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7 Keys to Taking Control of Your Family’s Finances for the First Time

Monday, October 3rd, 2011

Are you a passenger when it comes to the family finances? With busy lives, household chores are often dived up to help families muddle through the chaos of daily life.  That is why it is not uncommon for one partner in a relationship to manage the day to day household spending, savings and other financial affairs.

If we knew for certain that no hardships lay ahead (divorce, death, physical/mental disabilities) then leaving our financial well-being in the hands of our trusted spouse might be ok. Unfortunately, life is rarely that ‘crisis free.’ None of us know what lies ahead or when we may have to take the reins of the family affairs. It is best to be reasonably knowledgeable and up to date on the family finances.

 So do you know the state of your family’s financial health? If your spouse were no longer in the picture would your financial situation deteriorate? If a sudden change in your health made working implausible would you have enough disability insurance and savings to get by? What if you die, would your family be able to financially continue on intact?

Understanding the family’s financial affairs doesn’t mean you need to be an economic expert or a stock market guru it just means you need to have a good understanding of the big picture of your financial house. These seven keys will help.

• Wills & powers of attorney- You need to understand what they are and ensure they are always up to date and relevant.
• Insurance - It is vital that you have regular insurance ‘check-ups’ to ensure that at all times you are more than adequately covered for any of life’s misfortunes.
• Emergency funds- Do you have any and if you do, do you have access to them? If you don’t have enough savings to cover at least 6 months of your monthly overhead costs then, at the very least, make sure you have access to a line of credit.
• What’s coming in and what’s going out- You need to have a general understanding of what income the household is bringing in and how much is going out each month. If you are constantly in the red then it’s time for a family meeting to discuss necessary cutbacks or ways to make more money.
• What is the family’s networth? What do you own minus what you owe? - Your house, savings, RRSPs minus your mortgage, line of credit and credit card debt = your networth. If in the negative big time then a good financial goal could be to reverse this position so one day you own far more than you owe.
• What are your family’s financial goals and do you have any savings strategies in place to achieve these goals? -As time consuming or uninteresting the annual visits to your financial advisor may be it’s really important to show up and participate. You don’t want to find yourself all of a sudden divorced at 55 or widowed at 60 and in a state of panic because retirement at any age is no longer plausible. Plan as a couple while ensuring your financial health will remain intact should something happen to the union (death/divorce).
• Finally, know where all the above documents are kept-Will, Powers of Attorney, Insurance papers & documents of all your assets and of your debt. You never know when you will need to access them and quickly. It is best to have a safety deposit box for such papers. If you are really organized, scan the documents and store on a USB in a safe location outside the home. Again, a safety deposit box is the best place.

Image credit: Images_of_money

What to do with your tax return

Thursday, April 28th, 2011

Do you remember the good old days when spending our tax refund frivolously wasn’t such a big deal? Our jobs were stable, house values seemed to be on a never-ending climb and the stock market was booming. Things were looking pretty good.  Well, we are all feeling a little less wealthy these days; our portfolios have been beaten up, the wealth in our homes have taken a blow and on top of all that, we are worried about our jobs and the stability of our income.  There is a lot of insecurity or fear out there and so spending our tax refund on a great vacation or a new flat screen TV may not be the most financially savvy thing to do.

 So what should we do with this year’s tax refund- spend it or save it, invest it or splurge?

Well, that all depends. In these tough times, it is a good idea to give some thought to your overall financial health with the first and most obvious area being your emergency reserves.  Lets take Karen for example, a 42 year old marketing executive with a small independent firm who wants to know what she should be doing with her estimated $10,000 tax refund. In past years, Karen just reinvested her refund into her RRSP but this year things have changed. Karen’s company has been hit hard by the economic slump and has been hinting that layoffs are eminent. Although Karen is a long time employee with seniority she is not immune to layoffs.

The first thing Karen needs to do is evaluate her existing emergency savings funds to ensure that she has at least 3 to 6 months of living expenses set aside. Knowing that you have some backup money just in case can definitely ease some of your anxiety about what may happen. If Karen has little in the way of savings, a tax refund can give her the means to start building up a reserve. I would also suggest that Karen open up a low rate line of credit to help make up for the shortfall in savings. It is easier to qualify for debt when you have income, keeping in mind that this line of credit is ONLY to be used to help pay bills or pay emergency expenses.  

Let’s assume that Karen does have an adequate emergency savings fund, how then should she best use her tax refund?

Karen should review her overall debt load and either consolidate her loans into one low rate loan or start aggressively paying down any high rate loans.  You would be quite surprised at how many people have no idea how much they owe and what it is actually costing them to borrow it. Most often this is because we have way too much debt and it’s all over the place.  So we need to simplify our debt. We can do this by taking all our loan statements to our banker and ask if they can consolidate them into one, low rate, manageable loan. If you have only one loan payment, it not only makes life much simpler but also makes getting out of debt much more ‘doable’. Now if you have some high interest rate loans that you cannot negotiate into a lower rate loan then I would highly advise you to make it a priority to start aggressively paying them down. Use your tax refund here.

What if you have already paid off your debt and have a sizable emergency fund- then what? 

Lets say that Karen has a healthy savings accounts and no debt with the exception of her 4% mortgage, what then should she do with her refund?  Today’s low interest rates and stock markets make it a good time to invest versus paying down debt. Karen is in a high tax bracket, has a long time horizon and is a moderately aggressive investor who should yield between 7-8% over the long term. With all this in mind, investing versus paying down her 4% mortgage makes more sense for her. And since Karen’s tax refund was earned by making contributions to her RRSP, then why not continue the cycle and invest back into the RRSP creating an ever-growing nest egg. The $10,000 contribution would generate a $4,000 refund at the 40% marginal tax bracket, which she can throw back into the RRSP again next year.

So what should you do with your tax refund?

It’s important that you understand your unique financial circumstances before making any decisions. Use the refund productively and resist the temptation to spend it on frivolous items. In the long run you will be better off having money in the bank, with little to no debt then a big TV or just the memory of a two week vacation……..

The basics on the new ‘tax free savings accounts’

Sunday, November 30th, 2008

Things to know about the new Tax Free Savings

• Starting January 1, 2009, the Tax Free Savings Accounts are available for Canadian residents who are at least 18 years of age.
• You can contribute up to a maximum of $5000 a year. Any unused contribution room gets carried over to the following year.
• Withdrawals from your Tax Free Savings Account will not affect your ability to qualify for Federal income tested benefits like the Child Tax Benefit or the Guaranteed Income Supplement.
• You can open a Tax Free Savings Account and invests in GICs, mutual funds and other investments and not be taxed on any of the growth or earnings.
• You can have more than one Tax-Free Savings Account with different institutions but you cannot exceed your allowable contribution limit. (more…)