|Posted on 10 December, 2018 at 16:35||comments (0)|
Parents and Grandparents -
Have you thought about the legacy you will leave for you Children and Grandchildren?
Is leaving a legacy important to you?
I often think about the legacy I will leave behind. I think about how my Children and my future Grandchildren will remember me, and what I would like them to remember me for. I also think about the financial legacy I will leave my family. Not just my children, but my grandchildren, and their children and so on. I would love to be able to impact future generations in a positive way, both personally and financially.
The idea of leaving a legacy comes to mind more often around Christmas, The Season of Giving.
Most gifts we purchase are material and for the immediate, but do we think about the future? Do we think about leaving a lasting gift that will bless not only our children and grandchildren but future generations? I do. If I can, I would love to provide for my children and grandchildren when I’m older and even continue to provide for them when I’ve passed away.
A great proven way to leave a financial legacy – and one that Amy and I personally use - is to give our children / grandchildren the lasting gift of a Dividend Paying Whole Life Insurance Policy.
What Did I Just Say? What Kind of Gift is a Life Insurance Policy? Answer: One of the best possible gifts to give.
Let me explain.
Dividend Paying Whole Life Insurance is a permanent insurance policy, so first things first you’ve insured the next generations. You've protected their income and their future families. That’s a gift in and of itself.
This policy however, is not just a death benefit (which already is a great asset). It also grows cash values every day within the policy which can be used throughout the insureds life. It’s basically a GIC on Steroids (cannot lose value, and guaranteed to grow) that your loved ones can use for education, a down payment on a house, to travel and even to use as tax-free income in retirement. That's right, Tax-Free!
(With Government Debt now at over $664,080,990,000.000 (try saying that 5 times as fast as you can) and Baby Boomers hitting retirement, the words tax-free are becoming more and more important)
This entire policy grows every day. The policy stays in force and grows in value every day. whether the loved one you’ve insured lives until age 45, 85 or 105. When they pass it transfers to their loved ones – a spouse or children, whomever they choose.
You - parent or grandparent - can help the next generations in your family through post-secondary school, buy their first house, travel the world, be prepared financially for retirement, and take care of their future families, all with the gift of a small premium (level premium that doesn’t increase, that can be fully paid in 20 years, and that can be paid monthly or annually) towards a whole life insurance policy.
Think about this: You purchase a small whole life insurance policy on your grandchild when they are 1-year-old. Your children know of the gift you bought for their children. Your grandchild grows up and has a family. Your children buy their new grandchildren a small gift of dividend paying whole life insurance, following in your footsteps. Your own grandchildren use the policy you’ve purchased for them to help fund their retirement and when they pass away their death benefit goes to their kids as an inheritance. Now, their kids use part of that death benefit to purchase a life insurance policy on their grandchildren, and use the rest as they please - opportunity. And the cycle continues. For generations you’ve built a legacy of giving, a legacy of opportunity, and a legacy of family wealth. Years and years after you’ve passed away, you are still impacting your family’s lives. All from one gift! Pretty incredible.
Amy and I are very interested to see how our children will use the life insurance gift we’ve given them and what kind of difference in will make in the lives of them and their future families.
If you’d like to learn more about this gift and how to go about giving this gift to your children and/or grandchildren, we’d love to help. Contact us here.
Merry Christmas and a Happy New Year,
From Fresh Ground Financial.
|Posted on 20 November, 2018 at 16:45||comments (0)|
Financial Risk - Dealing with Debt / Mortgages
Tom and Dick were debating the other day about who was carrying more financial risk.
Dick thinks Tom is carrying more risk because he has $0 of savings, and $0 of debt.
Tom, on the other hand, thinks Dick is carrying more risk because while he has $20,000 of savings, he also has $20,000 of debt.
What do you think? Who is carrying more risk?
Tom - $0 Savings, $0 Debt,
Dick - $20,000 Savings, $20,000 Debt?
We’ll talk about that in a minute.
Organizing Income / Dealing with Debt and Mortgages Workshop
Tuesday, November 27th. 7-9 PM. 875 Gateway Rd. Wpg, MB
Currently, The average Canadian saves only about 4% of their income for the future (for most people that means short term future like a trip or a big expense rather than retirement) and spends 34.5% of their lifetime income on interest payments. Our mortgage is often the biggest interest expense.
In this 2 hour workshop we’ll walk through structuring our income for success and discuss how much of our income should go to our current lifestyle, how much for the future, how much towards our housing costs etc. We’ll also discuss some guidelines on how much house to buy, and an alternative way to pay off your house that could save you thousands in interest and years in payment time.
