Debt Is a Four-Letter Word

Debt today is so common, you might say it can’t be avoided. Most people are not in a position to purchase a house or car for cash, while those who can buy such things outright may prefer to finance and keep control of their capital.

The truth is, while most of us see debt as a bad thing, any money borrowed to generate income or increase net worth can be considered “good debt.”

If the amount borrowed is invested for an overall gain, the debt is a tool. Borrowing to further your education, for example, is good debt since an education generally increases the likelihood you will earn more in the future. Most often, too, the interest paid on this type of debt is tax deductible.

Examples of Good Debt:

  • Education. Student loans for university, college or trade school education can be good debt. As mentioned, interest rates are usually quite low, and repayment is commonly deferred until after graduation. In general, educated workers earn considerably more than uneducated ones, making the cost of borrowing easier to repay. A student loan is the first experience many Canadians have in borrowing and in managing (i.e., paying back) a large fiscal obligation.

  • Business ownership. Many entrepreneurs start their businesses with borrowed funds. For a person with a strong business plan, good entrepreneurial instincts and a desire to succeed, assuming such a loan can be the best investment an individual can make.

  • Real estate. Whether a primary residence or revenue property, real estate has proven to be a prudent long-term investment.

  • Investing. Borrowing to invest allows you to put more money into your investment in an effort to earn extra returns.

This is not to say good debt is without risk. If you take out a leverage loan and your investment fails, you will find yourself owing the borrowed amount plus interest, regardless. Real estate markets can fall, businesses often fail, and there are no guarantees that an education will result in higher income or stable employment.

With that in mind, it is important to think about insuring your loans to protect your family and estate from unwanted liabilities if you die, become critically ill, or disabled.

Bad Debt

Unlike good debt – borrowing to acquire assets that are likely to increase in value – bad debt is incurred when we purchase assets that will decrease in value. Some examples:

  • Automobiles. As soon as you drive that shiny new car off the lot, it loses value and continues to do so for as long as you own it. Unless you use your vehicle for business purposes, paying interest on a car loan makes little sense.

  • Credit cards. If you use credit cards to buy clothing, consumables and other goods or services, you are building a balance of bad debt. Credit card interest rates are extremely high, and rewards cards often charge additional annual fees, making any balance you carry a prohibitively expensive liability.

  • Vacations. Travel now and pay later is simply a bad idea. Once the joy of the vacation wears off, the borrower is left with a high-cost travel loan.

In between good debt and bad debt lies the consolidation loan. Although it is used to merge all “bad” debts, it makes the burden easier to bear by lowering interest costs and monthly payments.

Get Rid of Debt!

Two plans often recommended for getting out of bad and consolidated debt are the debt snowball method and the debt stacking method.

Debt Snowball Method

  1. List all of your debts in ascending order from the smallest (by amount owed) to the largest.

  2. Pay the minimum payment on every debt every month.

  3. Determine how much extra you can pay each month; begin paying off your smallest debt with this amount plus your minimum payment.

  4. Continue to pay this amount until your smallest debt is repaid.

  5. Once the smallest debt is paid, add your minimum payment from debt #1 (now retired) plus the extra you were paying on it to the minimum payment due on debt #2, your second smallest amount owing. Each time one debt is paid off, your payment amount “snowballs,” grows larger, as it is added to the next.

  6. Continue doing this until each debt is retired.

Debt Stacking Method

  1. List all of your debts according to their interest rates.

  2. Continue to make all minimum payments on each balance.

  3. Work out how much additional money, over the minimum payment, you can afford to pay each month, and add this to your minimum payment being made on the loan with the highest interest costs.

  4. Once the highest-interest balance is repaid, start paying the debt with the next highest interest rate.

  5. Continue until all bad debt is retired.

Whichever strategy you use, make sure non-deductible-interest debt is paid off before you tackle the “good” debt.

Anyone concerned about debt load is well advised to seek the advice of a qualified financial planner who will help develop an action plan and recommend risk-management steps. As a qualified planner, I would be most happy to assist you in your debt-management efforts. Please feel free to call me at any time.

