But what if those quotes are not indicative of the least expensive premiums you could pay? What if there were further, unpublished discounts available on your term life insurance policies? You could save even more.

(Why are these discounts unpublished? Well, they’re available to most life insurance brokers. Our suspicion is that many life insurance brokers are either not knowledgeable enough to be aware of these discounts, or they’re simply not interested in doing the work. The Term Guy, a Canadian life insurance broker specifically identifies these discounts, and offers them whenever they’re available.)

Discount 1: Backdating

What if your birthday was yesterday and you’re applying for life insurance today? Wouldn’t it be great if we could back up and apply yesterday when you were a year younger? That’d lower your age by one year for the full duration of your term policy – 20 or 30 years!

That’s what backdating does. You artificially ‘start’ your policy a day before your last age change, sometime in the past. The policy is issued as of that previous date, and you start paying premiums from that date; but of course all future premiums are for your reduced age. The tradeoff is that you have to back-pay premiums to just before your last age change, but the substantial savings can often make this worthwhile. Note that many life insurance companies use your ‘closest birthday’ to calculate your age for insurance purposes,so the date you’re looking for isn’t your birthday but six months past your birthday.

Backdating can save you hundreds a year over the course of your term life insurance policy.

Discount 2: Two insureds

Life insurance premiums are based on two factors – the unit cost of life insurance, and an flat monthly administration fee. Two insureds, you should pay two unit costs of life insurance and two monthly administration fees. However with some companies, placing two insureds on one policy means only one policy fee. With policy fees being $5-$10/month, you can easily save $60/year for the next 20 years on your term life insurance just by insuring two people on one policy. Note that this is two individual coverages and not a joint policy.

Discount 3: Term Layering

If you assume that your need for life insurance decreases over time, you could purchase a flat term 20 now, then reduce the coverage in the future. A far better way to do this (because the premiums are lower) would be to layer two types of coverage in one policy, i.e. $500K of term 10 and $500k of term 20. That layering would give you $1MM of coverage for the first 10 years (consisting of both the term 10 and term 20 layers of coverage). After 10 years you cancel the term 10 layer, leaving you with $500K of coverage for years 11-20 (from the remaining term 20 layer).

Term layering can save you hundreds of dollars in the first 10 years of your life insurance policy.

Discount 4: Term Stacking

If you’re seeking a term 20 or term 30 life insurance policy, term stacking can save you huge in the first year of your life insurance policy. The key is to use a company that lets you use the ‘exchange option’ in the first year of the policy. Not all companies allow this. The exchange option lets you switch from one term (say a term 10) to a longer term (say term 20 or term 30).

Here’s how it works. Instead of initially applying for a term 20 or term 30, you instead apply for a term 10 policy – the savings are in the substantially lower premiums for term 10 over term 20 or term 30.

Then, just prior to your next age change, you use the exchange option to switch to a term 20 or term 30 (which is just singing a form requesting that this happen). Your premiums for the term 20 at this point in the future? They’re the same as they would be if purchased the term 20 today, because you do the exchange before your age increases – so the premiums haven’t increased. That saves you the cost difference between a term 10 and term 20 policy until your next age change – about half!

For term stacking, remember that your age changes with most companies for life insurance at the midway point between your two birthdays, so if you’re just past six months since your last birthday then you can realize almost a full year of savings!

These four techniques are advanced and vary from person to person – sometimes none of them are available and the least expensive quote is the least expensive policy for you. Sometimes the discounts can be stacked, for even more savings (i.e. term stacking and two insureds). Because they vary in their availability, you’ll need your life insurance broker to review your specific situation to determine which ones are available for you. The only life insurance broker we know that uses all four of these in their daily practice (as we noted above, many brokers aren’t familar with some of these discounts) is The Term Guy – you can visit their website and request a quote and consultation on these additional discounts.

The post Term life insurance – advanced saving techniques appeared first on Canadian Personal Finance Blog.