Finally, we’ll discuss some simple strategies to help pay off debt more quickly.
In short - we’re budgeting well and paying off debt more quickly in this workshop.
Alright, Back to Tom & Dick
While Dick has debt, Tom is actually carrying more risk. If Tom were to lose his job or become disabled or ill, he would be in a very tough position, as he has no money available to him. If Tom ended up in this situation, he would likely be unable to get a loan because the bank would wonder how he is going to pay off the loan, having no job. He will have no way to cover his monthly expenses as he has no money in his accounts and no way to get access to money.
Dick on the other hand has $20,000 of savings in his control, to access and to use if he were to lose his job. He will be able to cover his monthly expenses for a time, giving him some financial security while he tried to get back on his feet.
Why do I share this example with you?
Most Canadians hate the idea of debt, especially big debt like a mortgage. Because of this, they use most of their extra monthly income to pay off their debt. What they may not know however, is that this will likely leave them taking on a lot of risk because the rest of their "financial house" is not in tact, or structured well. They'll often leave themselves under - insured (most Canadians are under - insured), and use those dollars and the dollars that should be directed towards saving for emergencies, saving for opportunities and saving for the future to pay of their debt instead.
While it is important to pay off debt quickly, it should never come at the expense of leaving your household poorly structured financially, and taking on undue risk. Before paying more into debt, we should ensure that we have access to money when we need it, that we are prepared financially for difficulties that come our way such as a death or an illness, and that we are saving for the future - the retirement years come much more quickly than we often expect.
My encouragement for you - whether you have debt or not - is to make sure that you have money that is accessible to you and in your control at all times. With access and control of money, you are ready for any emergencies and opportunities that come your way.
We'll discuss the ideas in this blog in more depth at the November 27th workshop Organizing Income & Dealing with Debt, including paying your house off more quickly while paying less interest.
We send out thoughts and tips like this regularly in our newsletters.
|Posted on 4 October, 2018 at 14:00||comments (0)|
Today’s Topic: Organizing Income.
“Do not save what is left after spending, but spend what is left after saving.” - Warren Buffett
** Financial Strategies To Get Ahead - a one-day seminar on October 20th - is designed to help people protect and growth wealth for themselves, their families and their businesses. Click here for more information and to register. **
Putting money aside on a monthly basis for emergencies and for the future is very important. Doing this puts us in control of our financial situation. If we do not have savings we often borrow when an emergency comes up. Those who do not save are usually indebted to those who do.
One way to ensure that you can save first is to make more than you spend. This allows us to structure our money, and plan for the future much more easily, because it gives us that room to save, and invest, and deal with emergencies along the way. Making more than we spend every month is the first step to wealth building.
Budgeting, and planning your cash flow - having discipline with your dollars - is a great way to ensure that we make more than we spend. Here is a helpful guideline to ensure that we can make more than we spend every month and have plenty of room for saving, for sharing with others, and taking care of our monthly needs.
The Goal (based on net income)
10% or more: For others
10% or more: Savings
30% or less: Housing Costs - includes mortgage payments, house Insurance, property tax.
25% or less: Daily Living - includes entertainment, eating out, hobbies, travel, clothing, gifts, infant needs, pet bills, personal care, etc.
25% or less: Everything Else - includes maintenance, phones, TV, internet, gas, parking, insurances, debt payments, investments.
These percentages are the goal. If you haven’t been saving anything yet, don’t worry too much. The key is to start. Maybe start with 1% until you hardly notice it and then increase it.
|Posted on 9 August, 2018 at 0:40||comments (0)|
One of the Most Effective, Underused and Risk-Free Money Making Strategies that Everyone Should Use.
Today’s blog is all about one of the best strategies for making money. I will warn you however, that this strategy is perceived negatively by some, mostly due to a misunderstanding of the concept. With that said, if this strategy is structured properly, it is - as the title says - one of the most effective, underused and risk-free money making strategies that everyone should use.
For now, we’ll use a few letters to name this strategy - DPWLI. So what makes this DPWLI strategy so great?
1) Guaranteed Growth that actually gives a decent return.
The most frustrating thing about investing is that we generally have to risk our money in the markets if we want a return that keeps up to, or surpasses inflation rates. If we do not want to risk our money, our best option seems to be GIC’s. GIC’s usually give a return somewhere around 2%. Inflation rates are around 3%. With GIC’s, we are losing money value.
