Article – Page 5 – Adviceon Library

Invest by paying yourself first

Some people never pay themselves first.

After most people have paid for their necessities, there seems to be little left over for investing.

Determine your perspective on investing. Always spending and never investing is a serious dilemma often based on a certain mindset that can easily change for the better. Do you view yourself as a consumer or an investor?

If you see yourself as a “consumer”, you may experience that there is never enough paycheck left at the end of the month for investing. However, is this caused by a lack of income or your own spending patterns? The first barrier to investing is a “perceived lack” of investment capital, often not reflecting reality. Unfortunately, what we think often becomes our reality.

Investors have personal discipline Conversely, “Investors” take an honest mathematical look at their expenses, separating discretionary income from what one needs to live on, knowing that impulsive buying decisions, even to purchase many small things on sale can add up.

This disciplined viewpoint allows them to have money to invest. Once paid, the first “consumption” decision can be to purchase an investment suitable to their goals and objectives. The rest of their paycheck is then spent with no worries on required consumption for the rest of the month.

Investors get good advice, and then act. Many people are impatient or confused when it comes to the science of investing. True “Investors” all have a key characteristic that makes for success — taking the right action with professional advisory assistance. They also understand that without experience and knowledge, investments decisions can be made in haste, and potentially destroy an otherwise good investment plan.

The importance of a Status Certificate when buying a condo

Condominium living has become an option for homeowners who want to reduce the many responsibilities of a single-family residence. Most condominium corporations assume these tasks and are a popular choice for young and middle-aged purchasers who are too busy or prefer to limit their day-to-day home duties such as garbage and snow removal, home maintenance and repairs. Condominiums are also attractive to retirees who want to own without any strenuous activities that consume time or who want freedom and security to travel without worrying about pre-retirement duties.

A purchaser needs to obtain an up-to-date status certificate for the unit and have it reviewed by a real estate lawyer. Real estate agents generally make a condo purchase and sale agreement conditional upon a satisfactory review of the Status Certificate. Under the Condominium Act, a condominium corporation has ten days within which to produce a status certificate for anyone who requests one (upon payment of the prescribed fee, which is currently $100). The Act also establishes what information a status certificate must contain.

What is a status certificate?
A status certificate provides a snapshot of everything that may concern prospective purchasers, including its overall financial situation and budget relative to the amount of money in its reserve fund (a savings account maintained for significant repairs and replacements of the common elements such as a new elevator or chiller); the rules by which unit owners are expected to abide; and whether the condominium corporation knows any circumstances that may increase to the standard monthly expenses.

It is important to determine if a condominium corporation is involved or expected to be involved in litigation, and an up-to-date status certificate may reveal that the unit is subject to a “special assessment,” which is a sum of money the condominium corporation believes must be collected from the unit owners to cover an unforeseen expense. This knowledge of a special assessment may affect what a purchaser is willing to pay for a unit.

Your mortgage provider may also want to let you know that your lawyer has reviewed the status certificate as a requirement of the sale.

What are the 5 Laws of Wealth Creation?

Here are five wealth creation principles that will remain true forever.

1. You must get time on your side by investing early in your lifetime. Time adds value to money. Delayed investing shortens your time, which increasingly requires the compensation of higher and higher returns to meet your retirement goals. Examine the following graph to see how time affects your investment growth.

Source: Financium

2. Your investment growth must exceed inflation. If you earn 8% on a $10,000 investment per year, over 20 years with inflation at an average 4% your actual investment will grow to $457,620, but your actual buying power in the future will only be $208,852 (while your money is growing, inflation is increasing the cost of goods). The graph below indicates how inflation might affect your investment’s future buying power.

3. Algebraic factors apply to investing. You can indicate your multiple on capital invested by applying mathematical rules, factoring in both time and rate of return.

· Double Your Money: Rule of 72. To find out how many years it will take to double your money, divide 72 by your average annual rate of return.

· Triple Your Money: Rule of 113. Divide 113 by your average annual rate of return to see how many years it will take to triple your invested money.

4. Taxation can reduce your investment returns.

Every dollar of tax retained through tax-planning is a dollar earned.

· Deduct what you can against your income. Business owners have the advantage of deducting many operating expenses from their revenues.

· Contribute to registered investments. For both business owners and employees, registered investments may allow deductions against earned income and may offer tax-deferral.

· Defer as much taxation as possible. The beauty of registered investments is that they allow some tax planning benefits depending on your income, and capital available to invest.