Summary

This series has described budgeting in 2 main parts. The first part is building your budget accounting for the income sources and expense sources which can be fixed or variable in nature. The budget is broken down into parts that you can control in the short term and parts you can control in the long term for you to see your options in adjusting your budget. The second part of the process is how to make changes to your budget and how to examine its various parts. The changes range from something incremental to a major life decision that can change many aspects of your budget. Much of this is scenario specific as in what parts of the budget get changed are driven by what situation you find yourself in. An extension of making changes to your budget is your money psychology, mindset and habits which underlie your decision process when it comes to money. A budget is a small scene that is part of a larger picture which is your financial situation. As you become more acquainted with the process, you can become the sovereign of your budget and cash flow!

How to Build the Budget

A budget is like a clip from a movie at an awards show. It’s a small scene that is part of the larger picture. A financial plan looks at the long term, encompassing your goals, preferences, circumstances and important life decisions. The budget is a snapshot of that plan that zooms in on a sub-period to see how the plan is going. As you move through time, you can zoom in on the details of the budget for a specific time period, and then zoom out to see how it fits with your overall plan.

This article series is designed in sections so you can focus on what is needed for your situation so you can zoom in where you need to and gloss over what you don’t need or already have. The analogy is the annual check-up with your doctor within the lifetime of your overall health. The budget is asking the “How am I doing at this moment in time?” and then looking at the long term and asking “What is this telling me about my money long term?”

The budget itself is composed of 2 main parts – money coming in (revenues) and money going out (your expenses). One of the central parts of successfully managing your personal finances is to live within your means, and your budget is what helps you determine if you are succeeding at that. Your means is the revenue piece, and comparing that to the expenses piece tells you if you are living within your means.

It used to be that budgets focused only on expenses, because job security was common and revenues were stable. This is no longer the case even if you have a “full time government job” because mass layoffs, downsizing and instability are now normal in the workplace. The 3 main types of income that this series covers are employment income, entrepreneurial income and retiree/investor income. A fixed income scenario like a disability pension can also be put into the retiree category. Realistically, a person will go through all of these income types and will likely combine them at certain points of their lives.

Budgets represent that balance between your income and expenses over a period of time. A budget spanning a year is recommended and very common, but there could be sub-periods like monthly or quarterly if this is useful, and budgeting for each paycheque can be useful for staying on track. Over these periods, you will notice patterns of income and expenses which will provide insight as to where your money is going and for what reasons.

To build your budget, you will need to determine those two main components: how much money you have coming in, and how much you have going out. The specifics for each are discussed in detail in the rest of this series..

The post Budgeting and Cash Flow appeared first on Canadian Personal Finance Blog.

When it comes to insurance, Canadians simply do not have a good enough understanding of what their needs and options are. Insurance can be both confusing and boring, meaning that you likely have not invested the time to research what coverage makes the most sense for you and your family, or what risks you remain exposed to. While it’s highly likely that you have heard of life insurance, you may not have heard about disability insurance.

I am sure that you realize how important your income is, but have you taken the time to think about how your life would change if you no longer received a paycheque? The purpose of this guide is to help you better understand how you can use disability insurance to protect your income in the event of an injury or illness.

So, what is disability insurance? It is an insurance contract designed to replace a loss of income in the event of an injury or illness. A more suitable name may be income protection or paycheque protection.

While many may think of a disability as a freak accident that caused you to never work again, it is quite the opposite. The most common form of claims are mental health issues such as depression and anxiety. This is closely followed by musculoskeletal issues such as back and neck pain. Many times, these types of disabilities do not prevent you from working altogether, however they may cause you to work part time or at a reduced income. A good income protection plan will pay out while you are still working in these modified roles, to top your income back up.

Your Ability to Earn Income is Likely Your Most Important Asset

Ask yourself, how important is your income to you and your family? If you still depend on your income, you may find that your ability to work is likely the most valuable asset you have.

Based on your annual income, here is how much you could earn cumulatively over your lifetime (by the time you are 65 years old).

