PART 1
As you read through Part 1, I want you to consciously remember that most of what you will read won’t be earth-shattering. It won’t be hard to understand, but it will be hard to execute. Keep in mind the analogy with physical fitness. We know we have to work out and eat better to improve our health. There’s nothing complex about that. Honestly, if you do anything in the gym for 45 minutes, three times per week, and avoid eating junk, you’ll see results over time. But getting to the gym and resisting unhealthy treats are incredibly hard challenges for most of us.
It’s not entirely clear what the money-management equivalents to exercise and a proper diet are. That’s what we’re starting with. After I show you how to do the financial equivalent of a basic sit-up and what foods to eat or avoid, the rest is up to you.
CHAPTER ONE
“Can you look at my investments?”
That’s a question I get asked a lot. And if it’s not that specific one, it generally still has to do with investing. Some people equate financial advice with the stock market and nothing more. It’s hard to blame them. Any business program on TV, business section in the newspaper, or segment devoted to economic issues on the radio has a ratio of investing news to personal finance information of about 20:1.
Investing is just one of many factors that affect your personal finances. And it takes a long time to get acclimated to the lingo and to learn the ropes. It also takes a long time to accumulate a sizeable portfolio, to the tune of decades. Retirement, which is a concept that probably should be retired itself, is often associated with stopping work at age 65. So if you want to have a proper, traditional retirement, you’re going to have to sock money away for a long time.
Without downplaying the importance of saving and investing, it’s worth emphasizing that there are a lot of things that can happen to you before your ideal retirement age that could derail those plans. You might die before 65. You might lose your job. You might get sick to the point where you can’t work. You might be injured and become disabled. You might have any number of incredibly expensive emergencies crop up.
Any of these developments can be fatal to your long-term retirement savings plan because they jeopardize your ability to save for your retirement portfolio. But it’s not only your retirement that is at stake. Your way of life is too. Your ability to keep your home, your car, and to put food on the table is also at risk. Any one of these disasters can leave a family destitute.
Here are the basic ways you can protect yourself against various disasters:
• disability insurance in the event that you become disabled (caused either by injury or ill health);
• life insurance, which protects your family’s lifestyle in the event of your death;
• an emergency fund for loss of employment or unexpected emergencies;
• wills and powers of attorney to help communicate your wishes to others if you can’t do so yourself.
Let’s look at each of them in turn.
DISABILITY INSURANCE
Disability insurance pays you a monthly benefit in the event that you lose the ability to work. You pay a premium (the cost of the policy) and if you become disabled, you are then entitled to monthly benefits for a specified period of time, known as the “benefit period.” The monthly benefit usually does not start to be paid until a few months after you become disabled. This delay—normally 90 days—is known as the “elimination period.”
For example, let’s say you are a graphic designer earning $60,000 per year. On the way home from work one day, you are involved in a car accident and become disabled. You are no longer physically able to work due to the injury sustained in the crash. After the elimination period (let’s say it’s the standard 90 days), you start to get a monthly benefit, which replaces part of your take-home pay, from your disability insurance provider.
The disability might also be caused by a health condition. For example, you could be diagnosed with multiple sclerosis and the symptoms could prevent you from working.
Some people have disability insurance as part of a benefits package at work, but most don’t realize how valuable it is. Unless they have to make a claim.
I recently met two men, both of whom were disabled. One had benefits at work that provided disability insurance coverage, and the other didn’t. The person with coverage has no debt outside his mortgage, and his wife currently is a stay-at-home mom to their two children. They are in no danger of losing their home. The person who didn’t have coverage lives with his wife on $1,600 per month provided by government benefits. After paying rent, utilities, and groceries, they have maybe $200 per month for everything else. Their credit cards are maxed.
Both these men will tell you that disability insurance is a necessity, not an option.
You insure your house and car. You might even insure every electronic gadget you buy with an extended warranty (which could be a big mistake, by the way). But what about your single biggest asset: the ability to earn an income for the rest of your life?