5. Become an active investor. It is important to begin investing early in life when you get your first job or begin your career. By beginning early, you can have the above stated mathematical laws of doubling and tripling your money working for you. Many wait far too long before investing and lose the value that time can add to a good investment portfolio by increasing the future accumulation of investment money.

The following table will let you know just how much you will need to invest to accumulate one million dollars.

Source: Financium

What is a Power of Attorney (POA)?

If you were to have a stroke, heart attack, or severe operation—a disability to which you could not take care of your affairs, who would take over? What if this was the last day you could make a mindful decision on your behalf?

You transfer directorial powers over your affairs to a Power of Attorney

In such a situation, a Power of Attorney (POA) allows people you trust to manage the prescribed affairs of your life.

Without a POA, your family though ready to pay your bills, and help manage your bank account and your investments, for example, may need special court approval to act for you. They could face a bureaucratic nightmare to acquire authority to pay your bills (from your provincial public trustee).

• Clarity can be defined. A POA leaves no room for misunderstanding the range of authority over your assets. You may need to set restrictive clauses in a POA that addresses your unique concerns.

• You will give up the powers of your signature The POA relinquishes the control of your signature and all the authority associated with it. Unless it states otherwise, the attorney may use a POA immediately upon signing.

• It must be witnessed. Improper witnessing annuls legal completion and sets the POA up for contention. Thus make sure the document is witnessed correctly.

• Be careful of restrictions you may not want to be included. Some broad-form POAs include optional clauses often left included, whereas they may not be applicable. These may have regulations on the attorney you may not want to impose.

• You may want to restrict beneficiary changes. If you want the attorney to have power over changes of beneficiaries to life insurance or investment assets, make that clear. If not, clearly restrict the right to change beneficiaries.

A warning which may or may not apply to you

Unfortunately, once authorised with your directive powers, an attorney could feel it is their privilege to become an “empowered benefactor” of your (you, the donor’s) estate once they lose capacity. So, having a lawyer articulate your specific wishes in your Power of Attorney documentation is a good idea.

To empower and entrust another with your authority, may be the last time you can make a responsible decision on your behalf, so make it carefully.

Where significant wealth is involved, consider a POA explicitly designed to give powers to assist in governing your financial affairs.

Estate planning with the right insurance protection

A proper estate plan will include an updated Will and a plan to avoid paying too much tax on investment assets such as stocks, bonds, mutual funds, and other properties that may have accrued capital gains. It will seek to minimise probate, pay off debts and prepare to meet specific family income needs. Estate planning often includes detailed life insurance planning designed to pay out a benefit upon the death of one whose estate is about to wind down.

When transferring your assets, including mutual funds, using a Will (also referred to as a Testamentary Trust), the key is to position as much of your wealth as possible to pass to your heirs. If you hold equity mutual funds that buy and hold stocks, they may have accrued capital gains. There will be a deemed disposition of all your property at fair market value at your death. For some, this could mean that there may be an existing capital gains tax liability. There are a few things to assess as you begin an estate plan.

Assess your tax liability. List each separate asset you own, the purchase price and date, and its current value. Include your non-registered investments in stocks, bonds, and mutual funds. Have your accountant assess what the tax liability will be.

Assess how you and your spouse can defer taxes Property willed to your spouse can be rolled over tax-free on your death. Your spouse will inherit the assets at the property’s entire adjusted cost base (cost amount). The taxation of the investment will then occur when your spouse disposes of the property or at the spouse’s death. This tax deferral is beneficial, especially if you have significant holdings in equity mutual funds invested for value as in large-cap or blue-chip stocks. Alternatively, you can choose to transfer any asset to your spouse at fair market value on death and recognise the accrued gain or loss.

Assess RRSPs if you have dependent children RRSPs can be transferred tax-deferred to your dependent children or grandchildren, even if a spouse survives you.

Assess income splitting using a testamentary trust By establishing a testamentary trust in your will, you will be able to maintain control during your lifetime over the use of your assets such as a mutual fund investment portfolio. The trust can provide guidelines for the treatment of these assets after your death. The trust document can specify the split of income among heirs. Carefully planned income splitting may allow for significant tax savings.

Assess insurance solutions There are estate planning solutions that only insurance can offer, providing both personal and business solutions to ensure you have financial security. First, assess your tax liabilities with an estate lawyer and/or accountant and make estate plans to determine how to pay them. Consider the following various insurance plans, such as life insurance where the capital gains tax liabilities are substantial.

