If you are a Sole Proprietor…
When you own and run your own business, you’re responsible for all aspects of the business. What would happen if you became seriously ill or died? Your business would lose its key person and your income source may disappear. There may not be enough income to manage all the business liabilities if you died. Creditors would press for immediate payment, and accounts receivable might become uncollectible.
If you die or become ill, your family would face three alternatives:
- They could continue the business, requiring family members to have the ability and experience to run your business, sufficient cash after debts are paid and the ability to retain your customers.
- They could liquidate the business. A forced sale attracts bargain-hunters and with “goodwill” gone, the value of the business may be drastically reduced – by as much as 40 to 90 per cent.
- They could sell as a going concern. However, finding a qualified buyer may be difficult; the cash for purchase may not be readily available and the agreement on a fair price may be difficult to reach.
Alternatively, you could protect your business and family if you chose business life, disability and critical illness insurance. These products could help you and your family carry out your plans for the business if you were to become critically ill or die – for example, life insurance can provide funds to buy the business under a purchase agreement, and disability insurance can provide income if you become disabled. Critical illness insurance can help you pay off debts, stabilize your credit position, offer cash values or loan options or establish a fund for personal income at retirement, independent of the business.
Registered Education Savings Plan
Simply put, the owner (usually the parent) makes regular RESP contributions. The organization providing the plan agrees to make payments to the beneficiary (your child) when he or she has enrolled in an approved post-secondary education program.
The RESP contract is registered with the government and contributions grow tax-free until the beneficiary receives payment. While there is no tax deduction, growth on the investment is tax deferred until money is withdrawn. Money paid to the beneficiary becomes taxable for the beneficiary, but as a student he or she will likely have a low income.
Other RESP facts
- You can contribute up to a lifetime maximum of $50,000 per beneficiary.
- Contributions cannot be made after the 21st year of the plan, or the 21st birthday of the beneficiary – whichever comes first.
- The RESP owner must close the account at the end of its 25th year.
Canadian Education Savings Grants (CESG) – an added benefit
Through the CESG program, the federal government will contribute 20 per cent on the first $2,500 of annual RESP contributions, to a maximum of $500 per year for each beneficiary. These grants continue to the end of the calendar year in which the beneficiary turns 17, to a lifetime grant limit of $7,200 per beneficiary.
If all contributions made on behalf of the beneficiary do not qualify for the full grant of $500, the unused grant portion can be carried forward for use in another year.
Keep in mind, however, if the beneficiary does not attend a qualified post-secondary educational program, the plan owner must return the grant money to the government.
RRSP Contributions all year long
Making regular contributions to your RRSP throughout the year alleviates much of the pressure of making last-minute decisions during the hectic frenzy of RRSP season. You can make monthly contributions easily and conveniently with pre-authorized deductions from your bank account. These contributions can be set up for as little as $50 a month.
Spreading your contributions throughout the year gives you the benefit of time, allowing more time for your money to grow. The earlier you begin to save during the year, the longer your money is working for you.
Dollar cost averaging
Investing a set amount of money in market-based funds regularly – whether it’s weekly, bi-weekly or monthly, allows you to take advantage of dollar cost averaging. Because the purchases are made automatically and for a set dollar amount, you will be purchasing more units of a fund when prices are low and fewer units when prices rise. Dollar cost averaging takes the guesswork out of predicting the “best” time to buy.
Asset allocation
Taking the time to develop an investment strategy now will give you more time to make investment decisions that are right for you. Investigate all your options. Think about the questions you want to ask. Find out how much you need to save now to reach your retirement goals.
Do you know which investments are best suited to your goals for retirement? Do you know which funds to choose when the markets can fluctuate dramatically?
Successful investors know an investment’s performance is unpredictable, and the best plans involve a long-term strategy. Asset allocation first identifies your tolerance for market volatility, and then selects an appropriate mix of funds and interest accounts from among the three basic asset classes (cash, fixed income and equities) to help minimize risk and maximize potential return. Asset allocation should be a part of an overall investment plan customized to reflect your personal investment style and goals.
Financial Planning Guidelines
The following are some general money management concepts. By understanding these, and putting a plan into action, you can better secure your financial future.
Start now
This sounds easy, but most people put it off. Successful people start today to build their financial future. You can do this too. Start with a plan that includes your personal goals.
Get control of the uncontrollable
Uncontrollable events in your life could include dying prematurely, becoming disabled, or having an extraordinary one-time expense. But you can be prepared. There is no substitute for a properly designed will and power of attorney. Having a will and power of attorney can avoid excessive cost, delay and hardship. Proper insurance coverage for life and disability can help cover your financial liabilities and obligations. Lastly, be prepared for unexpected major expenses. Always have an emergency fund equal to three to six months living expenses available. This doesn’t necessarily have to be in cash, just have the funds available!
Pay yourself first
It’s critical to put yourself at the head of the cash flow line. Investing monthly in yourself and your future allows you to increase your net worth annually. Savings plans based on automatic deduction can help make this process easy and ensure that you stay on track with your savings goals.
Debt elimination
Always eliminate debt that is not income tax deductible. Try to pay off your credit cards in full each month, as carrying debts on them can be extremely expensive. As a general rule, pay cash for personal needs and borrow (if necessary) to invest. Many people do exactly the opposite!
The power of compound interest
Money left to accumulate annually can grow exponentially towards retirement if the interest portion is re-invested annually. Time is a critical element – the earlier the contribution the better. Funds put into an RRSP account have the added advantage of accumulating tax deferred, growing more rapidly than non-tax sheltered funds. And don’t forget to utilize a TFSA!
