|Posted on 20 June, 2018 at 17:25|
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.