Let’s put it into context. Assume that as a university graduate, you start your working career earning $45,000 per year. Assuming raises and promotions over time, your salary grows by perhaps 4% per year on average. Over a 40-year career, that translates into total earnings of more than $4.25 million. Over that time, part of your take-home pay is slowly converted into tangible assets and investments, but while you are younger, your future earnings are among the most important aspects of your financial well-being. That potential is your biggest asset, even though it won’t show up on a balance sheet for years. How well protected is that asset?
Life insurance can be structured to provide your family with an ongoing means to sustain, after your death, the lifestyle you have created in your lifetime. But what happens if you don’t die from an accident or health ailment, but suffer an injury serious enough to keep you from working? What if you become disabled for an extended period? It’s a sad truth that sometimes people would have been better off financially if they had died, instead of surviving with some form of physical handicap, simply because they didn’t take the time to ensure they had proper disability insurance coverage. It’s a morbid thought, but think about it: the mortgage still needs to be paid; you may want to pay for special devices or services to assist with coping with your disability. The accident or illness could lead to your having to downsize your lifestyle. You might have to move to a smaller house, cut out some luxuries, and so on.
As I mentioned in the introduction, Great-West Life reports that one in three people will become disabled for longer than 90 days before age 65, and the average length of disability that lasts more than 90 days is 2.9 years.
If you have a benefits plan at work, then you’ll want to find out what your coverage is exactly. Some plans provide a benefit for only five years, while others provide a benefit until you are 65. The percentage of income replaced also varies. If you’ve lost your employee handbook, call your HR department and get to know the details of your disability coverage. Some people discover that it needs to be topped up with a private plan, one that covers the difference between what you’re earning at work and what you would ideally like to have as replacement income.
If you are self-employed, or don’t have a benefits plan, run, don’t walk, to get a disability quote from an insurance agent. Be prepared for the sticker shock, because policies can sometimes run to more than $100 per month—but remember, disability coverage may be your most expensive insurance policy because the asset you are protecting is potentially your biggest.
As a real-world example, my disability insurance policy will provide $2,500 per month should I become disabled, and it will be paid to me until I turn 65. I’m currently 35, and my annual cost is $820 per year. It would’ve been $73.81 per month, but you save money by paying annually instead of monthly. In my case, I save $65.72 a year by making a single annual payment.
There are many factors that affect the premium of a disability insurance policy. Someone who works in construction is more likely to get hurt than I am, because most of the time I work at a desk or in front of a camera, where mishaps are relatively rare. It might cost the construction worker more for the same policy for this reason. You can also choose a shorter benefit period, instead of “to age 65,” which is what I selected. For example, you could pick a benefit period of five years. If I became disabled today I would receive $2,500 per month for 30 years (and the amount would actually increase over time with inflation, because I chose that option). When you factor in the gradual increases in the benefit, the value of the policy could add up to more than $1.2 million. If I chose only a fiveyear benefit period, the total paid to me would be just over $150,000. Because the insurance company would be on the hook for less, the premiums would be cheaper.
You can lower your benefit amount or increase your elimination period as well. There are many options you can adjust (or, realistically, have an insurance agent adjust to see what works best for your budget if you’re tight on cash flow). If you had to choose between cutting the length of the benefit period and decreasing the benefit amount, it might be wise to start with decreasing the benefit amount, but keep the coverage to age 65.
There are also various bells and whistles you can add to the policy. What we might normally call “extra options” are referred to as “riders” in the world of insurance. An example would be a rider that increases your benefit with inflation. Since that means a larger overall benefit to you if you make a claim, it increases the premium you pay for the policy.
There are different types of disability-insurance plans offered by the major insurance companies, all with different features and benefits. Because it is so important, I highly recommend that you take the time to sit down with an agent to sort it all out. You don’t want to make mistakes with any financial decisions, but with something as important as disability insurance, you really need to find an experienced agent who is willing to take the time to explain your options. Don’t delay in making an appointment, but don’t rush through the process once you’ve started it. Make sure you’re comfortable with the decision you make.