*Assuming a 2.5% increase in income each year.

We all know the story about The Goose that Laid the Golden Eggs. The story is about a poor farmer and his wife who had no money for food or clothes. After several days of starvation, the farmer decided to go hunting for food. He came across a goose, who was too small to satisfy his appetite. He brought that goose home and to their surprise, it laid a golden egg. He took that golden egg and sold it for clothes and food. The next day, that same goose laid another golden egg, which in return they used for more food. That goose continued to lay golden eggs every day until the farmer and his wife got greedy and decided to kill the goose, thinking it was full of golden eggs. After they cut open the goose, they learned that they made a mistake as there were no golden eggs inside. The farmer and his wife returned to poverty.

When it comes to insurance, the golden eggs represent your house, your car and other valuable assets you may own. Most of these which you already insure. The goose represents your earning power, which is the financial means to provide for yourself and your family. What’s more important to insure, the goose or the golden egg? I agree, it’s the goose and I sincerely encourage you to invest the time to ensure that your income is adequately protected. The risk of disability is very real, and the financial impact can be devastating.

What happens if you suffer an injury or illness that prevents you from working or earning the same level of income that you currently are accustomed to? It’s this paycheque that allows you to pay for the necessities such as a roof over your head, food on your table and shoes on your feet. It’s also this paycheque that allows you to go out for dinners, enjoy your hobbies and take vacations. For many of us, it’s this paycheque that affords us the lifestyles we live, and we couldn’t imagine having this source of income eliminated from our lives.

The post Disability Insurance appeared first on Canadian Personal Finance Blog.

Introduction: Finding Debt Relief and Rehabilitation

Bankruptcy is a scary word. It conjures up images of losing your home, destroying your credit, and other unpleasant thoughts. But it can provide relief from a crushing debt burden, so for some people it can be the right move.

Do you remember going to see the doctor when you were a child? You dreaded getting jabbed with a needle for a blood sample or having to take some awful-tasting medicine, but before you knew it, it was done and over with and the sting went away. One can think of the personal bankruptcy process in the same way – you dread filing for bankruptcy and expect it to be painful, but before you know it your debts are gone and you’ve moved on with your life.

You should be aware that the bankruptcy system exists to work for you as well as your creditors. The personal bankruptcy process has the objective of rehabilitating the debtor, so that they can become a productive member of society without the burden of crushing debt. The bankruptcy system also ensures that all creditors are treated fairly and get an appropriate share of any assets from the debtor.

If you find yourself struggling to stay on top of your debts, you may be able to solve the problem without needing a break from your creditors. For example, a money coach might help you budget better, or a counsellor may help you with underlying issues such as problem gambling. But when your debt situation is overwhelming, it may be time to speak to a licensed insolvency trustee to evaluate your financial situation and determine if it’s time to ask your creditors for relief.

There are several ways to seek relief from your debts, and we will discuss each in more detail in subsequent articles. These options are governed by the Bankruptcy and Insolvency Act.

A consumer proposal is a formal repayment plan that can be tailored to your ability to pay, and minimizes the impact on your credit rating. Creditors may also receive more money than in a bankruptcy. Consumer proposals are for debts that do not exceed $250,000 (excluding mortgage debt on your home).

Personal bankruptcy is where you legally assign your assets to a trustee who will liquidate them and remit the proceeds to your creditors. You can retain some personal assets, such as necessary clothing, and specified amounts of household furnishings, tools, etc. Bankruptcy will stop wage garnishments and legal proceedings, but will have the most severe impact on your credit rating.

A Division 1 Proposal is like a consumer proposal, a legal process available under the Bankruptcy and Insolvency Act that allows you to settle with your creditors and avoid bankruptcy, used when your liabilities exceed $250,000.

Settling tax debt can lead to particular considerations and ways of dealing with the Canada Revenue Agency worthy of its own article, though the proposals use the same framework as a consumer proposal or division 1 proposal.