The DPWLI strategy works likes a GIC on steroids. It offers - over the long term - an annualized rate of return around 4.5%. Now that may not seem all that high but let me explain something. Most people see the Average Rate of Return on their investment statement. But I said Annualized Rate, and Annualized Rate of Return and Average Rate of Return are quite different. You can expect to need an Average Rate of Return of about 2% higher to have the same amount of money in your account as what an Annualized Rate of Return will give you. If you have money in the markets (ex. RRSP’s in mutual funds or index funds), you would need an average rate of return of about 6.5% to match the 4.5% Annualized Rate of Return that the DPWLI strategy offers. You may be thinking to yourself that 6.5% isn’t all that great. That may be true but it’s already better than the return most people are getting. There’s more to consider however… point 2.
2) It’s all Tax - Free
When the DPWLI strategy is structured properly, all the money you take out to use - now or in retirement – is received tax free. No Taxes! At all!
When you have your money in an RRSP, your retirement income is fully taxed. Taking into consideration the tax implications of this type of investment, you would now need an average rate of return around 8.5% over the investment’s lifetime to have the same amount of money in your account as the annualized tax-free 4.5% rate of return that the DPWLI strategy gives you.
Tax Free Savings Accounts also offer tax-free income, but you are significantly limited to how much you can invest in a TFSA, and you need to find a place to put your TFSA. Most people leave their TFSA at the bank gaining 2% (again, losing value). If you have your TFSA in the markets, you are dealing with the risk of loss.
3) You can use it during your life time and the value keeps growing.
One of the most amazing things about the DPWLI strategy is that you can use the money that has grown using this strategy without losing the value of the investment.
Albert Einstein said “Compounding interest is the 8th wonder of the world. He who understands it, earns it… he who doesn’t, pays it.”
I think most of us understand this statement to some degree. None of us like taking money out of our investments (our RRSP’s, TFSA’s, etc.) because when we do, we are taking away the opportunity for our money to grow on itself. We are depleting the value and potential of our investment. We do not want to do that. This leaves us with two choices to ensure that we have money to deal with emergencies or issues that come up, or for opportunities that arise.
The first option would be to save money in an emergency or savings fund.
The problem with this strategy is that we now have a pool of money that is not working for us. This “emergency” fund is just sitting in an account making 1%, waiting for something to happen.
The second option is to borrow money from the bank.
There are a few problems with this strategy. First, we need to qualify to borrow from the bank. Second, the bank controls the whole arrangement. You’ll have set payments and interest to pay. And finally, plenty of issues arise if something unfortunate happens and you cannot continue your monthly payments, even if only for a short period of time. Your credit score will drop, and you will start paying interest on interest on interest.
With the DPWLI strategy, you are in control. You can use the money that you have gained and the value of your fund does not decrease. It actually continues to grow in value, even if you have used it. The principal of your investment continues to grow interest on interest on interest, increasing the value of your policy and you can use that money for emergencies or opportunities. This strategy relieves you from the need to have an emergency/savings fund, and helps you avoid the bank for loans.
4) The moment you put any money into the DPWLI strategy someone you care about is guaranteed to receive a large sum of money - tax-free.
This strategy has an inheritance - a guaranteed death benefit - attached to it.
The DPWLI strategy allows you to grow money at a decent rate in a guaranteed and safe manner. It allows you to receive all the money gained through its lifetime tax-free in retirement and to use that money in your lifetime – for emergencies and opportunities - without losing any value. And it allows you to give people you care about an inheritance.
DPWLI stands for Dividend Paying Whole Life Insurance. Most people view Life Insurance as an expense, but it doesn’t have to be. When your life insurance policy is structured properly, it is an asset. It is an investment, a TFSA account, an emergency and opportunity fund, a retirement account, a legacy for your family. It’s like a GIC on steroids wrapped in Life Insurance. And it’s all guaranteed whether you live till 40, 70, or 105.
To top it all off, the value of your life insurance policy - the death benefit - increases in value every year too.
Now, you may be thinking “what if I wouldn’t qualify for life insurance?”
You do not personally need to be healthy/insurable to use this strategy.
Or maybe you’re thinking “I’m too old for this, it’ll be too expensive.”
Not true. You can still do this with a very small investment amount.
This truly is one of the most effective, safe, predictable, underused, and all-encompassing money making and family wealthy building strategies available.
Interested? Let’s talk.