I can’t stress this enough: run, don’t walk, to make an appointment with someone to talk about this if you don’t have coverage. You can’t get it after you become disabled, and if you do become disabled without coverage, it’s almost guaranteed that you will be poor forever.
I’m serious! Put down the book and send an email, or make a phone call now! Arrange to talk to at least two different insurance agents from different companies and get the ball rolling. The application process can take a few weeks and you don’t have to pay until a contract with your final cost is in your hands. You can back out anytime.
If you’re thinking, “I’ll get to it,” either you’ve missed the point or you think you’re invincible. There are five simple rules for financial success. Five. You don’t get to pick and choose which ones to follow. You need to follow them all.
LIFE INSURANCE
Life insurance pays what is called a “death benefit,” which is just a lump sum of money, to a beneficiary in case you die. You pay a “premium” (the cost of the policy), and when you die, a designated person receives a cheque for the benefit amount. It’s pretty straightforward in the general sense. But there are a few nuances you need to become familiar with.
If you have dependants (people who rely on you to support their lifestyle), the loss of your income can change their lives. Many people buy life insurance to minimize or eliminate any financial changes in the lifestyle of their loved ones. You might want to ensure that your dependants can remain in the family home, that the children can be supported until they are independent, and to make sure there is no financial hardship on top of the emotional hardship brought about by your passing.
Most people seem to know that they need life insurance if they have dependants, and they seem to know it if they have children, but too many of those same people don’t actually have life insurance, or they have the incorrect amount, or think their group benefits plan at work is all they need (it may or may not be).
This is a perfect example of people knowing what they have to do but not doing it. Some of you are reading this right now, know you need life insurance, and still don’t have any. What exactly are you waiting for? Actually take a minute and decide for yourself why you are waiting. Again, seriously, put down the book for a minute and take the time to think about it. You need to make this a priority. Not, “I’ll get this done this year,” but, “I’ll be sitting in front of an insurance agent by next week.”
You might be thinking that the chances of your dying are low because you’re relatively young. Well, the good news is that life insurance premiums reflect your likely lifespan. I just bought a new life insurance policy for $250,000, and, as a 35-year-old, it’s costing me less than $16 per month ($187.50 per year to be exact).
I’ve shared a short story about life insurance in Chapter 8. I recommend that you read that story before you meet with an insurance agent, just to bring you up to speed. The rest of this section deals with some other important nuances you might not otherwise have considered.
When Is the Underwriting Performed?
“Underwriting” is the process of determining if a person is eligible for an insurance product and how much risk the insurance company feels it is taking by offering this person an insurance policy. This assessed risk is used to establish just how much a particular insurance policy will cost. There is a difference between insurance policies that have the underwriting performed at the time of claim (which, for life insurance, means when you die) versus underwriting that is performed at the time of application.
I hope the concept of figuring out whether someone qualified for life insurance after they are no longer living strikes you as odd. On occasion, it has led people to pay life insurance premiums for years only to discover that, when they die, their beneficiaries do not get the lump-sum death benefit that was expected.
On the other hand, underwriting at the time the application is made, which can involve a nurse coming to your house to take your blood pressure and collect a urine sample before you get a policy in your hands, leads to a much more robust life insurance policy. Death for any reason, except suicide, usually triggers payment of the benefit from day one of the policy coming into force. After 2 years of the policy being in force, your beneficiaries could still receive the death benefit even if you committed suicide (as long as it wasn’t a part of some insurance-fraud scheme).
Underwriting at application can seem like a hassle. There can be lots of questions, some of which might make you uncomfortable, and some people just hate needles. There can be a tedious follow-up by the insurance company with your family doctor if the company feels anything needs to be checked out further. The company may even insist on waiting for the results of your annual physical. But once it’s done, it’s done, and you know you have robust coverage when underwriting is performed at the time of application.