Starting Over – Rebuilding your Credit

One concern for many individuals contemplating a consumer proposal or bankruptcy is the effect on their credit rating. Your credit rating for a particular loan account will range from R1 – a revolving account in good standing, to R9 – a revolving account in very poor standing.

Bankruptcy will bring a person’s credit rating for each loan account included in her bankruptcy proceedings to an R9 with the credit bureau. It will remain so for 6 years after a discharge from bankruptcy, after which it will be deleted from the debtor’s credit file. For a consumer proposal, A debtor’s credit rating will be downgraded to an “R9” rating with the credit bureau during the performance of the consumer proposal. Once the consumer proposal is completed, the credit rating will be upgraded to “R7”, and will so remain for 3 years. After 3 years, the R7 is deleted from the debtor’s credit file.

Moreover, your credit score will be impacted. This is a number out of 900 which represents an overall assessment of your credit worthiness. This is called a FICO score and is calculated based on the following factors:

• Your payment history comprises 35% of your FICO score. It includes which of your accounts were paid on time, the amounts owed and the length of any delinquencies. Also included are any adverse public records such as bankruptcies, judgments or liens.
• Data about your debts comprises 30% of your FICO score. This data includes the number of accounts you owe money on, the type of debt and its total amount. Also included is your credit utilization rate.
• The length of your credit history comprises 15% of your FICO score. This factor includes the length of time your accounts have been open and how long it’s been since they’ve been active.
• The types of credit used comprise another 10% of your FICO score. Having a greater variety of differing types of accounts such as credit cards, mortgage payments and retail accounts is more beneficial than holding fewer.
• The last 10% of your FICO score is made up of data related to new credit applications such as the number of recent credit inquiries, and how many new accounts have been opened. Opening up too many accounts in too short of a time period is interpreted as a sign of risk and will lower your score.

Does this necessarily mean that you won’t be able to get credit during this period? No, it does not.

Your credit history and credit score are certainly important factors in determining your credit worthiness. However, lenders will look at other factors such as your income and your ability to get a guarantor or co-borrower. There are also other devices through which you can rebuild your credit:

• Secured credit cards – Certain financial institutions issue secured credit cards. By providing a bank or trust company with cash as security against any purchases, such as by providing a money order along with the credit card application, you’ll be issued a credit card with a maximum credit limit equal to the money provided. For example, you submit a $1,000 money order along with the application form, and you are issued a credit card with a limit of $1,000. The bank has your $1,000 as security to ensure you pay your credit card balance.
• Mortgage brokers – If you are in the market for a home and need financing, a mortgage broker will shop around for the best mortgage rate available to you given your bankruptcy. However, due to your bankruptcy, the rate offered to you will usually be above current market rates. In many cases these higher rates may make renting a better financial choice, though the rent-vs-buy consideration is dependent on many factors, and a credit check may also be part of a landlord’s screening process.

Conclusion

If your debts are overwhelming and you don’t see a way to get out from under them, an insolvency trustee may be able to help you understand your options.

Insolvency trustees are also in a position to help you rebuild your credit, and can refer you to organizations that can assist in financing a vehicle, making a real estate purchase, or securing a credit card account notwithstanding your bankruptcy.

The post Personal Bankruptcy appeared first on Canadian Personal Finance Blog.

Part 1: What is a Stock

Saving for the future is very important, but savings alone can make reaching your financial goals very hard. If every dollar you want to spend in the future – say, for retirement – you have to earn and hold on to first, it can make the idea of meeting your future goals seem daunting.

For someone spending 40 years of their life working and planning for a retirement of 30 years, they would have to save a huge portion of their income to be ready. That or plan to have a big cut to their lifestyle in retirement, neither of which is an appealing choice.

To get ahead, we need to not just work ourselves and save from those paycheques, we need to get our money working too.

There are many different ways of making your savings grow: for example, you could start a business, or buy a property that you rent out. However, those options take a lot of time and effort. In many cases it’s more like buying a second job for yourself than simply getting your money to work for you. More importantly, you typically need a lot of money available to do either of those.

