By Sheila Walkington, BBA, CFP®
Everyone experiences stress as a natural reaction to certain events or circumstances. The severity of the reaction will, of course vary from individual to individual. For example, some love the sound of thunder while others find it a source of great anxiety.
Though you and I may differ in terms of what personally causes us stress, there are several types of life stressors that have a dramatic influence on all humans according to extensive research studies. Large scale research projects completed by the Center for Disease Control, the American Institute of Stress, and many others that examined the causes of stress in humans confirm that there are certain life events that most humans find very stressful. Stress due to issues related to personal finances sits at #4 of the top 10 causes of stress.
For some, it’s about making ends meet or family conflicts, for others it’s about long term financial security, being taken advantage of or the ups and downs in the stock market. Whatever your stress, you can improve your relationship to money by becoming more aware of what’s blocking you from financial peace and taking the steps to set yourself free.
1. Live the Life that You Want
If you are waiting to reach some magic number in your bank account or to be debt-free before you start living the life you want, you are probably giving money way too much hold over your life. While it’s important to pay the bills and to be financially responsible, a healthy relationship to money comes from using money to support your dreams and goals, not as an end in itself. So, be clear about what you want your life to look like, get your financial house in order and align your money with your life.
2. Look at your family background
How did your parents handle money? Were they extravagant spenders or excessive savers? What messages did you pick up about money as a child? Chances are the impact of these messages are buried pretty deep and could be influencing the way you handle money today. You might have adopted the same dysfunctional behaviors and beliefs as your parents or you might have swung to the other extreme – spending recklessly to counteract the penny pinching attitude you grew up with.
The key to freeing yourself from the stresses of past conditioning is to bring these memories to a level of awareness and to take a good hard look at how this might be affecting your relationship to money today.
3. Communicate with your spouse
If you have had disagreements with your spouse about money, you know how stressful and destructive they can be to a relationship. In fact, money issues are considered to be one of the major causes of divorce. As difficult as it is to talk about money issues, communication is essential in working through financial woes. Set a specific time aside to talk about money concerns and involve a third party (coach, counselor, financial planner) if the discussions get too emotionally heated. Try to focus on mutual goals, be clear with what your needs are and try to avoid blaming your partner. And be patient – your spouse is probably struggling with as many mixed messages about money as you are.
4. Educate Yourself
How many times have you met with a financial advisor, nodded your head, but really had no idea what was being said? The financial and investment world is increasingly complex and if you don’t understand the language of money, you can be left feeling very vulnerable and uneasy. Even if you work with an advisor that you trust, the only way to truly overcome this anxiety is to educate yourself about money.
Take a money course, read a book on financial planning or look for an advisor who focuses on financial education. You don’t have to become a real estate guru or an expert on the stock market, but make sure you are delegating, not abdicating responsibility for your finances.
A great place to start is Unstuck – How to Get Ahead Financially and Start Living the Life You Want which is available for purchase on Amazon.
5. Get out of debt
Debt limits your options, simple as that. The more debt you have, the less control you have over your life and your choices. Nothing causes more stress than working at a job you don’t like just to make your monthly credit card payments. While it may be hard to avoid incurring some debt (home ownership for instance), make sure you have a plan for repaying the debt as quickly as possible. Try to resist the convenience and reward incentives of credit cards. You might get a free trip to Saskatoon but the real cost could be your overall financial well-being.
6. Live within your means
According to Stats Canada, over 50% of Canadians spend more than they earn. No wonder we’re stressed about money! The most important financial principle (no, it’s not the latest stock tip) is to figure out how much money you need for your current lifestyle and how much you need to save for future goals and dreams. Then, find out how much income you earn after taxes and deductions. If you spend more than you earn and have nothing left over for savings, reduce your expenses or find a way to make more money. There is no easy solution here, just a cold, hard look at the financial numbers. While this exercise may be challenging, the buck stops here, literally!
7. Find out how much you need to retire
Retirement (or financial independence) ranks as one of the top financial goals, but most people have no idea how much money they will need. With so many immediate financial pressures, it’s easy to resist or avoid thinking about the future. However as uncomfortable as it may be to look at our finances today, it will only get harder tomorrow! So give yourself the gift of peace of mind and ask your financial advisor to help you figure out what you need to do today to achieve the lifestyle you want in retirement. Taking control of your finances can be challenging, but the rewards of financial peace of mind and security are well worth your efforts. I guarantee it!
If you take CPP early while continuing to work part time before you turn 65, are you still allowed to contribute to an RRSP?
Hi Vesna,
As long as you have contribution room available, you are able to make RRSP contributions until Dec 31st of the year you turn 71. Whether you are collecting CPP or working or not, does not change your ability to make contributions. If you are working part time, additional contribution room will be added each year. Check the Notice of Assessment you receive from the Canada Revenue Agency each year to find your annual limit.
It’s important to remember though, that just because you are able to make RRSP contributions doesn’t mean that this is necessarily the best course of action for you. RRSP’s allow you to defer your taxes from high income years (eg. when you are working) to lower income years (eg. when you are retired). They allow you to reduce your taxes in the year that you make your contribution but when you withdraw the money you must pay tax on it as income.
If your only income is CPP (a reduced amount because it is taken early) and income from part time work you may already be in a lower tax bracket. In this case there may be little benefit in deferring taxes and you may be better off in saving in a TFSA instead. In some cases, investing in unregistered investments may also prove to be more tax efficient than an RRSP. Another thing to consider however, is whether you have adequate eligible income to claim the full pension tax credit once you reach age 65. You should aim to have pension income of $2,000 per year. If you don’t have a pension plan through work, one way you can create pension income is from your RRSP savings.
A Money Coach can help you identify whether an RRSP, a TFSA or unregistered investments would be best for you. They can also help you create a plan for drawing down your retirement savings to reduce your taxes and increase your disposable income.
Will i get tax if i re-invest my RRSP fund to an annuity when I’m 71 years old?
Hi Marc,
You should be able to transfer your RRIF to an annuity without tax implications. Here is a good article http://www.getsmarterreinvesting.ca/question/can-a-rrif-be-converted-to-an-annuity/