Contrast this with an insurance policy based on the answers to a few yes-or-no questions over the phone or on a simple one-page form. That basic test is just a screen to see if you are terminally ill right now (and would be denied coverage right away). The actual underwriting hasn’t been done and won’t be done until you make a claim (die). That’s the worst time to find out that you didn’t actually qualify for the coverage (or rather, for whomever is making the claim on your behalf to make that discovery). The company might refund the premiums paid, but that sum might be a drop in the bucket compared to the insurance benefit you were counting on.
In short, it’s worth the hassle and discomfort to get the full underwriting done at the time you make the application. You can do this by getting a private life insurance policy through an insurance agent. One other advantage of private insurance is that if you are healthier than average, your premiums will be lower to reflect the reduced risk of your dying anytime soon. The flip side of that coin is that, if you are less healthy than average, your premiums will be higher than average to reflect the increased risk that you will die sooner rather than later.
If you have life insurance provided through your group benefits plan at work, it is imperative to understand your coverage. That means you actually have to read your group benefits handbook. The same holds true for your disability insurance provided through work. I’ll go into more detail on reading the fine print in Chapter 4. There, I’ll include a real-world example of an individual who had both a private life insurance policy and a creditor-based life insurance policy (sold with his mortgage by the lender). The person died and the private policy paid the death benefit in two weeks, while the creditor-based policy denied the claim. Imagine if that family only had the latter policy!
Term Life Insurance versus Permanent Insurance
When they talk about life insurance, I doubt that most educators lead off with the issue of when the underwriting is performed. They might start with the difference between temporary insurance and permanent insurance. But I tackled the underwriting issue first because there are many people who think they obtained full coverage when they ticked a box on their mortgage application, indicating that they had applied for mortgage life insurance. Yes, you might have life insurance of some kind, but if that policy doesn’t actually pay out when you die, that’s a big problem.
Having got that off my chest, let’s discuss the two main types of life insurance. Term life insurance is sometimes referred to as “temporary” life insurance. It is commonly described as coverage you rent for a while, until you no longer need it. That time could be when you’ve built up an estate large enough that you are effectively self-insured. If you are 65, have all your ducks in a row, and have a net worth of $1 million, you might not need that life insurance policy worth a few hundred thousand dollars, at least not for the original purpose, which was to make sure your family’s lifestyle was not devastated if you died when you were younger. They might have experienced considerable hardship then, when you were a young family with no assets, lots of debt, and a baby or two. Your situation changes as you grow up and grow old.
Life insurance premiums are directly related to your risk of dying. If you’re 20, you’re less likely to die than someone who is 50, for obvious reasons. When you’re 80, your chances of dying are high enough that trying to get a new life insurance policy would be costprohibitive. It follows that as you get older and your risk of dying increases, the premiums on a life insurance policy get bigger.
A term life insurance policy sets the premium to a constant level for the duration of the term, which could be 5 years, 10 years, or longer. So if you have a 10-year term life insurance policy for $250,000 of coverage, you might get quoted a cost of $16.88 per month (that’s the exact figure I was quoted as a 35-year-old). That $16.88 monthly premium will stay the same for the next 10 years. You can save money by paying annually instead of monthly: my annual premium is $187.50 (a 7% saving). When I’m 45, the premium increases to $1,052.50 per year for the next 10 years until I turn 55. At that point, it would be scheduled to increase to $2,337.50 per year for the next 10 years. And so on. (If those increases in the premiums scare you, keep reading this section for a trick to dramatically reduce the costs over time.) If I ever choose to stop paying my premiums, the policy will lapse. I owe the insurance company nothing, and it is no longer on the hook to pay my beneficiary a death benefit. That’s why it’s called “temporary” insurance.