There is no charge to meet with us, so it’s probably worth it!
|Posted on 25 July, 2018 at 15:45||comments (1)|
Children’s Future Career Choices and their Impact on Insurances.
A few weeks back I helped a client in their mid-twenties apply for $600,000 of life insurance at a monthly premium of just under $30 a month.
This client is a licensed pilot, but currently doesn’t have all that many flying hours and is currently not working for a reputable company.
When the insurance company contacted us with their decision, my client was given two options:
He could continue with the $30 premiums but aviation would be excluded from the policy. This, of course, meant if he passed away while flying the insurance company would not pay the $600,000 benefit.
His other other option was that he could include the aviation benefit in the policy but his monthly premium would increase from $30 to over $200. Yes, you are reading that right - a rate nearly 7 times higher than initially applied for.
This is just one example of an occupation that hugely impacts peoples ability to get good life insurance coverage to protect themselves and their families well. Roofers, Farmers, Construction Workers,Truck Drivers, Firefighters, and Police Officers are just a few of the people with occupations that can cause premium increases or there may be exclusions on their insurance policies.
Many of us teach our kids that they can do whatever they want to, become whatever they want to become. The reality is some of these career decisions can have a major impact building a healthy financial plan and protecting our families when life doesn’t go as planned.
There are many great reasons to insure your children and the ability for your children to choose any career they want, become whatever they want to become, without it impacting their ability to get insurance is one of them. By insuring your children you have ensured that they have insurance coverage for life at a monthly premium that will not increase, giving them the ability to pursue any career opportunity that interests them without it impacting their ability to take care of their future families, if something unfortunate happens.
When your children become adults, you can transfer the insurance policy over to them and they become responsible for the policy. This way you do not have to worry about the policy any longer but you’ve ensured that no matter what your children choose to do with their life, they are insured, and taking care of the ones they love.
If you’d like to learn about the many benefits of insuring your children, We’d love to talk to you.
|Posted on 16 July, 2018 at 10:40||comments (1)|
A few years ago you decided to open a business. It’s been steadily growing since opening day and you’re finally making some money. Maybe you’ve even got a few staff. Things are looking up and the expectations are high for the upcoming year.
You go to the doctor for a checkup and he tells you that you’ve got cancer. There’s a good chance for survival but you must start treatment right away and you realistically won’t be able to work for at least half a year.
Your take a weekend canoe/camping trip with family and friends. You hurt your back, can’t do the required tasks of your job and it takes nine months for you to become healthy enough to work full time again.
What’s going to happen to your business?
Can the business sustain itself without you there?
You are in a partnership and one of the two above scenarios happens to your partner.
Can you handle the work-load by yourself while your partner is away?
Can you afford to hire someone to replace your partner in the meantime?
Your partner passes away.
Do you have a way to buy out their share of the business?
These may seem like unlikely events, but statistically they are not.
Currently in Canada about..
1 in 2 people will be diagnosed with cancer in their lifetime,
1 in 5 will have a heart attack,
1 in 9 will have a stroke.
There is also nearly a 50% chance that someone 40 years of age or younger will go on disability for more than 3 months during their lifetime. If that occurs, the average time on disability is anywhere between 2.5 & 3 years.
When this happens to someone owning a business the consequences can be detrimental and many businesses are ill-equipped to deal with a situation of this nature.
Is your business equipped to handle a situation of this nature?
Have you thought about how to prepare for such a situation?
Did you know there are strategies available to protect your business if something unexpected and unfortunate happened?
There are too many businesses in Canada that are not prepared financially to deal with the fall-out of any of the events above.
Here are a few solid strategies to protect your business from unexpected illnesses, injuries or deaths. A couple of these strategies can even help you build wealth now and for the future.
1) Disability Insurance & Business Overhead Expense Insurance
Disability Insurance protects you - the business owner - if you are unable to work due to an injury or an illness. It typically covers about 60% - 70% of your pre-tax income - tax-free, and will help you continue to cover expenses such as bills, groceries, and family needs. Often business owners are not actually taking much of an “income”, but insurance companies will work with you to ensure your personal needs can be met.
Business Overhead Expense Insurance protects your business. This is great for Sole Proprietors, as you are often responsible for earning much of the business’s profit. If you are unable to work, Business Overhead Expense Insurance covers the monthly expenses for your business - such as wages, office space, and supplies - so it can stay afloat while you are on the mend. Having Business Overhead Expense Insurance ensures that you do not need to dip into your savings or increase your debt load to maintain the business while you’re injured or ill.