Personal insurance solutions to protect you and your family include:

• Life Insurance
• Critical Illness Insurance (CI)
• Long Term Care Insurance (LTC)
• Estate Preservation
• Individual Health and Dental plans

If you own a business, insurance solutions include:

• Partnership Insurance
• Buy/Sell Agreements
• Key Person Insurance
• Business Disability Insurance
• Business Office Overhead
• Collateral Loan Insurance
• Group Health Benefits

Why do segregated funds have higher management expenses?

What the higher expense pays for

The insurer holds a reserve in relation to the several guarantees provided in the policy contract. Due to market fluctuations, it is especially important that actuaries calculate and hold reserves needed to pay any future liability due to a capital loss.

Guaranteed Capital Protection Because of the need to assess and insure the portion of capital guaranteed, insurers must be involved. A slightly higher management expense ratio (MER) pays for these capital-conserving features.

Retirement planning advantage Some segregated fund policies allow for additional insured security, promising that a pre-established monthly payment of segregated fund premiums (i.e., investments) will continue on your behalf in the event of a disability. Consider how valuable this pledge would be to your retirement if you could no longer work.

Business plans must include retirement planning

Many business owners focus on their business and must remember to invest seriously for retirement.

The Retirement myth of the Entrepreneur: Most business owners believe their company will provide investment capital when sold, or if passed on to the next generation, a salary or dividend payments. For some, their financial stability rides on the company’s future success.

Make hay while the sun shines. Don’t be overly optimistic that your company will succeed and create good revenue forever. Planning becomes necessary when a business represents an estate’s significant value. You may make hay while the sun shines, but be sure to stack a lot of it away for future use.

Many are not convinced that they need to plan their estate or the succession of their business. Despite the economic importance of their business, most business owners are still determining the tax liability if both spouses were to die. An estate plan can ensure that these taxes will be paid from one or a combination of the following sources:

Life insurance
The business, from cash flow or liquid assets
RRSPSs/RRIFs (taxed when both spouses die)
TFSAs
Sale of real estate or a significant asset.
Non-registered investments

We are all ageing despite our business successes. Please take the time to do some essential estate planning to figure out who will take over the company and where your retirement income will come from. Review your personal and corporate-owned life insurance, disability coverage, and key-person insurance. Revise or complete both your will and power of attorney.

In some cases, paying relatively small life insurance premiums can entirely solve the estate’s future capital gains tax problems or generate capital to replace the tax that may be payable in your estate. It is essential to purchase insurance currently versus when older or health declines. If your health is a concern, ask your life insurance specialist if he can search the market for you.

Life insurance can eliminate company debt and help a succeeding son or daughter with new business capital. Finally, it can equalise the division of your estate among all of your heirs.

Note: Life and disability insurance taxation vary in accord with the strategies used by the life insurance specialist, changing legislation, and hiring an accountant to guide effective business strategies relative to succession or an estate.

Financial strategies affect your net worth

To know the state of your fiscal health, you must have a personal financial health check up. Your financial advisor will help put perspective on your diagnosis and how in shape you are for retirement.

Strategies can be designed to form a comprehensive plan to enhance your net worth as you move towards financial independence, secure in the knowledge that a retirement can become a reality secure with sufficient income.

Your annual net worth statement is the benchmark measure of your ability to become financially independent. Net worth means the same as net assets – the assets you have left after you subtract your debts.

Why do this annually? Time waits for no one. Retirement approaches faster than most people admit. Consider how quickly the last five years has passed. Double this time back ten years to the 2008 financial crisis which woke the whole world to the need for financial guidance.

How can I know my net worth? Simply add up your liabilities compared to your assets. Subtract your total liabilities from your total assets to give you your net worth.

You gain awareness of your debts. Debt totals warn against spending beyond our means. Compound interest on a growing credit card debt at 18 to 28% can strain your cash flow. Always set goals to reduce debt.

Investment planning results become evident. Your net worth statement reveals all of your accumulated assets, including your RRSP, TFSA, and non-registered investments, putting them all into perspective. You may find that you need to rebalance your investments. You will also see which are performing well, suited to portfolio growth. While employed, this gives you a retirement metric concerning your future income goals to help you see how close you are getting each year.

It reveals opportunities for further financial solutions. Picture each financial need in contrast to your net worth snapshot. What have you saved for each future goal? Where has your income been going? Do you have home equity built up or do you still have a large mortgage? Is a Home Equity Line of Credit (HELOC) eating away at your assets? It can reveal the importance of keeping your credit cards paid monthly.