Permanent insurance is designed to address the increase in the cost of insurance as you get older, assuming you continue to need the coverage when you are very old. Permanent insurance is priced so that you pay the same premium your whole life, which is where the name “whole life insurance” comes from. That means it’s much more expensive than term insurance at the beginning of the policy, but much cheaper at the end. Really what is happening is that the extra cost up front (compared to a term life policy purchased at the same age) is set aside into a reserve account. Later, when the premiums of a whole life policy are lower than term life, that shortfall is covered by tapping into the built-up reserve. The result is that you overpay for insurance early in the policy and underpay for it later, but your premiums stay the same your whole life.
For example, my 10-year term life policy with $250,000 in coverage costs me $187.50 per year for the next 10 years. The same $250,000 of whole life coverage would be close to $1,500 per year forever. That’s almost 10 times as expensive to start. If I kept my 10-year term life policy and just let it renew at the higher premiums every 10 years, by the time I was 75 my annual premium would be $20,155. Even if I re-qualify as healthy (to get a better rate) when I’m 75, a 10-year term life insurance policy for $250,000 at that time might be $8,072.50 per year. The whole life policy would be looking incredibly cheap at that time, but that assumes I kept paying the premiums since I was 35.
But why would I need $250,000 when I die, if I live to be 75? Presumably, I will have saved some money over my career. If I have had kids, they had better be out of the house and self-sufficient. In fact, I would hope to have a sizeable estate, enough that I could leave a small inheritance to my spouse, children, or their children. So there are reasons to think that permanent insurance is unnecessary for many people. There are exceptions, of course.
Term life insurance is much more affordable than permanent insurance when you are younger, which is the time you need life insurance the most. As you get older, and with planning and good fortune, build up your estate, your need for life insurance decreases. This is why most people are better off with term life insurance. While the unit cost of insurance increases over time, the number of units you need decreases as your assets grow. If you were the family breadwinner, with a stay-at-home spouse and two young children, your death would be devastating, emotionally and financially. If you earned $50,000 per year, you might want 15 years of income replacement ($50,000 × 15 = $750,000) so that your family could retain the same home and lifestyle they would have if you were alive. That might be enough to see the children move out, and for your spouse to establish a career and become self-sufficient. If you’re 55, have a spouse who earns an income, the kids have moved out, and you’re mortgage-free, there may not be a need for income replacement at all.
To determine how much insurance you should have, you need what is known as an “insurance needs analysis.” This is a quick exercise that helps you to estimate your true insurance requirement. There are some simple online calculators you can try, but it’s best to walk through it with an experienced agent.
See Chapter 8, where I explain the differences between term and whole life insurance in greater detail. That chapter concludes with a crude insurance needs analysis. After reading it, you’ll be more up-to-speed when meeting with an insurance agent to discuss your options, and ready to go through a formal insurance needs analysis.
Already Have Life Insurance? Here’s How to Save Big Bucks!
They say there are only two certainties in life: death and taxes. But a third could be rising life insurance premiums. But while life insurance is a necessity for most, there are ways to reduce your lifetime costs significantly. For many it could add up to tens of thousands of dollars.
As you know, the cost of life insurance goes up the older you are. It’s also more expensive the less healthy you are. And actuaries (the people who determine what the premiums will ultimately be, based on mortality statistics, interest rates, and other factors) also know that if you qualify as healthy today, there is a chance that you will become unhealthy tomorrow.
Glenn Cooke, president of LifeInsuranceCanada. com, provided me with some real-life quotes to help demonstrate how this can affect the cost of your insurance.
For example, if you were a 40-year-old, non-smoking male in good health, and you wanted $500,000 of term life insurance coverage, one company quoted a monthly premium of $30.78 for a policy with a
10-year term. After the term is up, you can automatically renew, but the monthly premium increases to $231.75. Contrast this to the same coverage applied for today by a 50-year-old man: if he qualifies as healthy, his premium is only $71.42 per month.
According to Cooke, the reason for the difference is that the insurance companies use two different sets of mortality tables when pricing life policies. A “select” mortality table factors in your specific level of health, which is obtained after taking a medical assessment upon application for the policy. So the company knows exactly how healthy you are when the policy takes effect. The select mortality table is used only to price the insurance for the first term.