2) Shared Ownership Critical Illness Policy
This is a great financial strategy for a business to protect the business owner, and to receive retained earnings tax-free in the future.
Personal Critical Illness policies pay a large lump sum of money when the insured person has a Critical Illness. The major four illnesses are Cancer, Heart Attack, Stroke, Coronary Artery Bypass, but about 25 illnesses are covered under these policies.
With a Shared Ownership Critical Illness Policy, the policy is jointly owned by the corporation and the business owner. Both parties share in the monthly premium payments, but the corporation pays the majority of it. Because you are both the corporation and the owner, this strategy allows you to benefit financially, no matter what the outcome.
The three possible outcomes to this strategy are:
If the owner is diagnosed with a Critical Illness, the corporation gets paid the large lump sum of money.
If the owner passes away, the corporation gets their premium payments paid back to them, in full.
If the owner stays healthy for a set period, say 15 years, the owner will receive all of paid premiums back – both the corporations share and their own – tax-free.
Using this strategy, you protect your business financially in the case you get ill, if you pass away your corporation does not lose a dime, and you’ve created an opportunity for yourself to receive your retained earnings as tax-free income in the future.
3) Dividend Paying Whole Life Insurance
A properly structured Dividend Paying Whole Life Insurance policy acts like a guaranteed tax-free GIC on steroids.
This is a great strategy for business owners to protect their families, to build a tax-free pension for themselves, and to finance their needs - personal or business - throughout their life without dealing with a bank.
How it works:
Once you’ve purchased this life insurance policy, your family is automatically guaranteed a death benefit. It is a permanent insurance policy, so if you pass away - no matter what age you are - your family or other loved ones are provided for financially. Your policy will also be earning interest and dividends, so your death benefit is guaranteed to grow every year.
In the meantime, cash values (savings) are also guaranteed to grow within your policy on daily basis, which can be used throughout your life for emergencies, business or investment opportunities, and anything in between.
Come retirement time these cash values can be withdrawn against your policy - tax-free. Your pension.
This can be structured so all premiums are paid through the corporation but you, the owner still have all the control.
4) Immediate Financing Agreements
Lots of business owners like the idea of, or at least know they should have life insurance but would rather put their earnings back into the business instead of using it to protect themselves.
An Immediate Financing Agreement allows you to purchase a life insurance policy but receive the entire annual premium back immediately to invest in your business at a low interest rate from the bank.
This is an awesome strategy for all business owners that qualify, as it ensures that you are insured and that your family and business are well protected. The insurance policy is creating a healthy tax-free pension for you in the form of cash value growth, which we spoke about under strategy 3. Every dime that you paid into the insurance policy as a premium payment, will also be immediately given back to you to use for, and grow your business.
5) Funding Buy-Sell Agreements.
Insurances - especially Disability Insurance and Life Insurance - can and should be used for buy-sell agreements for businesses with partnerships. Many businesses will have buy-sell agreements in place in preparation for unexpected situations, but do not actually prepare for how to fund these agreements.
If your partner passes away, do you have the cash to buy out their shares?
Do you have a plan in place to buy out your partner if they become disabled and can no longer function in their leadership role?
Purchasing Insurance policies on partners is a simple and wise way to fund buy-sell agreements.
Bob and Jane each own 50% of their business worth $500,000.
Bob buys a policy on Jane for $250,000, making himself the beneficiary. J
ane unfortunately passes away. Bob receives the $250,000 benefit to buy out Jane’s shares of the business and provide for her family.
This of course would also be done by Jane, in the case that Bob passes away.
Protect your Business
It is hard work to start a business, to make it sustainable, and then successful. It’s tough to watch people go through so much to create and sustain a business they love, only to see it disappear because they were unprepared for an unfortunate event like an injury or illness and didn’t have the cashflow to hold it together. And it happens all too often.
When we meet with clients and their families to build a healthy financial plan, one of the first things we tell them is that their greatest asset it not their house, or their business, or their car. It’s their HEALTH!
Without your health you are unable to work, to bring in an income and provide for yourself and loved ones around you. The foundation to any healthy financial plan should be insurances, because insurances protect what you already have and ensure that an income is always coming in, even if you can’t provide it.
It’s the same for your business. Protect what you have.
I love watching small local businesses pop up and grow. I also hate watching them fail. This is especially true when it could have been avoided by simply protecting the themselves and their business.