However, you don’t have to do it all on your own.

The Power of Shares

One of the most powerful inventions to drive capitalism was the corporation. Corporations allow many people to become investors in a company, and for each of them to own a portion, or a share of that company. If you’ve managed to save $4000 through the year, that may not be nearly enough to buy an apartment building, the equipment for a restaurant, or to build a factory, but you can get together with other people with money to invest and create a corporation. Each of you could own a share of the company.

If the company makes money and becomes more valuable, then your share in it also becomes more valuable – as part owner, you own a portion of those profits.

There are many ways for you to get your money (and hopefully the profits it has generated for you) back out of the company an into your hands. The most common way is to sell your share of the company to someone else looking to invest their money.

The Stock Market

Indeed, there are already a multitude of other people out there looking to invest their money in partial ownership of companies, while others are ready to sell their shares. Many large companies are registered as public companies, and their shares trade on a stock exchange.

With stock markets and so many companies already in business, there’s no need to go and find a group of friends or co-investors to create a new company from scratch to get your money invested. You can instead simply buy shares of an existing company on the stock exchange and not create a second job for yourself.

We call those companies with shares available “stocks” – hence stock market as a place where you buy and sell stocks – and also refer to owning shares as “equity” or owning shares in many companies as “equities”. All three terms – shares, stocks, equities – are used somewhat interchangeably to refer to investing your money in companies.

Companies list their stocks on a stock market so investors can buy (and later, sell) those shares easily. A company can divide its ownership up into as many or as few pieces as it likes. So two companies may both be worth the same total amount, but have different number of shares and hence prices per share. For example, if Company A is worth $10M and divides its ownership into 10 million shares, each share would be worth $10. Company B meanwhile might have the same $10M total value, but split itself into just 5,000 shares worth $2,000 each. This means it rarely makes sense to try to directly compare shares in one company to shares in another.

There are many stock markets in the world, with the Toronto Stock Exchange, New York Stock Exchange, and NASDAQ being the ones you will most likely hear about and actually use. But you won’t have to travel to Toronto or New York to buy your shares of stock to get your money invested in equities. Trading in stocks is done electronically, and the exchanges don’t deal directly with individuals. Instead, you will use the services of a brokerage firm to place your orders for you. There are many brokerages to choose from, including those from each of Canada’s big banks as well as a few independent brokerages. These days you will almost exclusively make your purchases on your own through your brokerage’s a web interface.

Summary

You want your money to grow, and an important part of making that happen is to own stocks (sometimes called owning shares of companies or equities). Buying equities in existing companies can be easy if they are listed on a stock exchange, and you can get started with just a few thousand dollars saved. At the end of the day the important thing to understand is that when we talk about owning stocks or buying equities is that you are buying or owning small parts of businesses.

The post Index Investing appeared first on Canadian Personal Finance Blog.

By Glenn Cooke

Introduction

Critical Illness insurance seems pretty straightforward – if you get a critical illness, you get paid a flat benefit. Unfortunately when it comes time to claim, consumers often find that they weren’t covered for what they though they were.

There’s also a number of important policy attribures that don’t get discussed that can lead to misunderstandings as to what’s covered and what’s not. In particular there’s a simple sales phrase used to sell critical illness which is “If you get cancer, you get paid a benefit. If you don’t, you get all your premiums back’, something that’s not nearly as ‘true’ as a consumer might initially believe.

In the following pages we’re going to take a more fact-based approach to critical illness insurance in Canada. This will give you a better foundation for your purchase of critical illness insurance.

We’ll do so by breaking the problem down into two steps:

1. How Much Critical Illness Insurance
2. Best Type of Critical Illness Insurance

Following these two steps, in order, will ensure that we’ve purchased the best insurance coverage available.

It will also help in background understanding if you’ve read our Understanding Life insurance ebook prior to going through this one.