For every successive term, the policy is priced using what is called the “ultimate” mortality table. These are the statistics for the general population, which do not differentiate based on level of health. So the sample the table is based on includes unhealthy people who have a greater chance of dying sooner than their healthier counterparts, and who potentially would collect a large insurance benefit after having paid premiums for just a short while. The increased likelihood of large payouts gets factored in to the price, which means it goes up.
However, if you can still qualify as healthy, you can get a new policy at a lower rate and save big bucks. (Remember never to cancel a policy until you have a new one in its place.) On the other hand, if you take a new medical assessment and find out that you have become uninsurable or otherwise unhealthy, you can take the opportunity to talk to your insurance advisor about converting the existing policy to a permanent one. Cooke says the ability to convert a policy is an important feature to look for. While a term life policy might not be the right solution for everyone, understanding how policies are priced over time can save you a lot of money.
Table 1.1 shows the premiums that might be paid by a healthy, non-smoking male with a term life insurance policy valued at $500,000 on a 10-year term, first, if the policy is renewed automatically, and second, if he re-qualifies as healthy each time the policy comes up for renewal. If the individual in this example renews his policy until age 65, his total premiums paid are $61,722.00. If he re-qualifies as healthy every 10 years until age 65, his total premiums are $27,589.20. The total amount saved by the individual who re-qualifies as healthy is $34,132.80.
Table 1.1: Term Life Insurance: The difference between automatic renewal and re-qualifying as healthy1
|
Age |
Monthly Premium if Renewed Automatically |
Monthly Premium if Re-qualified as Healthy |
|
25–34 |
$27.90 |
$26.10 |
|
35–44 |
$58.95 |
$25.56 |
|
45–54 |
$122.85 |
$47.12 |
|
55–64 |
$304.65 |
$131.13 |
1 Quotes provided by Glenn Cooke, life insurance broker and president of LifeInsuranceCanada.com
AN EMERGENCY FUND
Emergencies happen all the time. An unexpected car repair, a flood in the basement, a cellphone bill with big roaming charges you didn’t expect, a leaking roof, you name it. Some people call these unexpected events “life.” And they really do happen more often than we expect. All of a sudden, if only temporarily, your income can’t cover your expenses. But I’ve just described the expense side of that equation. There is also the income side to look at. Namely, losing your job.
The problem is still the same. You can temporarily be forced into a deficit situation where your expenses are greater than your income. This is the rainy day people have in mind when they’re thinking of saving. The solution to either kind of emergency is to have an emergency fund. This is simply money kept in an easily accessible location that can be drawn upon on a rainy day.
I know what some readers are thinking. Do you create an emergency fund if you have lots of debt, especially high-interest debt, the kind charged by credit card companies? I’ll get to that.
How big should your emergency fund be? Depending on who you talk to, the general rule of thumb is to hold anywhere from 3 months’ worth of expenses to 12 months’ worth of income in your emergency fund. Twelve months’ worth of income might add up to more than $100,000 for some households. I can’t imagine putting that much money aside into a high-interest savings account as a safety net, especially if you have a balance on your mortgage or credit cards. Just think how much faster your mortgage could be paid off with a lump-sum payment that big!
For that same household, 3 months’ worth of expenses might be $10,000 or less. That’s generally going to be plenty for most people, especially if you are doing all the other things you are supposed to be doing (insurance, investing, etc.). For example, if you contribute regularly to a retirement savings plan and you run into an emergency, isn’t the logical solution to take some of those savings to meet the immediate need? Experts will tell you that it’s a no-no to draw upon retirement savings for any reason other than retirement, but, in reality, that’s exactly what most people would do.
Many people count their tax-free savings accounts (TFSAs), registered retirement savings plans (RRSPs), home equity, other investment accounts, and unused lines of credit as emergency reserves. Lines of credit may or may not be available when you need them, but the other sources are perfectly valid. That being the case, as you get closer to retirement, your need for an emergency reserve funded by a high-interest savings account decreases, because your assets have (or should have) increased.
