|Posted on 20 November, 2018 at 16:45|
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.
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