Catastrophic Financial Loss

Critical Illness insurance is often sold based on emotion. The fear is that we get cancer or have a heart attack. The payoff is a cheque. This connection is why critical illness insurance is called ‘cancer insurance’ or ‘the cancer lottery’ in the insurance industry. While using fear to self insurance works like crazy, it can lead to incorrect insurance coverage. Ask yourself, if you get cancer, why do you need $100,000? If you don’t have an immediate answer to this, you likely are leaning too much towards an emotional purchase instead of an insurance purchase.

To avoid this, we’re going to introduce a concept I call Catastrophic Financial Loss. We’re going to use this phrase to ‘test’ our insurance purchases. If we fail this test, it indicates we are not looking at the right thing.

1. Catastrophic – if we are using insurance to cover a financial loss, the amount of the loss should be huge enough to be life altering – or catastrophic. By contrast, consumer warranties on electronic items are not really insurance. A $500 phone loss shouldn’t be catastrophic for most of us. A $100,000 loss on the other hand is absolutely a catastrophic loss.
2. Financial – for insurance to make sense, a loss must be financial. This is opposed to emotional. Take for example the sales phrase I mentioned above – “If you get cancer, you get paid a benefit. If you don’t, you get all your premiums back”. Getting your premiums back – is that a strictly financial decision? Or more of an emotional one? In most cases, it’s an emotional decision. If that’s your motivation, be cautious and evaluate.
3. Loss – Mathematically, lotteries and insurance work the same way. A large group of people pool their money. A random event occurs (your numbers come up, or you get cancer) and the recipient of the event receives a payout from the pool. The difference between a lottery and insurance is in the intent – a lottery increases wealth. Insurance means you suffer a loss and the insurance puts you back to where you were; it preserves wealth. Lets say you’re looking at critical illness insurance to pay for out of country medical costs (a common sales approach). Is that a loss? Turns out that it’s not – if you don’t have the money for out of country medical costs, then critical illness is creating this wealth and this is now a lottery. That doesn’t mean you shouldn’t purchase critical illness, it does mean you should pause and evaluate your assumptions.

The post Understanding Critical Illness Insurance appeared first on Canadian Personal Finance Blog.

The financial triangle has a variety of stages – cash flow, insurance, retirement savings, estate and tax planning, and speculative investing. Using life insurance as an investment falls squarely in the upper estate and tax planning level. That means that you should only start looking at using life insurance as an investment AFTER you have cash flow, insurance, and retirement savings all looked after. At that time, life insurance is a very useful (i.e. financially astute) estate and tax planning tool. Prior to that time it’s a poor investment choice.

Life Insurance As an Investment – Pros

Life insurance policies have a number of strong benefits that center around taxes and estate planning. They are:

• Investments inside a life insurance policy grow on a tax sheltered basis (similiar to an RRSP or TFSA).
• Death benefits are paid tax free (so if you’re comparing death benefit funds, compare them to other investment choices after tax), including any investments and growth inside the policy.
• Life insurance policies will accumulate premiums to a larger death benefit upon your passing faster than investing the premiums in a comparable investment choice.
• In some policies, death benefits and investment amounts can be guaranteed.

The insurance industry generates specific strategies that combine and take advantage of these attributes of life insurance policies to generate tax efficient outcomes. We’ll go through three common investment strategies in this ebook. Each of the strategies will combine the above benefits in some fashion.

Life Insurance As An Investment – Cons

There are a number of drawbacks to using life insurance as an investment, they are:

• The policy, and in general the investments, are illiquid. They are not suitable if you ever need fast cash from the policy. Compare this to an RRSP or TFSA where if you had an emergency you could access the funds fairly quickly.
• Being a life insurance policy, there is an insurance cost. This can act as a drag on returns, particularly if using a strategy that is primarily dependent on the investments and not the death benefit.
• RRSP’s, TFSA’s, RESP’s and other tax sheltering choices will generally perform better than a comparable life insurance investment policy.

