Take the time to tinker with your finances

I am not much of a believer in New Year's resolutions. Lord knows they've never worked for me. If you're like me, self-discipline and a commitment to change don't magically appear at the stroke of midnight on New Year's.

Still, the beginning of the new year is an ideal time to take a look at your finances and make at least a few low-pain changes that can pay huge dividends over time.

Here are 10 suggestions humbly offered to help improve your personal finances:

1. The dreaded post-Christmas Visa bill is making it's way to your mailbox. Isn't it time you stopped funding the banks' billion-dollar profits? A credit card with a running balance is a creeping financial disaster. You're paying up to 20 per cent in interest to the bank and even more for those outrageous department store cards. Crucially, those are after-tax dollars, which makes your effective interest rate much higher. For example, a Quebecer in the top tax bracket would have to earn $3,600 to pay $1,850 in annual interest on $10,000 of debt on a typical bank card, according to a calculation by Jonathan Bicher, an accountant at Nexia Friedman.

Getting rid of credit-card and line-of-credit balances provides an unbeatable, guaranteed return on investment.

2. For similar reasons, paying off your mortgage is likely your best investment after working off that consumer debt.

Retiring your mortgage early provides a guaranteed return with the added bonus that it's tax free.

3. Pride yourself on being a smart, frugal shopper. Dale Ennis, publisher of Canadian MoneySaver magazine, urges people to shop around for any item over $100.

He had a new roof put on his house last year and followed his policy of getting three quotes. The difference between the high and low bid was 100 per cent. Get smart about the tricks retailers play to get money out of your pocket, such as putting attractive, high-priced prepared foods near where you enter a grocery store.

Buy in bulk when something you use regularly goes on sale.

And as much as you can bear it, brown-bag your lunch and make coffee at the office. The savings over a year are huge and, once again, are in after-tax dollars.

4. Once you've eliminated that nasty consumer debt, have a regular, automatic withdrawal taken from your bank account for saving and investing. It's called paying yourself first and it's the key to building a nest egg.

5. Take the time to educate yourself about the high cost and crummy performance of mutual funds. A study issued this year found Canada's mutual funds charge the highest fees in the world. A better choice is low-cost index funds or exchange-traded funds (ETFs). For details, explore this website: http://www.bylo.org.

6. Resolve to give up on trying to outsmart the market by jumping in and out of investments in an attempt to catch a rally or avoid a correction. It's a mug's game. And while you're at it, forget about chasing the latest hot fund or stock. The average U.S. stock investor earned only 3.9 per cent in the 20 years between 1986 and 2005, compared with 11.9 per cent delivered by the S&P 500 stock index, according to Dalbar Inc., a Boston research outfit. The difference can be explained, in large part, by self-defeating behaviours like market timing and hot-investment chasing.

7. Research indicates most people aren't psychologically well-equipped to buy and sell individual stocks. But if you do purchase stocks, stick to profitable, financially strong companies with a record of paying growing dividends. Canada's big banks are good examples. Avoid speculative, money-losing or heavily indebted companies. Say No to initial public offerings; research shows most end up as losers.

8. Know your returns. As I wrote last week, knowing your annual portfolio return is the key to understanding whether you're on track to achieving your financial goals or whether changes are needed.

Most investment firms don't provide this information on statements. They should.

Ask your adviser to calculate your portfolio's annual return or do it yourself. Visit this website: www.showmethereturn.com.

9. Beware of fraud. It's a cliche, but if it looks too good to be true, it probably is.

At The Gazette, we have spent a lot of time reporting over the last two years on the troubles of small investors who have collectively lost about $750 million on dicey investments.

Don't let yourself be victimized by a sales pitch.

Take care in choosing your investment adviser and insist on conservative, well-known investments.

If you're unsure, get a second opinion from an unbiased source such as a fee-only financial planner.

10. Give thanks often for all you have and be generous to those who are less fortunate.

dmacdonald@thegazette.canwest.com

© The Gazette (Montreal) 2007