If you’d like to learn more about these strategies, we’d welcome the opportunity to sit down with you to discuss how you can protect yourself and your business, save some taxes and interest, and build a tax-free retirement income.
|Posted on 29 June, 2018 at 9:55||comments (0)|
So, your wondering what got in to us to post an article about mothering and money! We're definitely not speaking from experience but thought it was a good article. I hope you enjoy it.
What Motherhood Has Taught Me About Money.
I never realized just how much disposable income I had until I gave birth to my first kid.
Before my daughter was born, it was so easy to throw money around. Weekend getaway? Sure, let’s go! Get my hair highlighted for $200? Yes, please!
Now every penny that we have that isn’t socked away for the future is accounted for—and the vast majority of it goes towards our family.
If you’re looking for a lesson in personal finance, all you have to do is get pregnant. Parents learn so many life lessons, in such a short time, that they form a special club of their own. I’ve found that, when you’re a mom, you just get it.
Here are six things I learned about money after I became a mom. If you’re a mother, you may know what I mean. If not, well, here’s what you have to look forward to:
1. Going out for lunch is a luxury — diapers aren’t.
When you become a mom, your priorities change. Drastically. Enough said.
2. You won’t believe how fast kids grow.
A pair of tennis shoes for a 4-year-old can cost as much as $50! So your best bet is to often shop consignment stores for the wee ones because kids grow so fast that second-hand clothes are basically brand new. If you shop carefully, you’ll likely find expensive brands that you may not be able to purchase new. The same goes for you: Gently worn clothing is a great way to save on items that you won’t wear often—like maternity clothes!
3. If you grocery shop without a list, you’ll spend double.
When you have a family, planning ahead for meals and snacks reduces your food budget significantly. Additionally, before you make an impulse buy, think seriously about the trade-off between time and money. For example, some moms will advise you to forgo the bag of pre-cut baby carrots, but I think my time is worth more–it’s a fast, healthy snack kids love that you don’t have to prepare
4. Rainy days happen (and umbrellas are important).
Even a few dollars saved every month can build a significant nest egg–or an emergency fund. Should you or your spouse get laid off, that cushion can see you through tough times. Or if one of your children suffers a significant illness, you won’t have to worry so much about paying for treatments. Being a mom means being prepared for everything … even the worst-case scenario.
5. Don’t feel guilty about spending on yourself.
Okay, spending your monthly mortgage payment on a spa weekend isn’t smart, but a good haircut or a new dress every now and then makes for a happier mom. Here’s why splurges are important and how to splurge wisely as a mother. For example, check out local deals site for coupons for a massage. You’ll feel even better because you got pampered for a steal.
6. The desire to spoil kids is almost overwhelming.
If we could give them the world, we would. There are lots of reasons not to create your own little Veruca Salt, but saying no all of the time can be a real bore–and not just for your child. No matter how hard you try to shelter them from the massive amount of marketing aimed at kids, they will inevitably want the latest gadget and the hottest toy. At some point, all of us wonder, “Am I spoiling my child?”
Here’s a secret: Although it’s important for kids to hear “no,” timing your gifts responsibly and making sure kids understand the value of a dollar means that you can sometimes indulge them. For example, you can find toys, sporting goods and entertainment for cheap if you shop carefully, and you’ll reap huge rewards in the form of that big smile on your little one’s face.
Amy L. Hatch is a writer and editor, as well as the co-founder of chambanamoms.com. She currently lives in Illinois with her husband and two children.
|Posted on 20 June, 2018 at 17:25||comments (0)|
Your Financial House
Part 2: Debt Elimination & Wealth Building
A couple of weeks back we discussed the Strong Foundation to any financial plan - the insurances. Once your insurances are in place, you can start dealing with the other 4 areas of your financial house - debt elimination, wealth building, retirement planning and legacy planning.
Throughout our lives we will focus on some of these areas more than others. In the earlier years of financial planning, when you have young families and are building careers, you’ll typically be dealing more with debt and trying to create wealth, with much less focus on retirement planning and legacy planning. This of course makes sense but keep in mind that the decisions you make with your finances today - even in the areas of debt elimination and wealth building - will impact your retirement and your legacy. Thus, you must make your decisions now, with what you hope for your retirement and legacy in mind.
For many who have debt, getting rid of it is the first priority, causing them to dump much of their extra income into their mortgage or loans. Paying off debt quickly is important but do so without compromising the rest of your financial house. Warren Buffett says, “Do not save what is left after spending, but spend what is left after saving.” Even if you have debt, saving should come first. Saving puts you in a position of strength, as those who do not save are generally indebted to and reliant on the people who do. We’ll discuss savings and wealth building shortly but the first step to getting rid of debt, is to not get into more debt. The best way to avoid more debt is to save first, ensuring you have a surplus every month.
