Practices to Ensure Your Financial Security
Thursday, April 25, 2013
Financial safety or security refers to a financial status that allows you to successfully navigate life’s more difficult or less profitable periods. These include, for example, recessions, periods of unemployment and retirement during which your income will be curtailed. It also includes unforeseen accidents, natural disasters or long illnesses that pose a huge risk to your normal income.
You can survive these periods only if you plan ahead and make provisions for them through careful budgeting, saving and investing. Here are some tips:
- Budgeting and saving are difficult, since both require sustained self-discipline. Typically people neglect budgeting and spend all they have, or they budget carefully but then spend instead of save. Try to think ahead and save!
- There are many unnecessary expenses that you can cut. For example, you can make a cup of coffee at home instead of buying one on your way to work every morning, or you can plan how many times you will eat out each month and try to stick to that.
- The best way to deal with your monthly savings is to place it far beyond your reach as quickly as possible. High-growth bank accounts or investments usually limit your access to the money. Think of opening a Tax-Free Savings Account (TFSA), which is an account on which you don’t have to pay income tax when you take your money out.
- One challenge of investment is to decide your tolerance for risk. Typically, the faster your investment grows, the higher the risk. Savings accounts, on the other hand, involve almost no risk but show limited growth.
- The one investment that most people make with little thought is their homes, which can appreciate well over time if regularly maintained and paid off promptly.
- Start saving for your retirement as early as possible. The earlier you start, the less you have to save, given the compounding interest over time.
- You can open a registered retirement savings plan (RRSP) and pay as much as possible into it. Your contributions qualify for tax rebates.
- Participate in your company’s pension plan. Typically your employer contributes the same amount as you pay in, so you’re earning money for which you don’t have to work.
- Investigate whether you qualify for federal government retirement benefits like Old Age Security (OAS), the Canada Pension Plan (CPP) and the Guaranteed Income Supplement (GIS).
- Take out health insurance to cover you against serious health problems. Some policies involve the pay-out of large lump sums when you are diagnosed with a serious illness, others cover you against long-term disability or illnesses by paying out tax-free sums. Calculate which would be best for you.
Life’s more difficult periods are often made a lot more difficult by our own inability to plan for them ahead of time. Financial security is something that we should prioritize.