Are you confident that you and your family are ready to face anything financially? Do you worry about what could happen to your finances if the unexpected comes your way?
Download today’s tools:
- Financial Security Checklist
- 5 Steps to the Right Life Insurance
- Replace your Mortgage / Credit Life Insurance
You CAN be confident and secure with your money. Today’s episode shows you the essential steps you need to take be confident about your financial security.
You can’t know what will happen, but you CAN be prepared.
My name is Brad MacBeth. I am an FPU coordinator. If you don’t know what that is, it’s Financial Peace University. That’s Dave Ramsey’s flagship program and I’ve actually taken a bunch of people through Financial Peace University over a whole bunch of sessions, and I am an independent licensed financial adviser. I’ve been in this business helping people with their finances for about 16 years. On top of that, I am an educator for the last 25 years; adult education, teaching in all sorts of different contexts and venues and I have walked through this journey, this big transformation journey financially. I’ve had to do it twice in big ways.
And what I mean by that is my wife and I did it for ourselves. That was one time and that’s where we put all these principles we’re talking about tonight into action and transformed our lives with it. But then working as an independent adviser, I had to figure out what this meant for what I did working with clients because all this stuff we’re talking about tonight, this is not what the financial services industry teaches or wants their people that are doing financial planning or sales. They don’t want them doing this stuff because that’s not what makes them a boatload of money.
So, I then had to go and figure out how to become an advisor who taught people how to do these things and live life quite differently and it’s been a great transformation. And now, it used to take a lot of time to get a bunch of people into a room and connect with a bunch of people. Now with what we’re doing here tonight, this kind of presentation, we’re able to easily find the people out there who want to transform their lives and so, I’m just very thankful for all of that now and it is so transformational, it brings such peace into your life. Congratulations to all of you for being on this journey here tonight.
[00:43:05] So, I want to talk about financial security. Planning for financial security is like the anti-lock brakes and airbags for our finances. If you’re old enough like me to remember a time when there were no anti-lock brakes or airbags or even seatbelts for that matter a long time ago, you’ll know what I’m talking about. And the thing about anti-lock brakes and airbags, they’re there to 1) prevent accidents and 2) reduce the damage that’s caused by accidents, and we’re gonna take a little bit of a look at that. And we can’t know what will happen but we can be prepared for what happened. Stuff happens in life. There is just no way for us to anticipate everything that’s going to come our way but we can make preparations in our finances to be able to deal with whatever is going to come our way and so, financial security is what that’s all about. So, let’s have a look at kind of a little bit of a state of the nation here.
50% of Canadians, there is some massive surveys done just last year. This is really great information. 50% of Canadians are living paycheck to paycheck. 50% would have to borrow money from family, friends or use credit cards to deal with even just $1,000 emergency. They’re $200 away from not being able to pay all their bills, and they have no financial plan of any kind. And so, that’s not a way to live and so, we want to look at three principles here on building our financial security.
[00:44:56] The first is to protect your cash. So, Mike taught us about putting your cash flow plan together and getting out of debt permanently and setting some goals. Well, all that stuff is vulnerable to the things that kind of go bump in life financially and so, the first step is to protect your cash and the way we do that is with an emergency fund. This is the anti-lock brakes of your financial plan. If you’re driving along and someone cuts you off in traffic or changes lanes in front of you in a way that they shouldn’t, you can stomp on those brakes and jam them down to the floor and you’re gonna be okay and there’s no damage done to your car. Your emergency fund is like that. It’s there to prevent you from having those minor accidents that can upset your finances. It’s a hard stop and when you use your emergency fund, you’ve got to go back and replenish it but it doesn’t have any kind of a long-term impact on your plan.
And so, what should an emergency fund look like? And bearing in mind that 50% of Canadians really don’t have anything. Your emergency fund should be about three to six months of expense money. And so, how do you determine whether it should be three or six or five or what-have-you? That’s fairly situational. It’s depends on your circumstances. For example, if you’re a double income household and both people have solid employment types of jobs, well you know, you can probably go more with the three or four months. But if you’re self-employed and you have a single income household, you’ve got a little more risk there financially, so you’re probably gonna want to tend more to the five or six months.
But bear in mind what we’re talking about here is expense money. It’s not three to six months of your income, it’s three to six months of your expenses. And what are your expenses? Well, if you have a financial emergency going on like any emergency, you’re gonna just focus on the essentials. So, if you’ve got some kind of financial upset going on you’re not going to go out and buy clothes this month or you’re not going to go out for dinner or go out to some entertainment thing or things like that. You’re going to batten down the hatches and you’re just gonna focus on what’s most key. And so that’s what we mean by expense money. It’s the essentials, it’s the bills that have to be paid. Obviously, we’re gonna eat so we’ve gotta have some food money in there, but maybe we cut back. We don’t have to eat as extravagantly, those kinds of things. So, we want to figure out what our three to six months or what a month’s expense money looks like and then, we want to have three to six months of that on hand. That is step one.
[00:47:56] Now, bigger things happen in life and we have to work to protect our lifestyle which put plans in place, set those goals like Mike was talking about and protect our lifestyle. We all have a way of life that we’re carrying on. It’s a standard of living, it’s just the kind of ebb and flow of how life is going and an equilibrium that we’ve arrived at. But big and bad things can happen.