Rule of 72
The rule of 72 is a general guideline of how long it takes to double your money. Take today’s interest rate, and divide it into 72. For example, a guaranteed investment paying six percent would double in value every 12 years.
Market Volatility and Risk
You may have heard the terms “bull market” and “bear market” batted around. What do these terms really mean, and do they affect your investments?
A bull market is a period of time when stock prices are on the rise. These are the times when the markets give a 20 per cent return for a number of years in a row. A bear market is when stock prices fall for a sustained period of time. The fear and uncertainty of a bear market is what makes most people nervous about investing in market-based products. Bear and bull markets, along with in-between periods of less dramatic ups and downs, are a normal part of investing.
The markets have seen some pretty dramatic fluctuations over the past few decades. Market volatility is not an unusual experience. In fact, severe short-term volatility happens regularly – about every two years or so.
While there is no way to completely protect your money from this volatility, you can put a plan in place to moderate the impact. Think back to when you put your savings plan into place. The goal is not simply to get a return or potential return, it is to get the most return for a given level of risk. If risk was not part of the equation, you simply would bring your money to the casino as the potential return is very high… along with the risk!
Here is a short list of things that you must look at when you are trying to measure the risk on an investment:
- Investment Risk
- Market Risk
- Liquidity Risk
- Inflation risk
- Systematic Risk
- Opportunity Cost
I don’t want to invest because…
I came across an old file from CI Investments. These guys do a wonderful job of simply showing excuses for not investing:
Linear thinking and financial planning
Linear thinking is what is holding you back. Linear thinking is what prevents you from really accelerating your wealth, your retirement, your freedom, and basically life.
What is linear thinking?
Linear thinking is that thought process that requires you to sequence a series of events one after another. Under this, no event can start until the previous event ends.
Event A starts. Event A ends. Event B starts. Event B ends….
In terms of financial planning, this is characterized by: “I will start saving after ___________”
This type of thinking is like cancer when it comes to financial planning. I will save for school. I finish school. I pay off debt. I buy a house. I pay off the house. I save for retirement. I retire.
Why can’t you do these things at the same time? In my experience, the biggest thing limiting people in their ability to do this is themselves. They do not make the decisions easy. They do not make them automatic. They fail to understand that everything works together in a system, and the system as a whole is greater than the sum of its parts.
Try to avoid linear thinking like the plague. Start saving early, and make it automatic. If you don’t want to put the time in to understand your finances, work with someone who does. Pay off debt automatically. Keep emotion out of it and do what is best for your finances. I know that new vehicle looks amazing… for $700/month it better be…. and you do need a new vehicle…. but if you can’t even save up $700/month for a few month before hand, how do you expect to afford it over the next 60 months?
What is Passive Income
I am a big fan of passive income. I am also a big fan of rental properties. What a lot of people don’t understand is that a rental property isn’t necessarily passive in nature.
Whys a rental property is not “passive”:
- You need to find tenants.
- You need to be available as a landlord
- You may need to make repairs
- You need to monitor your investment (market value, payments, insurance)
- blah, blah, blah
Bottom line, rentals are not completely passive in the sense that you purchase and forget.
This leads me to what the true definition of “passive” is. I would define passive income as any stream of income that you do not have to trade time or effort to create. If time or effort is required, it must be minimal to the outcome.
Example
You make an hourly wage of $20/hr. This is not passive as it requires you to work for one hour to get $20.
You blog for 1 hour a day and it generates you $1000/week. This is a passive income.
You invest in a dividend producing portfolio, you collect dividends every month.
So what is the point of all of this rambling? There are only so many hours in a day. If we simply rely on income and wealth to be created by trading time for money, there will be an eventual plateau of income that you can generate.
Lump Sum or Monthly Investing
The power of compounding is staggering!
I also believe that a good saver beats a good investor most of the time as well haha
If you invested $10,000 today, what would that be worth in 10 years?
What if you put the same $10,000 in over the ten years @ $83.33/month?
As you can see, there is quite a change in the potential final dollar figure.
The problem with lump sum investing is market timing. If you put all of your dollars into the market at once, you get your dollars working for you ASAP but you may miss out on future opportunities and better investing conditions.
A big advantage for the monthly contributions is Dollar Cost Averaging.
This is simply a method of investing that has you put a fixed dollar amount into an investment at specific intervals (monthly for example) allowing you average your unit cost in a volatile market.
So what do you do?
The answer is BOTH 
Make things automatic by setting up a monthly or weekly investments. When you get a chance, put away lump sums. This could be when you see opportunity in the market or when you have an extra couple of bucks.
Last Minute RRSP Contributions
The deadline for a contribution is today, Feb 29 2012.
Sooooo….. did you make a contribution???
What is an RRSP? Well, straight off of investopedia haha:
“A legal trust registered with the Canada Revenue Agency and used to save for retirement. RRSP contributions are tax-deductible and taxes are deferred until the money is withdrawn. An RRSP can contain stocks, bonds, mutual funds, GICs, contracts and even mortgage-backed equity.”
The best way I like to think of it is as a cup. You can put whatever you want in the cup (stocks, bonds, mutual funds, GICs, etc). The immediate advantage to an RRSP is the potential tax refund that you will receive when you invest in one. I say potential as you might owe money, or the RRSP may be been deducted at your source of income making a refund irrelevant as you never paid tax in the first place.
So does an RRSP advantage the most?
If you are in a higher income bracket, the refund would be larger than if you were in the lower brackets. If your total income is going to be lower when you take out money out of your RRSP relative to when you put it in. Finally, an RRSP acts as a tax shelter allowing your investments to grow tax-free.