Shielding Your Family From Your Creditors With Life Insurance

Naming a beneficiary of a life insurance policy provides a significant benefit in planning and protecting one’s estate.  With a named beneficiary, the death benefit is paid directly to the beneficiary and is received tax-free. It bypasses the policyowner’s estate and is not subject to probate or any other administrative fees.  

Creditor Protection at Time of Death

Under provincial life insurance legislation* when a beneficiary is named, creditor proof status is conferred upon the insurance proceeds protecting them from the claims of the policyowner’s creditors.  This won’t apply, however, if the owner of the insurance policy is a corporation.

It should be noted that it is the owner of the policy, not the beneficiary who receives the creditor protection. Once a beneficiary receives the insurance proceeds, those funds are not protected by claims from the beneficiary’s creditors.  

If the beneficiary designation is done before the owner of the policy becomes insolvent or the creditors commence action the policy is protected. The creditors of the policyowner cannot make a claim against the policy proceeds.

One exception to this could be an action brought by a dependent for whom adequate provisions were not made.

Creditor Protection While the Insured is Living

Many life insurance policies have an accumulating cash value or investment account attached to them.   These could include annuities and segregated funds which are primarily investment vehicles.  

So how does creditor protection during the insured’s or owner’s lifetime work?  

Creditor proofing will exist if the type of beneficiary named in the policy is one of the following:

  1. An Irrevocable Beneficiary – while the beneficiary is alive, the owner of the policy cannot change beneficiary or make any material changes to the policy without the Irrevocable Beneficiary’s consent.

  2. A beneficiary named from the preferred class – when a beneficiary is a spouse, child, grandchild or parent, the life insurance contract (including segregated funds) is “exempt from execution or seizure”.

When does a policy not have creditor protection?

There is no creditor protection if the owner is the beneficiary of a policy. For example, if a husband owns a policy on his wife of which he is beneficiary, the cash value of that policy may not be protected from creditors.

If creditor proofing of the cash value of a policy is important, it is best not to have the owner also be the beneficiary.

Contingent Beneficiaries

When naming a beneficiary, it is recommended that a contingent beneficiary or beneficiaries be named.  This will avoid having any future proceeds payable to the estate and exposed to creditor claims should the current beneficiary die.

Cautions and Concerns

Generally, if a life insurance policy was purchased for specific needs, and not in an attempt to avoid creditors, the creditor proof nature of life insurance is strongly protected by law.

However, several recent court cases and legal actions appear to have eroded some of the protection previously afforded in this area.  These actions include;

  • claims of dependents

  • collection efforts of the Canada Revenue Agency

  • property claims resulting from marriage breakdown  

The good news is, for the most part, creditor proofing still works the way it was intended.  With proper planning and advice, life insurance and segregated fund contracts can provide a shield from creditors and potential litigants, giving peace of mind and financial protection to you and your family.

Stop Living Paycheque to Paycheque and Start Living

We are now living in a gig economy as a result of wage stagnation and increased globalization. While previous generations have usually worked one full-time job, often with a pension plan, today more and more Canadians are working for several different companies as independent contractors.

While this type of work does offer much-needed flexibility for some, it also creates financial instability for millions of Canadians. A recent survey of all working Canadians by the Canadian Payroll Association suggests that 43 percent of workers were living paycheque to paycheque prior to COVID-19. That statistic does not take into account COVID-19’s impact on the workforce.

Regardless of how we got here, the fact is that income volatility is a huge problem for almost half the country. Not knowing when or where your next paycheque is coming from can create a multitude of issues that can have lasting effects on both your health and your finances.

The Effects of Income Volatility?

A survey conducted by the Canadian Payroll Association in 2019 found that 40 percent of the Canadian population are so stressed about finances that it affects their performance at work.

The survey also found that 40 percent of Canadians said they were overwhelmed by the amount of debt they owe. And a whopping 75 percent of Canadians are saving less than 25 percent of their retirement goals.

Knowing that the problem exists is one thing, but if we want to understand the gravity of the situation, we need to know the implications of living paycheque to paycheque. Below are a few of the most substantial effects.

Financial Stress Can lead to Poor Health Outcomes

Living paycheque to paycheque increases financial instability and exacerbates stress, which can impact the cardiovascular system, degrade your mental health and other bodily functions. Worse, it can become a vicious cycle: You become stressed, so your health deteriorates, which causes you more stress, etc.