Estate & Tax Planning can affect your final net worth. To draft a will, you need to know your ultimate potential net worth inclusive of business assets. Identify capital gains tax liabilities or tax on a vacation property. Your registered monies (RRSP/RRIF) will be fully taxed after the death of the second spouse (in most cases). Assess the final estate tax liabilities on your assets now. Consider that life insurance offers the easiest solution for projected estate related tax debts.

Business planning can be enhanced. Succession planning simplifies the transfer of a family’s business assets to the next generation. Often a simple life insurance planning manoeuvre can ease the effect of capital gains tax or provide for a future buy-sell agreement upon the death of the principal business owner.

Why is succession planning integral for business owners?

Getting into business is a lot easier than getting out. Many successful family businesses have accrued capital gains in the millions. The tax payable is so high that the business cannot afford the liability once the owner dies at least without liquidating.

One way to cover the tax liability is to save for it. The problem arises if the owner dies too soon, or the money gets used for an emergency or a new opportunity, or if the savings goal is impossible for the company to achieve.

A business owner’s retirement may depend on an estate plan.

Many business owners base their personal financial stability on the future success of the company. When a business represents the major value of an estate, planning becomes necessary. Yet, many are not convinced that they need to plan their estate or the succession of their business.

Find out what your tax liability will be. Despite the financial importance of their business, most owners do not know what the tax liability would be if both spouses were to die. An estate plan can ensure that these taxes will be paid from one or a combination of the following sources:

· Life insurance.
· The business, from cash flow or liquid assets.
· RRSPs (also taxed when both spouses die).
· Non-registered investments.

Frequently review your capital gains tax liability. In some cases, the payment of relatively small life insurance premiums can entirely solve the estate’s future capital gains tax problems, and/or generate capital to replace the tax that will be payable on your RRSPs when both spouses die.

When you buy life insurance it immediately covers the entire estimated liability risk, which is due. The benefit is paid upon the owner’s death (or the death of a surviving spouse).

Put succession planning on your agenda. Consider taking the time to do some succession training when you are active in the business, passing on what you know, while unifying current action with your estate plan. Sometimes successful business owners, while waiting for the perfect person to take over, run out of time.

Determine who will take over the company. If you are a family member, an employee, or a competitor, you will need to begin negotiating with your successor(s). Income from a good succession plan may nicely increase your retirement income. Therefore, it is good to know where it will come from.

Keep your legal documents current. Revise or complete both your will and power of attorney. Review your personal and/or corporate-owned life insurance, and disability coverage.

Establish or update your buy-sell agreement. Make sure your buy-sell and key-person agreements and applicable life insurance, is current and sufficient to cover your succession plans.

Other uses of new business capital offered by life insurance. A sole owner may buy enough life insurance to add capital to offer additional financial stability where a wife, son, or daughter goes through the transition to actually run the business. Insurance can also eliminate company debt to give a succeeding son or daughter a fresh start. Finally, it can fairly equalize the division of your estate among all of your heirs.

Can life insurance offer my heirs capital security?

Life insurance has provided families with basic financial security for well over 100 years. For example, a healthy, non-smoking 40-year-old male can purchase up to $500,000 worth of insurance for approximately $50 per month. That life insurance policy would pay out a death benefit, the equivalent of up to 10,000 times the amount of one monthly premium payment.

In this case, the $500,000 could provide necessities such as groceries, shelter, home repairs, means of transportation, and education for dependents. In this sense, the value of life insurance is tangible. Contrasted against the assets and services such a large death benefit can purchase, we realize how small the premium cost really is.

When does life insurance begin covering my family’s financial risk?

Even if death occurs one day after the initial premium payment, the full benefit is payable tax-free, thus instantly creating new capital, sometimes far exceeding the insured individual’s net worth. Most accountants and financial advisors agree that life insurance is foundational for families with dependents to build financial security.

An immediate foundation of financial security. In addition to savings, life insurance is designed to immediately provide the capital necessary to create ongoing investment income for dependents after income taxes and other liabilities are paid.

When you are not financially independent Life insurance can make up the shortfall when investments assets have not yet grown to the extent that your net worth enables you or your heirs to live in total financial independence.

When your health is not the best Many people who are not in perfect health are surprised to find that they can also purchase life insurance to ensure their financial security.

Note: Life insurance premiums vary according to the policy type. In some cases, paying a little more premium offers enhanced benefits Be aware that tax-deferral strategies may change due to legislation.