I had a sad example last year. A dear friend of mine found out he had cancer and he was gone five months later and that, he was 52 years old. It was shocking and for families that experienced that kind of a situation, unless you’re already independently wealthy, that is going to really upset your finances. It’s going to cause a potentially permanent change to your family’s finances. So just as they’re having to deal with this some kind of devastating event in their life, their finances are falling apart as well. So, we protect our lifestyle with life insurance. Life insurance is there to ensure that our family’s way of life continues even under the most catastrophic circumstances. It’s not there to– is some kind of a lottery win or anything like that. It is there to make sure that if something happens to me, my family can carry on in the lifestyle that they’ve had without having that severe impact on their life.
And so, the third principle we want to follow here is we want to protect our income. Now for most of us, our biggest asset is not what we think it is. Most people tend to think that the big asset in their life is their house if they own a home, maybe it’s cars or maybe it’s jewelry or some other types of possessions. But for almost everybody, our biggest asset especially when we’re pre-retirement. Our biggest asset in life it’s not our house it is our ability to earn an income.
For example, if you’re 35 years old and you’re making 50,000, 60,000 dollars a year, you are still going to have ahead of you several million dollars in income that’s going to come your way before you reach age 65. So that’s what you’re ensuring when I say protect your income. And the way that we protect our income is with something called disability insurance. These three things: your emergency fund, your lifestyle protection through life insurance, and your income; protecting your income through disability insurance are the three key principle pillars to protecting your family’s lifestyle.
[00:51:05] One of the questions we get a lot is what kind of insurance should I have. People hear about all sorts of different types of insurance products and they’re uncertain what to do. This is an area where we give a very simple answer, and that is term. You want term life insurance. The other types of life insurance are generally called cash value types of life insurance. They have names such as whole life insurance or universal life insurance. But those are insurances that carry with them some kind of an investment or financial growth component. And insurance is an expensive and a low return place to invest and grow money. It’s not a great place to accumulate money. If you want to grow money, you want to do that in a separate kind of investing and saving category, not inside your life insurance.
It’s much better to invest elsewhere. You’ll get better returns and you’ll have lower fees on that. What I’m essentially saying is you want to avoid gimmicks, bells and whistles; all that kind of stuff. Simple protection is all you need. Universal life and whole life. I’m not saying nobody ever anywhere should ever have those products but they have some very specific and narrow uses for tax planning, for business owners or for the wealthy. They can have some nice features, but for the vast majority of Canadians they are not good tools for providing for your family’s financial protection, for putting that financial security in place.
They are expensive and they will gobble up a lot of your money keeping them in place. Just as an example typically, a family with young children, they might be spending between 50 and 100 maybe a little over dollars a month on all their insurance whereas families in that same category that have whole life insurance, they’re often spending three and four and $500 a month, and so that’s not a great use of your money. That money should be divided so that you’re getting the basic insurance and that bigger sum is going to you’re investing for the future, and earning a better rate of return and costing you less to do.
Now, there’s some really nasty insurance out there that you really want to avoid and that’s mortgage insurance and creditor insurance. They are uncertain, they’re expensive and they protect the lender. They don’t protect you so they are not great products at all. You may not even be aware that you’ve got these products. Often, people aren’t aware that they’ve got this on their credit card. For example, they don’t look closely at their credit card statements, they don’t realize that they’re paying an amount every month often based on the balance that they’re carrying on their credit card, and it’s a very high amount for the amount of life insurance coverage they get there or disability coverage.
[00:54:16] The uncertainty that comes from these products is that when you buy standard term life insurance, you go through a bit of a process, you submit an application, the insurance company looks closely at your application and then it issues your policy. Once they’ve issued that policy, you’re golden. You have that contract and if something happens to you, it’s gonna pay out. With mortgage or credit insurance, that’s not at all what happens. If you’ve purchased or obtained these products before, you’ve maybe had that experience here at the mortgage broker, you’re excited because you’re about to get your new home and they ask you is there filling stuff, oh do you want life insurance on this, well that sounds like a good idea. So you say, “Well sure. What does it take?” And they go, “Oh, it’s just simple.” They check the check box, you initial that and they ask you five or eight or ten questions maybe and you go away from there A) now with a significant monthly payment for that insurance, but B) you think that you’re protected.
But what happens from there is that the life insurance company doesn’t actually go and investigate these questions until or unless you make a claim. And so fast forward and maybe it’s ten years later and something catastrophic happened, spouse has passed away and you’re like well thank goodness the house will be paid off anyway. You go to make a claim on this life insurance and you find out that so there’s a question about how the spouse answered the question 10 years ago. Well first off, you can’t recall what went on 10 years ago and secondly, the spouse is not there to actually address the question. And so, this leads to an unfortunate number of people being declined the payout when they make claims on this type of insurance.
For example, in Australia, they did a survey and they found that 75% of those policies did pay but 25% of those policies when there was a claim made against them, did not pay out. So one in four who submitted a claim were not paid the benefit that they felt that they believed that they had in place. With conventional life insurance, it’s less than 1% that don’t get paid out and those are always because of fraud. So, it’s the mortgage and creditor insurance is not a good product and it really needs to be avoided.
[00:57:00] So, here’s your action plan. We can’t know what will happen but we can be prepared, so be sure to prepare. Your action plan is to review your current insurance policies. Now, let me add a caveat there. Don’t cancel anything. Go and have a look at what you’ve got and if you need to make some changes, then go about doing that. But don’t cancel any insurance coverage that you currently have until you put new insurance coverage in place. But you need to go have a good close look at what you’re paying, have a close look if you’ve got mortgage insurance that should be included on your mortgage statement you can see how much you’re paying there and have a close look at your credit card statements. Any kind of credit you’ve got, look on there and make sure that there’s not some kind of a line item in there for insurance coverage. And if there is, go and look at getting the right type of insurance coverage in place and once you’ve got that, make sure you cancel those because those are not going to serve you well.