Now that we understand that, let’s discuss some basic strategies to paying off debt most effectively.
The key to dealing with debt is unification. With multiple debts, payments typically end up covering interest cost, with little going to the debt load. Unifying debts at a similar or lower interest rate will see more of those payment dollars going to principal, thus speeding up the progress. There is a great strategy to pay off our houses more quickly, with less interest using the unification strategy.
If unifying your debts is not an option, deal with one debt at a time. Choose one loan to push most of your payment dollars into and pay the minimums on the rest. Once the first loan has been paid, take those dollars, and push them into your next loan.
As mentioned earlier, saving first is the first step to wealth building. If there is no surplus at the end of every month, it is impossible to build wealth. Saving also gives us access to money in case of an emergency or opportunity. Having access to money allows for more opportunities to present themselves, creating the ability to build more wealth. A good goal is to save 10% of net income. And the earlier we start the better, as that money has more time to work for us. If you currently aren’t saving, the best thing to do is to start. Begin with 1% or 2%. As that becomes a habit and manageable, increase it. Slowly progress towards the goal and build wealth.
Many people will take what little savings they have and throw that money into the market, using RRSP’s and putting them into mutual funds. While this can work, it may not be the best option. The market is volatile, constantly going up and down. If you have money you’re willing to lose, putting it into the market is just fine, but safe, consistent, guaranteed strategies are what to look for with your early savings. Growing your savings consistently and safely is better than losing what little you have.
For more information on the topics discussed today, feel free to contact us for a free meeting, or sign up for Session 2 and/or 3 of our summer education series “Financial Planning for Young Families.” You can find out more and register for the sessions under the Financial Education tab.
Next Blog we’ll discuss some of the things we need to think about now - in regard to building wealth, saving, and investing - that will have an impact on retirement and legacy planning.
|Posted on 29 May, 2018 at 14:30||comments (0)|
Your Financial House
Part 1: The Secure Foundation - Insurances
As most of us already know, building a house upon a strong foundation is important. I recently read an article about building a house that read: “A proper foundation does more than just hold a house above ground. It also keeps out moisture, insulates against the cold, and resists movement of the earth around it. Oh, and one more thing: It should last forever.. without a good one, you’re sunk!”
When it comes to our financial houses, the foundation to build our house upon is the personal insurances. These insurances are Life Insurance, Critical Illness Insurance, and Disability Insurance. Just like a proper foundation of a house allows it to stand strong when elements out of its control are happening around it, insurances allow our financial houses to stand strong when things we cannot control happen to us and around us. And as we all know life doesn’t often go as planned and things that we don’t want to happen, happen all the time. If are foundation isn’t built properly - just like a house without a proper foundation - we’ll be financially sunk.
The role of all three insurances is to protect you, your family, your income, your current lifestyle, and offer you financial stability in the midst of hardship. Most people view insurances as an expense but they really are investments in yourself and your family, ensuring financial stability no matter what happens. And the younger you get them cheaper they will be.
Life Insurance is designed to protect your loved ones in the case you pass away. This applies to both the income earner and the stay-at-home parent. The stay at home parent does a lot of work that has ecumenic value, and thus replacing their efforts would cost a significant amount of money. Would the income earner be able to afford those extra costs? The wage earner makes a lot of money in their lifetime. How will the family live without that income for years to come? A good rule of thumb for life insurance is 10 x ones annual salary plus all debts owed. Realistically, the rule of thumb is still not enough to match most peoples economic value.
Term insurance is cheap to start but gets expensive later on in life, however, often we need a lot of insurance when we’re young and this can be a great way to make sure your family is well protected at a affordable cost. Permanent insurance lasts forever - like a strong foundation should - and it grows in value every year if properly set up, so this is can also be a really great option.
Death is mandatory, so ensuring you have a well valued life insurance policy is a good way to start building your strong foundation.
Disability Insurance (DI) is designed to protect you and your loved ones in the case you cannot work due to a disability or critical illness. Stay at home parents unfortunately do not qualify for DI, but it would be very wise of the wage earner to ensure they have a disability policy that covers their income. DI pays 60 - 70% of ones gross monthly income tax free, on a monthly basis. This ensures that ones needs and expenses can be met whether it’s groceries, bills, daycare costs etc. Six months of disability can wipe out 5 to 10 years of retirement savings. Having a monthly income from an insurance company helps protect those savings or prevents going into debt, when your typical paycheque is not available.
