Financial Literacy

The real January effect

We spend January 1 walking through our lives, room by room, drawing up a list of work to be done, cracks to be patched. Maybe this year, to balance the list, we ought to walk through the rooms of our lives… not looking for flaws, but for potential.

~Ellen Goodman

Have you ever heard of The January Effect? It’s basically a piece of market folklore that gets mentioned each New Year, with updated performance statistics. It usually comes with endless debate about whether it’s an actionable piece of information or something more akin to a stock market ouija board.

I’ve heard of a few slightly different variations on The January Effect, but most of them refer to the tendency of the stock market to rise between the last trading day of the departing year and the fifth trading day of the New Year. Some say that the trend of those key trading days will tell the tale of the tape for the remainder of the year – except for the few years when it doesn’t.

The main reason given for The January Effect is that tax-loss selling in December drives prices down a bit, providing an attractive entry point for investors and funds looking to put that money back to work in the New Year. Some have speculated that this effect isn’t as relevant anymore, since many investors hold their retirement savings in tax-sheltered vehicles, eliminating the need for tax-loss selling.

In Canada, however, the existence of one such tax-sheltered vehicle may actually add to The January Effect. In January the RRSP contribution deadline is just a couple of months away and people are starting to get a feel for whether or not it might be a good idea to make an RRSP contribution in order to get a tax break for the previous year. (The RRSP contribution deadline for 2011 is March 1st by the way.)

The real January effect

The January Effect does work a good part of the time. But I find that the most reliable and lucrative January trend in personal finance is the need to get organized. I can be the biggest organizational basket case in December but somehow manage to turn it all around in the first couple of weeks of January. (I have yet to master the trick of getting that to carry straight through to the following December. ;))

The need for a fresh start at the beginning of a new calendar year is something many of us thrive on. It’s a time to set new priorities and look for opportunities we might have overlooked in the past few months. Revived by the break from routine that the holidays provide, we can look at our life and our personal finances with a fresh set of eyes.

10 ways to improve your finances and your life in 2011

If you have yet to take advantage of The Real January Effect, or you’re finding that you’re kind of immune to it, here are 10 actions you can take to improve your finances and your life as we open the book on 2011:

  1. Track your expenses: If you’ve never tracked your expenses before, this is probably the number one thing you can do to improve your finances today. You can’t maximize your money if you don’t know where it’s going. If you’re a veteran expense tracker, you might want to update your numbers for 2011, taking into account rising food and energy costs.
  2. Set up a budget: You don’t have to have the perfect budget and it doesn’t need to be set in stone. A good budget is simple and flexible. The best budget is the one you use. You shouldn’t feel guilty every time you look at it. You should feel empowered. Budgets are, by definition, a work in progress. Expect the unexpected.
  3. Organize your files: If you don’t yet have a filing system that organizes your bills, receipts, pay stubs, and tax-related information, now is the perfect time to set one up.
  4. Review your investments: How did your savings and investments perform last year? Are you happy with your asset allocation? What’s on your shopping list for 2011? How’s your retirement plan looking?
  5. Clean out your desk: If you have a desk or workspace where you perform your personal finance tasks, clean it up. A clean desk really can help clear your mind and focus your attention. (I need to do this more than once a year.)
  6. Centralize your financial information: What would happen to your finances if, heaven forbid, something happened to you tomorrow? Would those left with the responsibility of sorting out insurance, bank accounts, investments, and dozens of associated passwords know where to start? No one wants to think about this, but organizing your financial life is one of the greatest gifts you can give to your loved ones.
  7. Set some goals: You don’t need a lot of them, but a few key targets can help us focus our attention in an era when we’re being pulled in so many different directions.
  8. Turn off: Take some time each day to disconnect – from responsibilities, gadgets, and noise. You’ll be amazed at what you hear when it’s really quiet.
  9. Search for imbalances: Is there something that’s been bothering you that’s not quite right? Sometimes these things nag at us throughout the day but only become clear once we’ve turned off. What steps can you take to restore balance?
  10. Maintenance mechanism: Put some kind of system in place that makes it easier for you to follow through on these principles and update them regularly. It could be a reminder in your organizer, or a commitment to write out your goals and revisit them once a week, once a month, or even every day if you really want to form a habit.

The maintenance mechanism has been a real stumbling point for me. So far, I haven’t found anything that works for more than a month or two. I’m trying again this year, but I’m starting to see that raw commitment and some genuine frustration with the status quo are more effective than clever tips and tricks.

I’m not sure whether you find yourself more willing and able to get organized in January, but I’ve found that the urge to purge comes like clockwork on January 1st of each year. I’d rather invest that trend than in stocks as indicated by the traditional January Effect. I’ve found it pays great dividends each and every year.

Has The Real January Effect worked its magic on you yet? Do you have any ideas to share?


  1. Jessica07

    I think #1 on your list is probably the hardest one for me to do. It drives me crazy when I get behind and have to play catch-up. Perhaps I should be a little more diligent about #10.

    • 2 Cents

      I got into the “catch-up” trap on a lot of things near the end of last year and it wasn’t fun. Maintenance sort of goes along with that, but the days seem to go by so quickly and it’s a lot easier to talk about keeping up with everything than to do it.

      Thanks for your comments! 🙂

  2. youngandthrifty

    I was checking your “about” and I had no idea you were female! Canadian PF bloggers unite! (My feminist side comes out from time to time)

    This is a great post- today (Monday) is supposed to be Blue Monday (the most depressing day of the year apparently) so reading a post about goals definitely helps the blahs 🙂

    I am guilty of #5. Decluttering is so great for the body and spirit. Definitely need to get more organized for 2011.

    • 2 Cents

      Yep. Two X chromosomes for me – although I live in a house full of XYs ;). I’m glad this post swept away your blahs a bit.

      I agree with you on the decluttering thing. It seems silly to think that simply tidying up a few things can help you be more productive and feel better, but it works!

      Thanks for stopping by!

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