The post Life Insurance as an Investment appeared first on Canadian Personal Finance Blog.

Life insurance is confusing to many consumers. What product is best? Should I get cash values? Is life insurance a good investment? It’s overwhelming and difficult to know even where to start.

In this e-book we’re going to clear up that confusion. We’re going to break the problem down into specific steps and educate on each step. For best results, you want to do these steps in order:

1. How Much Life Insurance
2. Best Type of Life Insurance
3. Best Life Insurance Company

By focusing on those steps, in that order, you will end up with proper insurance coverage.

However before we get into details let’s look at a basic principle of life insurance that will underpin our decisions – catastrophic financial loss.

Catastrophic Financial Loss

Before we begin I want to introduce an underlying insurance concept that will help us evaluate if we’re making the right decision. We’re going to apply the term ‘catastrophic financial loss’ as a reasonability test for our insurance decisions. We want our choices to meet all three of the words in the term; if our decision fails any of these three tests then either we are making a poor decision or we’re using life insurance for something other than pure insurance needs (which is fine, as long as you’re aware of this).

1. Catastrophic – if we are using insurance to cover a loss, the amount of the loss should be catastrophic; i.e. it should be a loss that we can’t easily recovered from. A counter example to this would be consumer warranties. e.g. If you break your $800 iphone that’s no fun, but it’s not life altering. This is why most consumer advocates advise not to purchase electronic warranties. Conversely if you total your $30,000 car that would be much more of a catastrophic loss and thus something you should insure.
2. Financial – When determining our insurance needs, what we are seeking to cover should be financial. This is in contrast to insuring a need that is emotional. e.g. If you’re buying life insurance to gift your grandchildren some money on your passing, the amount isn’t financial – you’re making this decision based on emotions. In this case our insurance purchase would fail the financial test. Again, that’s fine as long as we’re aware and educated on what we’re doing.
3. Loss – For insurance to make sense, we need to suffer a loss. If there’s no loss then we’re participating in a lottery. With both insurance and lotteries a bunch of people contribute ‘premiums’ into a pool; a random event happens that selects someone from the pool and that person receives the grouped proceeds from the pool (either you get lottery winnings, or an insurance payout). The difference is that with a lottery wealth is being created that wasn’t there before. With insurance we’re replacing lost wealth and returning us to the same position we were before. e.g. lets say you purchase mortgage life insurance to cover your mortgage. If you die, what happens to the mortgage? Nothing – there’s no loss. This tells us that we’re looking at the wrong thing – in this case we probably want to be looking at the income that’s being used to pay our mortgage. And your income is lost upon death.

The post Understanding Life Insurance appeared first on Canadian Personal Finance Blog.

It’s February in Canada, which means it’s RRSP season once again. Every year we can save money in RRSP’s, and receive a tax deduction for our contributions. The tax deduction alone makes this a great thing, but it’s not the only important part of your retirement savings.

What is possibly the biggest factor in your retirement savings isn’t your interest rate earned, or your investment strategy. It’s your TIME. Starting to save earlier has a huge impact on your end goals – far more than most people realize. Let me illustrate.

Let’s take Canadian RRSP contributions people A and B. Both are 20 years old. They earn 5%.

Canadian A saves $1 each year from ages 20-29 (so for 10 years).

Canadian B saves $1 each year from ages 30-64 (so for 35 years).

How much do they have at retirement? Get ready……almost the same amount. At age 65:

Canadian A has $91.

Canadian B has $94.

No substantial differences in their retirement lifestyle between those two numbers.

Now lets see what happens if they both earn 7%:

Canadian A, who started early and only saved for 10 years has noticeably more money at retirement than B who saved for 30 years.

The point? Start saving now – today. Don’t wait another year. The time factor in long term investing is huge.

But there’s another hidden point here – fees on your investments. Let’s compare A and B, but against themselves at different interest rates.

Canadian A earns 5% until retirement. At retirement they have $91.

