Starting to Plan
Five Financial Principles
Spend Less Than You Earn
It’s easy to get into the habit of spending – to let expectations and wants exceed income, regardless of how much money we make. Studies show when people earn more, they tend to spend more. If your hard-earned dollars are spent before they even reach your bank account, it’s time to take a closer look at your finances.
Be Wise With Debt
Debt can accumulate when credit is readily available. But acquiring debt does carry financial risk and that’s why it should be managed wisely – even for things considered to be “good debts” like your home mortgage, a child’s education or a business investment.
Protect Against Setbacks
We all think it won’t happen to us – until it does. Knowing your insurance options is a good first step toward financial protection for you and your family. Preparing for life’s unknowns is part of a solid financial plan.
Have a Short & Long-Term Plan
Reaching your financial goals requires a short and long-term plan. Short-term planning looks at being prepared for unexpected events that could happen tomorrow, such as a job loss. Long-term planning is about creating a plan to achieve other significant financial objectives throughout life – like, funding for your children’s education and saving for retirement.
Being wise with money isn’t a new concept. But when we view generosity as part of wise money management, it introduces a new conversation about how we can be more intentional about giving – by planning ahead to give back.
Build an Emergency Fund
An emergency fund helps to reduce the financial stress that accompanies unexpected events. It’s a good idea to include regular savings in your budget to cover three to six months of living expenses in case of a job loss, illness or emergency.
Consider Saving with TFSAs and RRSPs
A Tax Free Savings Account (TFSA) is a great savings tool and it’s available to anyone over the age of 18. Within a TFSA, income and growth in the account accumulate tax-free – and the funds are easily accessible in the event of an emergency, providing that deposits are made in eligible investment vehicles and according to regulatory restrictions.
With an Registered Retirement Savings Plan (RRSP), contributions will reduce your taxable income for the year and may lead to a refund on your taxes. All income earned and growth is tax-deferred. Unlike a TFSA, funds withdrawn from an RRSP are taxable. The chart below compares the differences between using a TFSA or RRSP for your savings needs.
|Primary Purpose||Saving for retirement||Savings throughout your lifetime (including retirement)|
|Contribution Limit||18% of earned income, subject to an annual maximum||Currently $6,000 per year (1)|
|Unused Contribution Room||Carried forward every year||Carried forward every year|
|Taxation on Growth||Growth is tax-deferred||Growth is tax-free|
|Tax Deductions||Deposits will reduce your taxable income for the year||No tax deductions|
(1) Annual limit set by Canada Revenue Agency each year.
Manage Your Debt
While the world cannot function economically without debt, it becomes a problem when it is abused. Most people have some kind of debt and below are five tips to help you manage it.
1. Know how much you owe.
Make a concise list of all debts and review it often. It’s good to understand the big picture of where you’re at financially so you can create a plan to pay down each amount.
2. Live by a budget.
Now that you know how much you owe, you can figure out how much money you need to set aside to pay off your debts, while managing your monthly living expenses.
3. Decide which debts to pay off first.
To start, focus on the debt with the highest interest rate. As you pay off each loan, start using those funds to pay down your next debt.
4. Pay your bills on time.
Your credit is something you need to protect and build. Late payments also make it difficult to pay off debt in a reasonable amount of time, due to extra fees that may be incurred.
5. Talk to a professional.
A qualified and trustworthy Financial Representative can help you categorize your debts, assign measurable goals and set realistic plans to reduce and eliminate your debt as efficiently as possible.
Prepare for the Unexpected
Unexpected job loss is why having an emergency fund is critical. Three to six months of living expenses gives you some time to find another job so you don’t have to incur debt.
Statistically, one in six Canadians, will become disable for three months or more before the age of fifty. There are two main options for you to consider when thinking about protecting your ability to earn a living.
- Individual disability insurance plan: An individual plan can give you the most comprehensive and flexible coverage because it can be tailored to meet your needs and it follows you from job to job.
- Group insurance plan: If your employer offers group disability insurance, be sure that you understand the features, benefits and definitions of the plan. If you leave your current employer, this coverage does not follow you.
Group plans offer a solid base of protection that you can build upon with an individual policy to create a plan that is both comprehensive and cost effective.
According to the Canadian Cancer Society, approximately one in two Canadians will develop cancer in their lifetime. Critical illness insurance acts as a “living benefit” that can be used to offset lost income and pay additional expenses that are inevitable with illness.
Here are some facts about critical illness insurance, and why it is something you should consider:
- Policies can range from covering a single critical condition (cancer) to many (typically 24+)
- Pays a lump sum benefit when someone is diagnosed with a covered critical illness and survives the waiting period, typically 30 days
- Can be offered through your employer, or purchased using an individual critical illness plan
While the Canadian healthcare system pays for much of our critical medical treatments, consider a critical illness policy to help cover additional expenses that could arise.
Dying Too Soon
Statistics show that three in four Canadian households would have difficulty paying living expenses if the primary wage-earner were to pass away.
Here are 3 reasons why you should consider life insurance
- Locks in your insurability: By purchasing life insurance at a young age, you are locking in your ability to own life insurance. Unlike investments, where you can purchase them at any time, insurance can only be purchased when you are healthy enough to qualify for it.
- Covers debts and obligations: By choosing the beneficiary of your life insurance policy, you are able to ensure that there is sufficient money available to cover off any debts you may have such as a student loan, credit cards, or a mortgage.
- Protects your loved ones: Life insurance provides the opportunity for your family to maintain their current standard of living if you were no longer there to provide for them.
At some point we all worry about money, but for every stage of life being wise with money starts with a plan. A Financial Representative is here to help you plan ahead so you can feel confident about your finances.