Conditions like depression and anxiety can go into overdrive when you experience financial instability, meaning that you have to work harder just to make it through each day.

How to Avoid Financial Stress in the Gig Economy

Make a Plan – This plan can be for six months, one year, or 10 years – whatever you want. The plan should include budgets, saving potential and job improvement. If you’re making incremental steps forward, that should help you relieve some anxiety about the future.

Save Anything – Whether it is $5 or $500, every dollar counts. You may not think it’s much, but it will add up overtime.

Avoid Accruing More Debt – Although this plan is easier said than done, it is sometimes better to pay less on your debt and save more money so that you don’t borrow more when something unexpected happens.

Invest in your Future – Start investing. Nowadays, there are many different options to consider when you think about investing your money. Whether you are a new or a seasoned investor, it is a good idea to make your money work for you.

As always, please feel free to share this article with anyone you think may find it of interest.

Copyright © 2021 FSB Content Marketing – All Rights Reserved

5 Top Financial Planning Strategies For Small Business Owners

Creating a financial plan for your business is critical not only for your business’ survival but also for its growth. However, many small business owners struggle to create a comprehensive financial plan that considers all of the financial needs of the business – which should include long term growth goals and contingency plans for any unexpected circumstances. Below, we have compiled a list of the strategies business owners should start with when considering a comprehensive financial plan.

Access To Capital And Debt Management

Talk to a professional when your business needs access to capital – especially if you have just opened your doors. Many new companies do not qualify for traditional, low-interest loans, and some new business owners mistakenly turn to loans with high-interest rates. This can turn out to be a problem for the business in the long-run. If sales are slow at the beginning, then the company could struggle with repaying its debt. It is a good idea to explore all loan options with a professional when you are considering options to raise capital to expand your business. Any financial plan should include ways of accessing capital that won’t cripple your business in the long run.

Favourable Tax Strategies For Your Business

We get it. Business owners are often too busy to research the most favourable tax strategies available to them. However, paying more in taxes can be avoided. Examining different tax strategies with a professional could free up cash and allow the business to achieve its maximum growth potential.

Prepare For The Unexpected

As 2020 has taught us, anything can happen. Regardless of the external or internal circumstances, your business should be prepared. It is a solid financial strategy to develop a contingency plan that will allow your business to adapt to new circumstances.

Do you have a key employee or employees that you rely on to run the business? What would happen if they became ill? What if something happened to you? Would your family still receive an income? Luckily, there are insurance policies designed to protect your business and family in the event that any of these possibilities become an unexpected reality.

Prepare For The Expected, Too

Most of us will want to retire at some point. But how do you plan on transitioning out of the business and into retirement? Many successful business owners understand the importance of having a retirement plan for themselves and their spouse independent from the business. Take a moment and jot down some retirement goals to get a general idea of what your retirement will look like for you. Do you plan on passing the business down to your children? At what age would you like to retire? A good financial plan will help you to retire when you want and how you want.

Protect Your Assets From A Lawsuit

Let’s face it. These days lawsuits happen more frequently than business owners like to admit, so it is a good idea to be prepared. When designing a financial plan, investigate what type of liability insurance would be best to protect your small business. Would general liability insurance suit your needs? Or would you be better suited for a professional liability insurance plan?

This is certainly not a complete list of all the main strategies that a financial plan should include, but it is a starting point to work from. Please don’t hesitate to reach out if you think we can help develop a financial plan for you and your business.

As usual, please feel free to share this article with anyone you think might find it of interest.

CEBA extended to October 31st. Expanded to include more businesses.

On August 31st, Deputy Prime Minister and Minister of Finance Chrystia Freeland announced the extension of the Canada Emergency Business Account (CEBA) to October 31st, 2020. This will give small businesses 2 additional months to apply for the $40,000 loan.

In addition, the Federal Government said it was working with financial institutions to make the CEBA program available to those with qualifying payroll or non-deferrable expenses that have so far been unable to apply due to not operating from a business banking account.

Apply online at the financial institution your business banks with: