Financial Planning For Your Future

Strategies and Concepts for Young and Married Couples Starting out in Life.

Personal Tax

  • It is important to understand the basic income tax rates.

BRITISH COLUMBIA RATES SHOWN TO EXPLAIN CONCEPT OF PROGRESSIVE TAX RATES.

Income Ordinary Income Gross Capital Gain Cash Dividend
Up to $31,124 22.05% 11.03% 3.53%
At $31,124 25.15 12.58 7.40
At $31,677 31.15 15.57 14.90
At $62,249 33.70 16.85 18.09
At $63,354 37.70 18.85 23.09
At $71,470 39.70 19.85 25.59
At $86,785 40.70 20.35 26.84
At $103,000 43.70 21.85 30.59
Marginal Tax Rates
  • This is the rate of tax which applies to the last dollars you earn in a year.
  • It is a surprise to most people how heavily they are taxed on these dollars.
  • Income deductions, such as contributions to a Registered Retirement Savings Plan, reduce your taxes at your marginal rate of tax, your highest tax bracket.
Before Tax Dollars and After Tax Dollars
  • Paying with "before tax dollars" or with "after tax dollars", the cost difference is tremendous!
  • Suppose you pay for something which costs $1,000 and you pay with after tax dollars.
  • Your marginal tax bracket is 40%.
  • You have to earn $1,666 of your gross income.
  • This means the true cost to you is 66% greater than the price paid!
Consumer Debt
  • The greatest cause of poverty is consumer debt, mostly credit cards.
  • RETAIL credit cards charge extremely high rates of interest from the DATE OF PURCHASE.
  • If you do not pay 100% of the balance on your credit card statement, interest will be calculated on the full amount of the PURCHASE PRICE, not on the balance if you have made past payments!
  • Even worse, this interest and debt is paid with AFTER TAX DOLLARS.
  • BANK credit cards charge a lower interest rate than retail credit cards, but it is very high. Why?
  • The rates reflect the LOWEST CREDIT RATING.
  • This is why it is easy to get a credit card.
  • Most personal bankruptcies involve large credit card debt.
  • The bank has to write this credit card debt off upon a bankruptcy of the borrower.
  • The OTHER credit card holders pay for these losses in the form of high interest rates.
  • Credit cards should be used ONLY for convenience, NOT for borrowing money.
  • You MUST pay 100% of your credit card statement -- never carry a balance.
  • If you are unable to pay your credit card balance off immediately when due, arrange a personal loan from a bank based on your credit worthiness.
  • Negotiate with several banks and with this loan pay off all credit card debt, and cut up your credit cards.
  • The bank loans officer will calculate a debt reduction payment schedule.
  • This is usually a term loan with regular monthly payments.
  • Pay this loan off over the shortest possible time period.
When a retailer advertises here is no payment for 6 months, what is happening?
  • The retailer wants paid when the merchandise is sold.
  • The purchaser of the merchandise, (consumer buying furniture) signs paper; which the retailer (merchant) sells at a discount to a finance company.
  • If you do not pay off the debt on the exact date when due there will be a substantial penalty.
  • If you do not make this payment then interest will be charged at a HIGH rate.
Remember:
  • When you borrow money the debt has to be paid with AFTER TAX DOLLARS!
  • Interest charged is also paid with AFTER TAX DOLLARS!
  • Borrow money for the purchase of your home.
  • Do not borrow for consumer goods!
  • If you have to borrow money for an automobile be very careful.
  • Automobiles are one of our greatest expenses.
  • If you lease, add the down payment and every monthly payment until the end of the lease period, then add in the buy out amount which you still owe.
  • This will give you the TOTAL cost (expense).
  • Do not make your decision on the amount of monthly payment!
  • If you have Canada Savings Bonds, G.I.C's or any other non-registered savings, it is unlikely you will earn an amount "AFTER TAX" equal to or greater than the interest you will pay on consumer debt.
  • Liquidate these assets and pay off your debt or when your mortgage renews, increase the amount of your mortgage to give you the cash to pay off all non tax deductible consumer debt.
Budgeting
  • Develop a budget to keep you out of debt.
  • Your Ten Star Financial Planner has the tools to assist you in setting up your budget.
  • Determine your annual expenses.
  • This is made easier if you pay everything by cheque.
  • --Always write out the stub before you write out the cheque.
  • --Note the amount and what it was payable for.
  • Collect your bank statements, cancelled cheques or stubs, credit card statements with receipts. From these records determine your monthly expenses such as:
    • rent or mortgage payments
    • property taxes
    • food
    • vacation and travel
    • clothing
    • insurance
    • entertainment, etc.
    • Plan for seasonal expenses such as winter heating, clothing, electricity.
    • Also, unusual expenses such as furnace repairs and replacement, roof shingles which last 15 to 18 years, washing machines, clothes dryers, television set and other appliances.
    Open two bank accounts
    • One a chequing account, the other a savings account.
    • Deposit the amount of your pay in your chequing account which will cover your expenses.
    • Deposit the balance into your savings account.
    • If the balance in the chequing account grows, do not spend it.
    • This will be needed for seasonal expenses and unusual expenses.
    • A monthly withdrawal plan should be set up to transfer money from the saving s account for long term investments, such as a deposit to purchase a house, educational savings or retirement savings.
    Financial Planning
    • The first priority is to cover your Risk Exposures to protect you and your family from financial ruin. You can transfer these risks to insurance companies.
    • The next step is to provide for educational and retirement funds.
    • The last step is estate planning, or conserving your estate.
    Protect your income
    • It is very important to protect our income.
    • Your income earning ability is your MOST VALUABLE ASSET.
    • Think about it for a moment. All your personal assets, including your home, automobiles, and retirement savings are derived from YOUR INCOME.
    Your pay cheque stops if:
    • You die;
    • You become disabled;
    • You suffer a critical illness
    • You retire.
    • When you are given your gold watch at retirement it really means... NO MORE PAYCHEQUES!
    The Importance of Insuring Income
    • It is imperative that we protect our income if we die.
    • Your dependents, your spouse and children will be destitute if your income is not protected.
    • Our mortgage payment or rent is paid out of our income.
    • Our food, clothing, travelling expenses, heating, etc. is paid for out of our income.
    Determine your gross income
    • You should first determine your gross income earned by yourself and your spouse.
    Income Tax
    • Income Tax is paid on your gross income.
    • If you die, earned income will be replaced by investment income.
    • Both earned income and investment income is taxed.
    • Therefore, we will ignore tax, as your dependents will pay tax on the investment income which replaces your earned income.
    Discount for 2 Policies
    • Please note: Two individual life insurance policies on each spouse produces a discount.
    • The total premium for both policies is less expensive than a single premium for a joint first to die policy.
    • Mortgage insurance sold through banks and trust companies is joint first to die insurance.
    Beware of Mortgage Insurance (Joint first to die policies)
    • With a joint first to die policy, if a spouse dies the policy pays the death claim, but the survivor will have no insurance thereafter.
    • With 2 separate policies, the survivor will be able to continue their individual policy.
    • If both spouses die in an auto accident, the mortgage insurance (joint first to die) will pay once.
    • With 2 separate policies, if both were insured for the same amount, double the death benefit would be paid out.
    • Usually, mortgage insurance premium is included with the mortgage payment.
    • If one spouse develops cancer, and is laid off work, you may be behind in your mortgage payments.
    • If the spouse with cancer dies, when you are behind with your mortgage payment, there is NO INSURANCE.
    • The mortgage will NOT be paid off.
    • This has happened many times.
    Keep your life insurance & critical illness insurance separate from your mortgage payment
    • You have more flexibility when you shop your mortgage because you do not have to be concerned about qualifying for insurance with a new mortgage company.
    Save Money
    • Two separate individual life insurance policies with the discount for insuring both spouses is less expensive than mortgage insurance (joint first to die insurance).
    • Your Ten Star Broker will shop the market for you.

    SUMMARY: LIFE INSURING YOUR MORTGAGE

    With a Life Insurance Company With a Bank or Trust Company
    Two individual policies with a spouse discount is less expensive. A bank mortgage policy is a joint first to die policy and is more expensive.
    You can bulk up your insurance. Increased coverage will provide additional savings. The amount of coverage can only be for the amount of your mortgage.
    Individual policies may be continued as long as you wish. It is fully portable. The coverage will terminate upon mortgage repayment or assumption or sale of your house.
    You and your spouse may own an individual policy. Should you both die, the proceeds are paid on both policies. If one dies then the coverage on the survivor will continue. The group policy covering the husband and wife pays on the first death- not both. If both die in an accident half the amount will be paid compared to two individual policies. If one dies, the coverage on the survivor cannot be continued.
    If the main income earner has a prolonged illness, say from cancer for 8 months, and is laid off work, you may get behind in your mortgage payments. This has happened to numerous people. The life insurance premiums, separate from the mortgage payment, is affordable, is needed and pays off. If you are say 3 months behind in your mortgage payment at death with the mortgage life insurance as part of the payment, no death benefit will be paid.

    Cover Your Loss of Income with:
    • Life Insurance policies
    • Critical Illness policies
    • Disability Income policies
    Investment Strategy

    MORTGAGE

    • Interest paid on a residential mortgage is not tax deductible (unless the mortgage money was used to invest in a business, however, this is not usually the case as most mortgage loans are used to purchase the family home).
    • Interest paid on the mortgage, therefore, is usually paid with "After Tax Dollars".
    • One of the best investments you can make is to pay down the principal on your mortgage.
    EXAMPLE

    Assume:

    • The interest paid on your mortgage is 9%.
    • The interest portion of a monthly mortgage payment is $1,000.
    • Your marginal tax rate on your income is 40%. To pay the $1,000 of interest on your mortgage, you have to earn $1,666, pay tax at 40%, which equals $666, leaving $1,000 for the mortgage interest.
    • The interest portion, will have cost $1,666 of your "before tax income".
    • Now, if $1,000 represents 9% interest- the interest charged on your mortgage, then $1,666 represents 15%.
    • Paying down the principal of a 9% mortgage, is equal to investing money for a return of 15% and is RISK FREE!

    YOU NEED A TAX SHELTER:

    Saving in an R.R.S.P. marginal Tax Rate of 40%
    Inside an R.R.S.P. Outside an R.R.S.P.
    $3,000 available each year, as the deposit is tax deductible, and 10% interest will compound tax free for 20 years. $1,800 available each year as $1,200 is paid in tax. The interest is not sheltered, but taxed at 40%. The funds compound at 6%.
    Account value after 20 years=$171,825 taxable when withdrawn with balance on deposit sheltered from tax. Account value after 20 years=$66,215 tax free when withdrawn but balance on deposit subject to tax on interest.
    Combining an R.R.S.P. and paying down your mortgage:

    Assume:

    • A 40% marginal tax rate.
    • Mortgage interest rate of 9%.
    • $7,500 available to invest.
    • Deposit $7,500 into your R.R.S.P. and reduce your income taxes by $3,000 (40% of $7,500).
    • Use the $3,000 of tax savings to reduce the principal on your mortgage.
    Result:

    You effectively have $10,500 working for you compared to $7,500 of all of your money had been used to pay down the mortgage.

    • If you paid $3,000 off the principal and maintained the same monthly payment you would reduce your payment period by 20 months, saving $19,040.
    • If you did this each year the benefit would compound.
    STEP 1
    • Purchase Life Insurance, Critical Illness Insurance, Disability Insurance. Transfer these risks to insurance companies.
    • You are really sharing this risk with other policy holders, there is a large discount given to each policy holder as some will cancel their coverage, and the insurance company will get off the risk.
    • This means purchasing these coverages is a bargain for those who keep their policies.
    STEP 2
    • Implement a savings strategy to provide educational savings for your children and your own retirement.
    • Your Ten Star Representative can put together a custom made portfolio which meets your investment horizon and risk tolerance.
    • An automatic monthly deposit reduces volatility and gives you the benefit of a dollar cost averaging.