be making you free money for the rest of the year.
Plan to Get Out of Debt – I should not even be writing about this. Carrying unnecessary debt in retirement it’s absolutely the worst thing you can do. The only new debt you should ever incur during this phase of life is car payments when you absolutely must buy a new car. Even if you have the cash to buy a car outright you might be better off letting a dealership finance it for you, rather than using up your own resources. And you should try really, really hard to be mortgage free before you enter into retirement.
If you do have debt you should come up with a plan at the beginning of the year on how you’re going to be rid of it all by the end of the year.
Make the Family Finances Your New Hobby – So here is my final suggestion to kick off the new year. Make the understanding and management of your family finances your new hobby. That is pretty much what happened for me when I retired. It was initiated by a couple of situations. First of all, our financial planner who had done a great job for us retired about the same time, so rather than looking for someone new I decided to do it myself. Secondly, retirement finally provided me with that time to devote to learning more about personal finance.
The one thing that has really helped in that regard is to spend a lot of time reading about personal finance. Every day begins with me scanning the investment sections of the Globe and Mail and the Financial Post. I also spend a lot more time reading books about money management.
Onward and upwards! May 2022 to be your family financial management breakthrough year.
Set Up New Files – There is a very good reason that I keep paper files related to all of our financial activities (e.g. bank statements, credit card statements, household utility bills, and maintenance expenses, etc.). The Government of Canada requires us to retain our financial records.
Strike Budget for New Year – Based upon the previous year’s budget, I set up a new budget for the year ahead and enter our expected incomes or expenses for each category. Our budgets do vary from year to year, so it does require some thought. Striking a budget is all well and good, but, the most important “piece” is to track your expenses to see how you’re actually doing in comparison to your budget.
