December 22, 2011


Title: Financial tips for 2012

Sub-title: Some experts are predicting only moderate economic growth for the next several years. It may make sense to structure your affairs accordingly.


As Canada continues its tepid economic recovery, content that it is doing better than many other western countries, an increasing number of voices are warning that times could be tough for a while. The latest to join the chorus is Avery Shenfeld, an economist with CIBC World Markets.


“Akin to Pharaoh’s dream for Egypt, the global economy could well be in the midst of seven lean years, as the debt financed bounty of the prior expansion left a growth famine in the wake,” wrote Shenfeld in a recent note to the bank’s clients. “We are already more than halfway there, as the deep recession that began in 2008, was followed, at least in much of the developed world, by a lacklustre recovery.”


Shenfeld’s comments echo those of many prominent financial sector stakeholders, who warn that prudence may be in order. For example the Bank of Canada has indicated that it will not raise interest rates for the foreseeable future, due to persistent economic weakness. Several other major central banks have similar policies. As a result, we have prepared a list of financial tips for 2012, for those who believe that the economy may not bounce back quickly.


1. Assess your performance last year

If you don’t know where you are, it is hard to figure out where you are going. Every year business accountants put together financial reports, which managers use to assess their company’s performance. However few individuals so do. Try it. List all of your revenues and expenses for last year, as well as your assets and liabilities and use the information to assess your progress.  


2. Make a budget for 2012

It is spring break, and your family is bugging you to grab a last minute Caribbean vacation deal that they found online. Can you afford it? If you had done a budget at the start of the year you would know. For example you may be able to write a check for the trip, but did you remember that your municipal tax bills come due the following month? Budgeting forces you to assess and deal with obstacles on the road ahead and thus helps you better meet your financial goals.



3. Pay down expensive debt

Many categories of interest rates are at record low levels, particularly for prime corporate and mortgage borrowers. However credit card debt, government tax liabilities, car leases and many other obligations often come with extremely high carrying costs and late payment penalties. While borrowing to buy a house, a car or a school education can be a good investment, when done at reasonable levels, before taking on any new obligations make sure to pay down your high interest rate debt first.


4. Don’t buy a house solely as an investment

If you are like many long-term Canadian homeowners, you have probably been walking around cocktail parties these last few years, musing to anyone who will listen, about the windfall profits that you would accumulate if you sell your property. Yet while home ownership continues to be a laudable goal, during uncertain times, making money should not be your sole purpose. Home prices here are at fairly high levels right now relative to rents and family incomes, so they are unlikely to rise quickly in coming years. In short, if you are comfortable that a property seems like a gook deal for your current circumstances, by all means go ahead and buy. But don’t count on major short-term prices hikes, to justify your decision.


5. Invest in your brain. But invest even more in your child’s brain.

If sluggish economic growth is in the cards, then asset prices of any kind are unlikely to make big gains. So where should you put your money? Your brain might be a good place to start. Getting an education or beefing up on what you already know, can have a great long-term payback. For example, it may make more sense to invest $50,000 by using the money to fund a year out of the workforce in a retraining program to beef up your earning power. Stocks can rise and fall, but no matter what happens, the education and skills that you pick up will always be with you. That applies double for investments in your kids’ education. Any money that you invest in their studies will pay back exponentially, because they will benefit for more years from the education you buy them than you would.


6. Think long-term

With 24 hour news, Internet downloads and 250 channels on TV, it’s hard to find a moment to think about anything let alone the future. However doing so can have massive benefits. While planning for next year can help you overcome obstacles that you are likely to meet, planning for the next five, 10 or 20 years, does that on steroids, by putting things that you are doing today in proportion. Start by figuring out how you will pay for your retirement. Then try to come up with some good ways to stay useful after 65. Life expectancy is now in the mid-80s for most of those reading this column. Twenty years is a long time to sit around watching MASH reruns. One idea: think about working part time to ease gradually into retirement. If you still have free time, consider helping out your kids with the grand children. The current younger generation is facing economic and social challenges we never dreamed of. They can use all the help they can get.


7. Plan to put money aside

Last month we talked a bit about putting aside a nest egg to protect your family from unexpected events such as medical emergencies, job loss, divorce or separation and so on. All of these are more likely to occur during tough economic times, which, in addition to the financial challenges they lead to, can also generate enormous stress levels which can aggravate health challenges and can spark marital discord. Experts say that you should have enough short-term cash lying around to fund your expenses for six months. However saving that kind of money takes a while. Make getting started on that objective a key goal for 2012.




While the preceding suggestions are somewhat random, there is a key theme running through them: the need for a return to old fashion values, such as thrift, hard work, a focus on family and long-term thinking.


There’s a reason for that. The free-spending, debt driven years of the 1990s and 2000s, which many of us grew up with, were likely in many ways an anomaly. If we are indeed heading into a period of deleveraging and retrenchment as many experts suggest, then changing the habits that got us to where we are, may be a good place to start.



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