Canadian A earns 7% until retirement. At retirement they have $207.

Wow. I’m not going to advise you on how to ‘pick’ investments focused on higher returns, because higher returns alone is bad (you need to balance returns with risk). But there’s a relatively easy way to increase your rate of return on your retirement savings.

The answer is fees. Mutual funds and similiar investments charge fees on your savings. We’ve already seen this comparison but lets look at it again.

Canadian A earns 7% and pays 2% in fees. Ultimately they are earning 5%. At retirement they have $91.

Canadian A earns 7% and pays 0% in fees. At retirement they have $207.

In this example, if they eliminated 2% fees, they would more than double their retirement savings for the same amount of money they deposited into their retirement savings. That’s almost unbelievable – but it’s also true. This is why unbiased experts and Canadian financial advocates recommend that you attempt to minimize fees on your retirement savings.

The 2% difference in fees isn’t an arbitrary example. Mutual funds often charge in that range, while other investment types may offer fees closer to 0%. Shop around and make sure you’re paying the lowest fees available.

Here’s the summary. Start saving now, right now. Doing so will have dramatic impacts on your retirement lifestyle. And watch your fees, small fees can have a huge impact on your retirement as well.

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Reorganizing Your Debt

You’re not having any problems paying your debts on time, but it would be nice to simplify the budget a bit. Fewer debts to manage is one way of making things simpler. You could look into options for Ontario loans that would allow you to borrow enough money to pay off all of those credit card and other debts. That would leave you with one obligation to manage rather than several. 

One of the perks of this approach is that loan’s interest rate could be better than the rates applied to all or most of your debts. Along with making it easier to manage your debt, a lower interest rate will mean you can retire the obligation sooner rather than later. Think of the amount of money you will end up saving along the way. 

Remember that if you want to enjoy the maximum benefits from this strategy, avoid incurring any new debt. The only exception is some type of emergency like a car repair. Even then, pay off that new debt in one to two months. When your loan is settled, you get to enjoy some time being truly debt-free. 

Avoiding Interest on a Bill

You have a bill that needs to be paid in full as quickly as possible. If it rolls over for another month or two, the interest will be significant. You may find that personal loans offered by Magical Credit help you avoid the higher interest charged by some creditors. While you do still pay interest on the loan, the fact that the rate is lower saves you money. That’s always a good thing. 

Taking Care of a Pressing Need

There are times when you need to take care of something before it turns into an obligation that’s more complex and expensive. For example, you need new tires for the car now if you want to avoid the possibility of a blowout at the worst possible time. Keep in mind one of those older tires could blow out when you’re driving at a faster speed. The risks to you and to the vehicle itself are significant without those new tires. 

In this situation and similar ones, taking action now helps avoid worse issues later on. Obtain the loan and buy the tires now. While you may never know how much you save in terms of repairs and possibly medical costs, knowing you can drive the car safely makes the loan worth it. 

Emergency Funds At Your Disposal

Something unexpected happened and you need money right this minute. Perhaps it was a dental issue that had to be corrected without delay. Maybe you needed travel funds to get to a sick relative or friend. The nice thing about personal loans is that they can often be obtained in a short amount of time. That makes it easier for you to handle the emergency expenses without having to wait. 

Take Advantage of a Good Deal

It’s not so much that you need something right now or that you want to take care of a pressing debt or pay off several debts at one time. You’ve come across some type of deal that is not likely to repeat itself later on. It could be a one-time chance to purchase a second vehicle at a great price. Maybe it’s the opportunity to pick up something that one of the kids will need for a college dorm room next year, and the price is too good to pass up. Unfortunately, you don’t have the spare funds to grab that great deal. 

A personal loan can supply the cash needed to claim that deal and save a lot of money over time. Buy the car and use it whenever you like, even as you look around and notice that the great price for that make and model is not found anywhere else. You can also smile with satisfaction when the item you purchased for your child ends up costing a lot more when he or she does finally head for college. 

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