Financial Steps
Step 1 – Set up a small safety net Fund. – So that your budget is solid and not likely to suffer from the small bumps that life brings. This will cover periodic unexpected expenses when they arrive (i.e. car and appliance repairs). This could be as low as $250 or $500 if you reside with your parents and/or rely on public transit or as high as about $2,000 if you are a two car family, with children and a house. You will want to eliminate your debt so do not make this too large. There will be an opportunity later to increase the size of your Safety net. If you dip into this replenish it quickly.
Step 2 – Eliminate all consumer debt (Lines of credit, credit cards, car loans,…). This can be done in either a snowball approach or an avalanche approach. Snowball is to eliminate the smallest debts first. Those ankle biters, they may be a hundred or two hundred dollars that you owe a friend or on department store credit card. When you can quickly drop the number of debts that you have it creates psychological wins which enable you to progress with traction and an increasing sense of freedom and that you debt free life is achievable. . The Avalanche approach has one tackle the highest interest rate debts firsts. That credit card around 20% interest in lieu of the 10% line of credit then work your way down to the smallest interest debt which may be a loan from a friend or family member. Focus on that which will give you the psychological traction you need to maintain your focused drive and peace of mind. If the debt is in arrears and creditors are pounding you may want to make it a priority. If the debt is stale, you can likely shuffle it down in priority and focus on the more active ones. I like the snowball for maintaining a sense of accomplishment. When you receive those paid in full statements they make great fridge mounts to stay inspired.
If there is a friend you owe money too – do not burn a relationship over a small amount. Do not take the friendship for granted or dodge any inquiries they may have about changes or updates to your financial position. Even if your friend isn’t saying anything address it with them. Keep them updated on your progress and be gracious about their patience. I lost a close10 year friendship when they diddled around about paying me back. A lack of intensity/accountability and sloppiness created resentment and eroded the trust. While they eventually repaid 3/4’s, the inability to come up with the remaining $100 and dragging things out eroded the relationship. I cared less about the money then I did about their inability to address my inquiries head on. Moral of the story – Don’t borrow/loan money with friends as the friendship is on the line.
Step 3 – Max out your TFSA (Tax Free Savings Account)
There are many variables to determine the right dollar value for you when creating a 3-6 month emergency fund. What other investments do you have and how liquidable are they (likely nothing). If something happened – what could you do to clamp down on your budget? Are you one income or dual income home? I recommend doing what you can to max our your TFSA as not only is it tax free but there are options in what you can use the money towards in the future.
Not to be macabre, but if you were in a car accident and/or in a coma for 6 weeks before your spouse pulled the plug (I know someone who this happened to), could your spouse be at your bedside for those long weeks and would the bills be paid? While they pieced themselves together emotionally before going back to work. What are the odds of loosing your job? What coverage do you have (sick leave, disability insurance, etc.). How easy is it for you to find new work? Etcetera. The point of the 3-6 month fund being accessible is that if you are paying down a mortgage – your reserves may only be your line of credit on the house. Hence – slow down the speed of paying down the mortgage to have a cash reserve – then pay down the mortgage. A TFSA that can begin to be liquidated in a week serves the job. Easier to access than an RRSP or company pension that you may be contributing into or waiting on an cheque from an insurance company. RRSP’s are generally not a tax advantage until your income is over 75K, discuss it with your accountant. As for the guy in the coma – he was in his 30’s, 2 young kids, and was out golfing with his buddies and a club hit him in the head – you never know what life will throw your way or when. Heart-wrench on top of Financial scrambling serves no one. Don’t forget to keep your will & power of attorney documents current. If you break your arm and your signature is a mess the bank likely won’t accept anything with your new scratchy signature on it, so PofA documents are essential.
Maxing out your TFSA is forced savings for the future. That money may be used as an Safety net, Retirement Fund, College Fund, or other large expenses (ie Car). Less than 80% of Canadians have maxed out their TFSA. Once you do so, you’ll be in a different position in relation to money and can think differently about what various types of savings/investments you desire.
Step 4 – Pay down the Mortgage. Know that the roof over your head is yours. If you opt for a tiny house, a condo, a 1,200 square foot home or more keep it manageable and in proportion to your income. You can always upgrade to a larger sized home or renovate enroute. A purchase may be part of a 5 year plan but it doesn’t need to be a forever home.
Step 5 – Create & spread wealth: This is a multi-prong approach. Retirement / Family education fund / Recreational home / Inter-generational Legacy / Charitable Giving & Philanthropy. This is where you plan for one’s financial future and one’s legacy, this may include RRSP’s or RESP’s. Part of that legacy should be on-going education. Both for yourself and that of other family members. This includes both formal education (i.e. college and/or university) and informal education (seminars, books, etc.) as well as therapeutic programs to ensure the mental/emotional health of all. The families best wealth is not limited to Financial Capital but also includes; Social, Emotional, and Intellectual Capital. Investing in your loved ones along the way is as important as an inheritance.
Over 70% of professionally prepared estate plans fail (closer to 90-95% if you include the bottom half of the bell curve where there is no estate or estate plan). Primary reasons is an inability to communicate about money along the way. Educate yourself about financial matters and educate your loved one’s. Prepare yourself, and your heirs, for your/their financial future. Your own financial ineptitude will either negatively impact your life and/or that of your heirs.