Critical Illness Insurance (CI) - just like DI - is designed to protect you and your loved ones in the case you are diagnosed with a critical illness. Cancer, Heart Attack, and Stroke are the 3 major illness but most policies will cover 20 - 25 different illnesses. This pays out a lump sum of money (starting at $25,000) when diagnosed with a critical illness. This lump sum payment allows you and your loved ones to cover the costs of the illness without having to use regular income, retirement savings, or borrow. You can use the money however you choose: pay for medications, for personal care, travel for specialized treatments. It can also allow a loved one to take time off work to support and provide care without having to worry about their own income. A good rule of thumb for CI is 1 to 2 times your annual salary and - if set up properly - CI can last forever, and if you don’t ever use it your family can receive all the premiums back - meaning that in the long run you haven’t lost a penny.
When something unexpected happens insurances provide financial stability, allowing us to continue paying off debt, meeting todays’ needs, and saving for the future. It also allows us to deal with the emotional turmoil of such an occurrence without having the financial stress. When uninsured or under insured, an unexpected illness, disability, or family death can have a tremendously negative and lasting impact on our finances.
Session 1 of our Summer Series Financial Planning for Young Families will dive deeper into all three of these insurances, and more. Check out the Financial Education page for more information and to register.
|Posted on 25 May, 2018 at 11:00||comments (0)|
Liz Frazier Peck
May 15, 2018
Think back to the last time you and your honey talked about money? I’m going to guess that it wasn’t a positive experience. That’s because most of our money conversations are reactive; they’re based around bills, budgets, overspending or other issues that pop up. Rarely do couples have positive discussions about their dreams, values and feelings around money. Talking about money with your spouse is critical not only to your future planning but also to the strength of your marriage. Marriage.com lists money as the No. 2 reason for divorce among couples (only behind infidelity). And it’s easy to see why. Money touches everything. If you and your spouse don’t have positive communication around money and support each other’s values, it can lead to constant bickering, fighting and worse.
The good news is if you’re reading this article, you want to improve your communication with your partner. Congrats. Below are four tips to having positive and open money discussions as a couple.
Set a “money date”:
As the very first step, Megan Lathrop, co-creator of Capital One’s Money Coaching Program, recommends setting a money date with your partner. Don’t worry, this isn’t what you’re thinking; we’re not asking you to bring your budget spreadsheet to review over a romantic dinner. The focus of this date is to have an open conversation about your relationships around money. Don’t even set an outcome or goal, just talk. Make sure you’re in a supportive and connecting environment, such as a hike or over wine (wine always helps). This begins to build a foundation of trust and understanding as you embark on future conversations.
Discuss your values around money:
In Lathrop’s workshops, she encourages couples to list their top five values. It doesn’t need to be about money, just whatever’s important to them. From there, compare your lists and identify your similarities and differences. This can be eye-opening to why you may have issues with your spouse around money. Lathrop states that typically what comes out of her workshops is the realization that the couple is not arguing about money, but about values. For example, your spouse may list adventure as a value, while you may list stability. After digging deeper you may realize that this is why he spends so much money on travel, and why you are always buying pieces for the home. The beauty of this conversation is if you make the discussion around values, both partners typically step in and want to support each other. This type of larger structured conversation is non threatening and positive.
Plan for your future:
This seems obvious enough, but according to Capital One’s Financial Freedom survey, one-third of couples never talk about their retirement plans with each other. If you don’t discuss your hopes for retirement then you end up making assumptions about what the other wants. Maybe your husband wants to garden with you ten hours a day like you planned. Maybe he doesn’t. The only way you’ll know is by asking him. Most importantly, having open conversations about your future allows you to plan for it, rather than just letting your future happen by default.
Turning triggers around:
We are all human and we all have our triggers. You know how it goes. You intend on just having a quick talk about the budget, and within five minutes both of you have your arms crossed and are glaring a hole through the other. What’s the best way to avoid these trigger flare ups, according to Lathrop? Slow down. “If one person is triggered, how they respond naturally can trigger the other person. Then we have two triggered people.” Think of it as the stop, drop and roll fire safety method. When you feel your blood heating, take a pause. Acknowledge how you’re feeling and take a break from each other to reflect. Then come back together to discuss when you’ve settled down.
This article was written by Liz Frazier Peck from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.