Buying life insurance for the first time can be overwhelming. Knowing your individual need for life insurance, the types of policies that are available, and how much money your family may need are all factors that will determine what type of policy you want to purchase, how much you’ll need to purchase, and even if you need to purchase life insurance at all.
Understanding your needs
A very common mistake is purchasing a policy just because it was recommended. The fact is, everyone has different financial needs, and therefore just because a certain policy works for someone, doesn’t necessarily mean it’ll work for you – you may not even need life insurance at all. The purpose of life insurance is to provide your family with financial support as if you’re no longer around to do so. If you don’t have any dependents, you probably don’t need to spend much (or anything) on life insurance. However if you’re contributing significantly to the financial well-being of someone (spouse, children, elderly dependent), you want to ensure that they’re taken care of in the event that you’re no longer around.
Understanding the policy you need
There are two basic types of life insurance policies: life and whole life. Term life insurance policies last for a specific period of time. It is less expensive than whole life as it usually expires before the benefits are used. Whole life insurance lasts from the day you purchase the policy until the day you die, no matter what. Whole life insurance is much more expensive, because the coverage could last several decades. Depending on whether you feel you need life insurance coverage for a specific period of your life or for your entire life will decide which type of policy best fits your needs.
Know how much to buy
To figure out how much life insurance you’ll need to buy, you need to understand the potential financial needs of your beneficiaries. Don’t follow any “rule of thumb” guidelines because, again, not everyone’s financial needs are the same. To calculate how much money your dependents will need, you need to figure out the number of years of support each dependent requires, and the amount each dependent would need per year. Add those up, and you have a good idea of how much life insurance you should be purchasing.
When the TFSA was introduced in 2008 it was widely celebrated as a new way to hoard money so that it was out of the reach of the taxman; the intention was to increase the appeal of saving. Unfortunately many people are still unsure as to how to take advantage of this wonderful savings tool. To help you get the most out of your TFSA, we’ve put together a list of things to avoid.
Don’t over-think the TFSA vs RRSP debate
A lot of people debate over whether they should contribute to a TFSA or an RRSP. There are clear benefits to either account; there’s no tax break for a TFSA, but you keep all the money you withdraw. An RRSP gives you an immediate tax deduction, however you need to pay taxes on any withdraws you make. You need to consult a tax professional to determine which saving vehicle is the best fit for you.
Don’t use your TFSA as a ‘savings account’
The “S” in TFSA is a little bit misleading. Many people treat their TFSAs as a glorified savings account, keeping most of their funds in things like cash and GICs. Sure, they are low risk but the returns are nominal. When you combine higher returns with tax-free growth, that’s when you really unlock the true wealth-building potential of TFSAs. If you have a long-term investment plan, you should consider holding bonds, stocks, and REITs in your TFSA.
Don’t put US Equities into your TFSA
If there’s one thing you should never put in your TFSA, its US dividend stocks. The problem them is that the US Government charges a 15% withholding tax on any dividends paid out to foreign investors. In RRSPs, the effects of the withholding tax can be mitigated by applying for a Canadian tax credit on the withheld amounts of the dividend, thus reclaiming the lost amount on your tax return. Due to the nature of the TFSA, there’s no way out of losing that 15% to the US Government.
Making a budget may not sound like the most thrilling thing I the world to do, but it’s absolutely vital in keeping your finances in order. Before you begin creating your budget, it’s important to realize that in order to be successful you’ll need to be fully aware of all your financial inflow and outflow; where your money is coming from and where it’s going is integral in figuring out how you’re going to allocate your income, and also how you can save on frivolous expenses. Here’s a guide on how to create a simple budget.
List your income, expenses, and spending
The first step in budgeting is to determine how your net income (or after-tax income) measures up against all your expenses and other spending. Writing down your income and expenses helps to track your spending behavior so you can properly fulfil your financial goals.
Your income is simple to list (generally speaking), but your expenses and spending require closer attention. Many people don’t actually know exactly how much they’re spending outside of covering obvious monthly payments (rent, car, things like that). This is why it’s so important to track your monthly spending, so then when you prepare your budget you have a clear picture of ALL of your expenditures (including small, seemingly harmless ones).
Set your saving goals
Next up, you’ll need to put into writing your short-, medium, and long-term saving goals based on your wants and needs. It’s really important to be realistic in this step. Once you’ve set your goals, you can figure out how to achieve them in the framework of your income and expenses. You may need to rethink some of your spending habits for these goals to even be financially viable.
Creating a savings plan
Now that you have your expenses covered off, you need to include savings into your budget. The mere act of creating a monthly budget often opens up opportunities for increased savings, since personal spending ends up being better managed. Make sure that you prioritize creating an emergency fund in your budget, to cover 3 to 6 months of expenses. In the event of unforeseen circumstances, an emergency fund works as a cushion while you work to regain your footing.
Starting too late or saving too little aren’t the only things that can derail your retirement; unexpected life events can be just as consequential and have the same negative impact on your retirement plans. When calculating your retirement needs, it’s easy to overlook these risks. Don’t. Here are three often ignored events that can undermine your retirement.
If you’re in your late 40s or early 50s, you tend to assume that you can continue going well and making a nice salary, at least until you want to stop. But sometimes people find themselves out of a job years before they expected to. Even if you’re offered a generous severance package, early “forced retirement” can be a devastating blow; it reduces your saving capacity, and cuts back on the amount of time your investments have to grow.
Many people severely underestimate how much they’ll need in retirement. A significant number of people don’t really know how much their spending; they think they’re spending $40k a year, then later down the line they find out it’s more like $70K.
Supporting your adult children
A surprising amount of near-retirees are digging into their retirement funds to help support their adult children. This causes an incredible financial drain, especially if portfolio returns haven’t been as good as they hoped. One of the biggest expenses prying money out of parents is the real estate market. More than one in five first-time home buyers rely on loans from their parents to help cover down payments.
When planning for retirement, awareness can go a long way. If you realize your employment is less than secure, save earlier on in life. If your adult children are a financial burden, talk with them about your situation and put limits on your support. It’s important to stay on top of your financial situation so there are no unexpected shocks.