Unless it causes you to lose sleep at night (in which case, you might want to set aside more), 3 months’ worth of expenses kept in a high-interest savings account is more than enough for an emergency reserve. It should be in either a simple savings account or a cashable (which means you can access it at any time) guaranteed income certificate (GIC). You will also want to have a few hundred dollars (or more) in cash stored in a safe place in your home. This is to ensure you can still buy necessities if there is a natural disaster that knocks out the ability to pay for goods and services with debit and credit cards. Think of floods, hurricanes, earthquakes, terrorist attacks, and cyber crime. Canada is not immune.
To start your emergency fund, set up an automatic transfer to a high-interest savings account. A “make-itautomatic,” “pay-yourself-first,” or similar program, whatever you want to call it, is fine: just do it. Even if your automatic savings plan is only $25 a week to start, start it. Rome wasn’t built in a day. Don’t over-think it.
What if you don’t have retirement savings and do have lots of debt? Credit card interest might cost you 28% per year, and a high-interest savings account might be earning you only 1%. Does it make sense to have $10,000 sitting in cash when you owe that much on a credit card? Of course not.
The recommended emergency fund of 3 months’ worth of expenses really only applies if you don’t have high-interest debt. But, if you do have high-interest debt, that doesn’t mean you should have absolutely no emergency fund. It just needs to be smaller. Way smaller.
If you have maxed-out credit cards, you are on a path that could lead at any moment to financial disaster. One more unexpected expense and you could find yourself missing bill payments, or even heading to a dreaded payday-loan operation that provides an advance on your paycheque at interest rates that would make a credit card blush. Eventually, this path can lead to bankruptcy.
If you feel as though you’re headed in this direction, you have to decide how much longer you want to keep going before you turn back. Sooner or later, you’re likely to find you have no more credit available, and that’s a hard place to be in. If you have reached this point already, you might have thought about what would happen if you lost your job, right at this most inopportune time. It would guarantee financial ruin in a matter of weeks.
At some point, you’ll heed the wake-up call yourself. Enough is enough. Time to set off in a new direction and start climbing your way out of debt. With planning and luck, that decision will lead eventually to the day when you find yourself running a surplus (see Chapter 2), and then using those surplus funds to aggressively pay down debt (see Chapter 3). The hard truth is that, if you are carrying credit card debt, whatever credit you have left is your emergency fund. This is not ideal, but so long as you’re paying down that debt, then you’re moving in the right direction. Don’t let up once you’ve freed up a few thousand dollars in credit—you need to get rid of it all.
People often wonder if there is a magic financial solution that will get them out of a certain predicament. In this case, there isn’t. You have to do the financial sit-ups you know you have to do, and it’s going to be painful for a while.
While 3 months’ worth of expenses as an emergency fund is not feasible for people with high-interest debt, a smaller fund is still necessary. You should aim to have a few hundred dollars in cash stored in a safe spot in the home as just mentioned. But it has to remain untouched, except for extreme emergencies.
WILLS AND POWERS OF ATTORNEY
Most people already know what a will is. When you die, a will explains how you want your estate to be taken care of and distributed. If you have young children, you can use your will to assign a guardian to take care of them and ensure that there is money available to help the guardian in case you and your spouse die. (That money, incidentally, might come from a life insurance policy.)
A power of attorney (POA) is a document that gives someone else the ability to act on your behalf in case you become incapacitated and unable to make decisions for yourself. If, for some reason, you ended up in a coma, for example, a power of attorney would come into force. There are two main types of powers of attorney: power of attorney for finances (or property) and power of attorney for health care.
Power of Attorney for Finances (or Property)
If you get sick or have an accident and become incapacitated, you still have bills to pay. If you want to make sure your finances are being attended to, you need someone to act on your behalf—an “attorney.” Note that in this context, an attorney is not a lawyer. It’s just another person.
This attorney would be responsible for making financial decisions while you are unable to make them yourself. For example, if your mortgage comes up for renewal, it might just roll over at the offered rate for a new 5-year term, whereas you might have wanted to shop around for a new mortgage provider and a better rate (or other features). Perhaps you receive a tax refund from the Canada Revenue Agency: instead of just sitting in cash, your attorney could use the funds to help your child pay for school.
Power of Attorney for Health Care
A power of attorney for health care is similar in nature, except the decisions made by the attorney reflect your medical treatment in case you can’t make those decisions on your own due to incapacitation.
A “living will” is a document that may eliminate the need for an attorney to act on your behalf. It’s a document that outlines the kind of medical treatment you wish to receive in dire circumstances. For example, you might indicate that you have no desire to remain on life support if it’s essentially all that is keeping you alive. This directive can also be included in the power of attorney for health care as a guide for the attorney.
These documents may have slightly different names and nuances in different provinces. For example, some provinces use the term “advance directive,” others use “health care directive,” and so on. These differences underscore the need for a lawyer to provide professional advice. The cost of having them drawn up differs a lot between law firms, for a variety of reasons. A simple will and set of powers of attorney can be about $400 on the low end. Documents that deal with more complex situations can run a few thousand dollars. I’m sure everyone has seen the do-it-yourself will kits advertised on TV or on the internet. For a sum as little as $30 you can create your own will. First of all, you need to know that some kits are better than others. Second, if you have anything that isn’t plain vanilla with respect to your living situation or estate, you might not create a will that either does what you intended or holds up in court if someone contests it.
If you die without a will, the courts will appoint someone to administer your estate. This may or may not be done according to what you would have preferred. But if you’re single, with no dependants, and have a simple estate, it’s probably not the end of the world. But once you have a major life event, such as getting married, getting a will drafted and signed moves up the list of your priorities really fast.
And if you have kids, run, don’t walk, to get it set up. I have met countless couples in the last few years who have told me how they waited years after the birth of their first child to get their wills set up. I don’t need to finger-wag here. If you’re in that situation, you already know what you have to do.
Powers of attorney and/or your living will are a different story. If you become incapacitated and don’t have a spouse or children, you still need to have your finances managed in case your incapacitation is prolonged. You may still have healthcare directives you want followed. Getting your powers of attorney set up can cost just over $100 if you get them done on their own.
These documents don’t do you any good if no one knows about them. It’s important to let your loved ones know where you keep them. When you get everything set up, call your parents, siblings, guardians for your children, whomever, and let them know where to find these documents. They should ideally be kept with all your important financial and medical papers. Note: think twice about using a safety deposit box for some important documents. A bank will be very reluctant to release the contents of these boxes to anyone other than the owner. That’s a hassle you can avoid by using an alternate, safe storage location.
A PAUSE FOR THOUGHT
Let’s take a moment before continuing. We’ve just gone over Rule 1. Along the way, I’ve given you some not-sosubtle hints to get the ball rolling on how to disaster-proof your life. Did you call an insurance agent? What about a lawyer? If you haven’t, remember that you have no control over what life throws at you or when it gets thrown. Don’t make the mistake of thinking that bad things can’t happen to you. And don’t delay.
Perhaps you are waiting to finish reading the book before you start putting any plans into action. And maybe that’s because you worry that you don’t have the money to pay for a will, powers of attorney, insurance policies, and an emergency fund. Booking a meeting with a lawyer or an insurance agent doesn’t mean you have to fork over money today. It might be a month or longer between now and when you have to shoulder that cost. You just need to meet with someone and get the process started. You should be able to finish this book before you have to make any commitments or sign any documents. If you are serious about your money, that’s enough time to figure out how to pay for these costs.
There are only five rules. You have to follow them all if you want that easy A.
Still not convinced? Contact me on Twitter (@preetbanerjee) and let me know what’s got you stuck.