By Richard W.R. Yasinski, CFP
Just like our personal health, our financial health is up to us. We alone have to take the initiative to educate ourselves on the basics, consider our situation, seek out professional help where appropriate, and make the necessary changes. Here are seven questions you need to ask yourself and ensure you are completely comfortable with the answers.
Do you have an up to date valid Will and powers of attorney?
I know you’ve heard this before and I know you know the importance of having a Will and keeping it in a safe place. Having a Will is a completely selfless act, because you do this for your family. But it’s not just about having a Will, it’s about having an organized estate and a place where your trustee can get a list of all assets. It is they who must deal with the assets in your estate after you pass away and these assets can pass smoothly or with much pain and cost.
Recent changes (Jan. 1) in Ontario increase the responsibility and liability on trustees settling an estate to ensure an accurate list of all assets is included. This means having a valid Will and an organized estate plan causes less risk to your estate trustee and your beneficiaries. A power of attorney for property authorizes someone you have chosen to act on your behalf, as your legal representative, should you not be able or available. Know where this is and confirm you still want the person named to act for you.
Same goes for the power of attorney for health which happens to be a separate document. Both become invalid at your death and the Will takes over. If you have a living ex-spouse, a disabled child, a corporation or business, properties outside the country, spendthrift or beneficiaries or dependents challenged in any way, I recommend going to an estates lawyer; not any old lawyer will do.
What would happen to you or your family if you lost your source of income?
Whether it’s a job loss or disability or just a desire to go and find yourself, you need a source of funds to continue paying living expenses so you don’t look longingly at the grilling steaks from the canned bean aisle. This means having a disability policy and emergency funds in the event of income interruption which will cover expenses for up to six months.
Personal disability policies are expensive but there are ways to economize by playing the odds. Odds are, if you become disabled, you’ll recover within six months to two years so having a policy to cover this period is the most critical. Of course, a lifetime disability is still possible and you need to evaluate the risks. A good insurance agent can help you do all of this.
What would happen to your family if you died?
Do you have enough life insurance to protect your family; does the insurance policy equate to a reasonable amount should the worst happen? The amount of life insurance you need depends on the income you are protecting, the assets and liabilities, your age, and the income needs of the surviving family. If you have an older policy, it should be reviewed and new quotes obtained as life insurance premiums can be lower now, if you are in good health. A good insurance agent can help you with this too.
What is the difference between what you earn versus what you keep?
You can only spend and invest the earnings you keep and tax planning is about keeping as much of it as possible. Understanding the tax impact of RSP contributions, the deductions available, and the tax credits you qualify for to reduce your tax payable means you can make informed financial decisions about keeping more. Understanding your marginal tax rate, the tax on the last dollar you earn and when your earnings cross over that threshold will help you make good tax planning decisions. An accountant can help with this but your financial planner (should be) where you get an overview of this given your financial situation.
What short-term obligations do you have?
Education funding, a planned sabbatical, change of career, or a new car; these are all things that may need short-term funding and planning. Have you thought about how you might pay for them and the best way to save for them?
How much do you own versus what you owe and what does this mean?
Your financial net worth is what you own, including your house and investments, and net present value of your pension and business (if you have them). What you owe includes money loaned to you to purchase appreciable assets (i.e., your home and investments), and money you owe on depreciable assets (i.e., credit cards or car loans).
Good financial health means you are increasing assets and rarely carrying debt on depreciable assets. You want to know your net worth is increasing and the debt you carry will not risk this.
Will you have enough?
At some point you will stop working or you have to assume your health may force you to stop and you must begin to draw an income from the equity you have built. Do you know how much you need to provide the retirement lifestyle you desire and for how long? Do you have a way to manage your income and expenses so you will continue to have enough in a rising expense environment until the day you die? This is the question in life after possibly, “why am I here?” You may even feel more interested in first answering, “Will I have enough?” before you attempt to answer, “Why I’m here?” If this is a question you don’t feel you can comfortably answer, then meeting with a financial planner may help.
Richard W.R. Yasinski, CFP, is an independent certified financial planner who founded Financially Sound in 1996. He specializes in personal comprehensive financial planning, investments, tax, insurance, and estate matters. See www.financiallysound.ca for more information.