As in many prior years, my last post of the year is about undertaking a "financial clean-up" over the holiday season. I feel this "clean-up" is a vital component to maintain your financial health. This year I will consider the effects of COVID on your clean-up.
So what is a financial cleanup? In the Blunt Bean Counter’s household, it will entail the following in between eating and watching the 2021 IHF World Junior Championship (it looks like the tournament will be a go and will have an all Canadian referee contingent, which will make many people very happy).
Yearly spending summary
I use Quicken to reconcile my bank and track my spending during the year. If I am not too hazy on New Year’s Day, I print out a summary of my spending by category for the year. This exercise usually provides some eye-opening and sometimes depressing data, and often is the catalyst for me to dip back into the spiked eggnog.
But seriously, the information is invaluable. It provides the basis for yearly budgeting, income tax information (see below), and amongst other uses, provides a starting point for determining your cash requirements in retirement. Whether you use Quicken, Excel or just a bunch of hand-written sheets, it is important to summarize your yearly spending. If you do not track your spending in any manner, maybe for this year, select January, February, April, May, November and December to get a mix of pre-COVID months, COVID-adaptation months and living-with-COVID recovery months. Next, go through your bank account and summarize your expenses for those months, and extrapolate them for the year accounting for any other large out-of-the-ordinary expenses in the other months.
Most of us will have spent significantly less in 2020 due to COVID. If you have a summary of your 2019 spending, a comparison will likely reflect a large drop in your discretionary spending. Review these expenses and consider whether you can keep your spending somewhere between 2019 and 2020 when we return to “normal.” Your fixed expenses are likely fairly similar, but you may be able to reduce some of those expenses.
Investment portfolio review
The first couple weeks of the new year is a great time to review your investment portfolio, annual rates of return (for 2020, but also 3-, 5- and 10-year returns if you have the information) asset allocation and to re-balance to your desired allocation and risk tolerance. The million-dollar question is how your portfolio or advisor/investment manager did in comparison to appropriate benchmarks such as the S&P 500, TSX Composite, an International index and a Bond Index. This exercise is not necessarily easy (although all investment managers and some investment advisors provide benchmarks, they measure their returns against). The Internet has many model portfolios you can use to create your own benchmark if you are a do-it-yourself investor.
While the markets bounced back strongly from the initial COVID drop in March, the returns I am seeing from clients are varying widely. Thus, it is especially important this year to review your returns against the appropriate benchmark. This means that if you have a conservative portfolio, you should not expect to have some of the large technology gains a more aggressive investor would have. However, if your returns are way off your conservative benchmarks, you need to discuss with your advisor the reasons for the variance.
It may be a good year to look at the returns of certain balanced funds (various banks and private funds such as Vanguard offer these funds) as a comparable for 2020. These funds can be 60%/40% equity to fixed income or vice versa—or other combinations. You just need to do a bit of digging to find the appropriate fund to compare to your portfolio allocation (it will never be an exact comparison).
The reason you would look at these balanced funds is because they are typically low cost and you would hope your advisor at worst achieves returns similar over 3-, 5 and 10-year periods and provides some value-added services to you.
As noted above, I use my yearly Quicken report for tax purposes. I print out the details of donations, medical receipts (also useful for your medical insurance re-imbursements I discuss below) and other expenses that may be deductible for tax purposes such as auto expenses (this acts as checklist of the receipts I should have or will receive). Almost all of us used our home office for business or employment purposes this year, so you should print out or summarize your home-related expenses. Also stay tuned for news on Form T2200 from the CRA, which is finalizing its protocols for the form during this time of increased work from home. See this CRA press release for information on the simplified T2200 for home office expenses.
Where you claim auto expenses, you should get in the habit of checking your odometer reading on the first day of January each year (since, if you are like most people, you probably do not keep the detailed daily mileage log the CRA requires). This allows you to quantify how many kilometres you drive in any given year, which is often helpful in determining the percentage of employment or business use of your car. This year, many people will have only used their car three months of the year for employment or business, so your odometer reading on January 1, March 31, and December 31, 2020 would be the three most important readings (see if you have an oil change or car repair around these times that noted your kilometres on the service invoice).
Medical/dental insurance claims
As I have a health insurance plan at work, I also start to assemble the receipts for my final insurance claim for the calendar year. I find if I don’t deal with this early in the year, I tend to get busy and forget about it.
To facilitate the claim, I ask certain health providers to issue yearly payment summaries. This ensures I have not missed any receipts and assists in claiming my medical expenses on my income tax return. You can do this for physiotherapists, massage therapists, chiropractors, and orthodontists, and even some drug stores provide yearly prescription summaries. This also condenses a file of 50 receipts into four or five summary receipts.
Year-end financial clean-ups are not much fun and somewhat time consuming. But they ensure you get all the money owing back to you from your insurer, ensure you manage the amount of taxes you pay to the CRA, and jump-start your budget planning.
As noted earlier, this years summary will provide very telling data on your level of discretionary spending, pre-COVID and during COVID. Use this information to budget your discretionary expenses going forward. Finally, a critical review of your portfolio and investment advisor could be the most important thing you do financially as you prepare for 2021.
Please note the blog posts are time sensitive and subject to changes in legislation.
BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.