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In life, anything can happen. To get through, you need resilience. That’s why planning ahead is essential – putting measures in place ensures you have access to financial and other resources to handle the unexpected.
Serious illness, major home repairs, loss of a job or a sudden need for caregiving of a loved one can impact your day-to-day life and future plans. That’s why all good financial plans include a risk component, with plans and financial products that kick in when things get complicated.
In this week’s Reimagining Wealth newsletter, we examine what you need to stay resilient, including a worksheet to determine if you are well prepared. The glamour factor may be low, but a little foresight will ensure you can weather life’s ups and downs.
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Save for a rainy day
Emergency funds are there to cover the cost of a new car when the old one gets dinged up, or to finance a leave from work while your spouse has surgery.
But even Rob Carrick, The Globe and Mail’s trusted personal finance columnist, admits there’s no fun in such a fund. “[I] know how tired you are of hearing about emergency funds,” he says. “They’re boring – money just sitting in a savings account.”
Even so, Mr. Carrick argues that having accessible money in a high-interest savings account, earning a few percentage points in interest, is better than incurring interest charges from a line of credit or credit card – the latter of which can soar to 20 per cent.
So, how much to stash away? The amount varies depending on your employment status, where you live, your lifestyle and your health, as well as the health of family members.
“It’s whatever amount [that] feels to you like a cushion,” says Shannon Lee Simmons, a financial planner and founder of The New School of Finance. “It’s the amount that when you log into your online banking and you see that money sitting there, just in case, it feels like a warm blanket of calm. And its existence reduces money stress in a way that no other account can.”
She says $5,000 is the “happy place” for emergency funds. However, anything is better than nothing, and more is ideal, especially if you have considerable assets and high potential costs if things go awry.
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When is the right time for insurance?
Life insurance protects your family members after your death. It covers some immediate costs, such as legal fees and a funeral, and helps replace your income and other contributions to the household.
You can buy life insurance at any time, but the younger you are, the cheaper your premiums will be. Even people in their 20s might buy insurance, so if they pass away, they don’t leave others saddled with student debt or a loan for a new venture. By purchasing insurance early, you’ll continue to pay favourable premiums as you age and develop health conditions. If you’re worried you don’t have enough insurance, you can check out this calculator to assess your coverage.
Older, high-net-worth people can also use insurance as a way to pass on wealth to beneficiaries without having to go through probate, saving time and money. Individuals who are incorporated – such as doctors, dentists and some entrepreneurs – can establish a life insurance policy paid for by the corporation, and heirs get that money after their death, offering a process for getting money out of the corporation quickly and incurring lower taxes.
Disability and critical illness insurance, meanwhile, can offer protection against income loss if you get sick. It might be worth looking into this kind of insurance to see if it’s a fit, especially if you’re self-employed or an unpaid caregiver for family members.
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Estate planning: Don’t leave it too late
Having a will is not enough. A fulsome estate plan organizes your assets so that fees – such as probate – and taxes after your death won’t erode your net worth. As well, an estate plan should enable faster access to resources for your family.
“People assume a will covers the entire gamut, but estate planning involves creating a plan with a financial adviser and a lawyer that sets out legal documents on how to manage transfer of assets to the next generation,” says Robyn Thompson, founder of Castlemark Wealth Management and a certified financial planner.
When you make your estate plan, start by talking to your financial advisor about your values. What is important to you when it comes to leaving funds to your family or charitable causes? Then, identify who will be designated to make decisions for you if you cannot, due to cognitive decline or other incapacity, and other roles such as trustee for the estate. A plan will also involve products such as life insurance.
Are you resilient? A short-answer test
Take this test to see if your current financial plan will make for a resilient life. There are no wrong answers!
Question 1: Do you have an emergency fund? If so, where are those funds parked? If not, when do you plan to start an emergency fund?
Question 2: What is your ideal “happy place” number for your emergency fund? Do you have that amount saved?
Question 3: After using a life insurance calculator, how much do you need in life insurance? If you have a policy already, do you need to adjust it?
Question 4: What is your plan if you or your spouse becomes ill or disabled? Do you think you have the right insurance to get through it?
Question 5: What single thing do you plan to do in the near future to improve your estate plan?
Stay tuned for next week’s newsletter: Create a legacy that reflects your values.