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Savings – Pay Yourself First!: Budgeting 101

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You have all heard or read it before: the best way to build wealth is to pay yourself first! Made popular back in the 1920’s it really didn’t take off until the 1990’s with David Chiltons book The Wealthy Barber . With advancements in technology and  payroll systems, the ability to automate this process has helped to make it a very simple and successful way to reach your goals. You can easily set up to have 10% of your earnings go towards your goals. Retirement saving, buy a house, new car fund, children’s education etc are all good examples.

The reason why these automated programs are successful is that once it is running you learn to live without that money and it starts to really add up!

For example if you make $55,000 a year and you put 5% towards retirement every year (ignore raises and inflation): in 35 years at 6% return you will have saved $326,500! @ 8% = $525,680!!!!  Would you really miss 5% of pre-tax income!

TIP: If you are going through a period of financial difficulty (laid off, medical leave, etc) you may want to stop any and all savings programs until your income comes back. I would rather you avoid accumulating debt at 7,10,12,18,26% while saving and earning 2,4,5,8%. The math will never make sense.

TIP: If you currently have a fair bit of debt and little savings you need to get aggressive and get rid of the debt! Once you have paid it down then get started on your savings. Read this article on how to effectively pay down debt.

Watch for my book “One Day A Month To Financial Success” due out October 2011!

How To Effectively Pay Down Debt!

If you have debt and are currently reading this you have already accomplished step 1.

Step 1 – Make the decision to tackle your debt once and for all!

This is a critical step to getting your debt under control. In our consumer based, got to have the latest STUFF, no matter what the costs, society it is no wonder many are living beyond their means and racking up the debt. So if you are ready to truly deal with your debt and give yourself a better quality of life repeat after me: I have more than enough stuff! I want rid of my debt, high interest charges, stress, and frustration! I AM READY FOR A BETTER QUALITY OF LIFE!

Now repeat it again!

Step 2 – Make a list of ALL your debt!

Gather up all your bank statements, credit card statements, store credit, car loans, personal loans, lines of credit, mortgage, etc. Now on one piece of paper (if it is a long list use legal length paper) or in a spreadsheet list each creditor, the amount outstanding, the minimum payment, outstanding available credit, and the rate of interest. If you don;t know or can’t figure out how much interest you are paying – then pick up the phone call them and ask them to tell you! If you have a “DO NOT PAY FOR 18 MONTHS” kind of loan then learn how much the interest is and be sure to pay it all off before it comes due.

EXTRA: If at this point you have debt payments that total more than 40% of your gross income, you should contact Credit Canada at 1-800-267-2272 or visit their website at www.creditcanada.com . They can help educate and organize you to pay off your debt. They will show you how to communicate with your creditors to stop interest charges and reduce your payments. They can also help you to protect your credit rating and prepare to the future.

Step 3 – Organize the debt from highest interest to lowest interest

Rewrite or sort the spreadsheet from highest interest to lowest interest. Example:

Creditor Amount Outstanding Minimum Payment Available Credit Interest
Department Store Card $      2,200.00 $     66.00 $ 300.00 28.0%
MBNA Card $      4,850.00 $   145.50 $ 250.00 24.5%
Master Card $      3,300.00 $     99.00 $ 700.00 19.9%
Visa $      5,275.00 $   158.25 $ 725.00 19.5%
Personal Loan $     11,000.00 $   220.00 $     – 12.5%
Line of Credit $       8,850.00 $   265.50 $ 1,150.00 9.5%
Car Loan $     14,825.00 $   450.00 $      – 6.5%
Mortgage $   248,000.00 $1,250.00 $  12,000.00 4.8%

Step 4 – Pay out highest interest debt first!

Be sure to make the minimum payment on all debt first. This will help to protect your credit rating. Then any money you have left over take and put it all against the highest interest debt to pay it down as quickly as possible. Now look at the bottom of your spreadsheet where you have listed the debt with the lowest interest rate. Do you have any available credit at these lower interest rates? If so I want you to max out these accounts to pay off the higher interest debt as soon as possible.

Step 5 – Close your credit!

For many once you have paid off the debt it is far too easy to rack it back up! Once you have paid off the debt (highest to lowest interest) close the credit. This will help you in the future to qualify for other credit, improve your credit score and make it easier for you to stay on track for debt elimination.

Be aware that for many it may take four or five years to payout debt. The secret is that once you do start and you see those balances going down rather than up it will make you feel better and help motivate you to stick with it. By using the services of a credit counselor you may be able to save thousands of dollars in interest and having someone to talk to and work with you to accomplish this goal can make all the difference. Call or go to Credit Canada’s website www.creditcanada.com to learn more. Be sure to check out a number of great tools they have on their site that can help you to pay off your debt faster and save you more money http://creditcanada.com/financialtools.asp

Watch for my book “One Day A Month To Financial Success” due out October 2011!

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Identifying Income: Budgeting 101

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There are two sides to a budget – Income and Expenses.

Many when they build a budget will take their most recent pay and use it to determine how much  income they have coming in every month. This will start their budget off by several hundred dollars!

First many get paid on a bi-weekly (every two weeks) basis. So simply multiplying by two will have you underestimating your income by 8.3%! This could represent your retirement savings!

Second Some of the deductions on your pay are considered expenses and should be put in the expense column. So you may end up double counting these expenses. Most common is retirement or pension contributions that come right off your pay cheque. Other items might be life or health insurance premiums, union dues, gym memberships, etc. These automatic deductions can skew your actual income.

Third – Depending on your income and the time of year that you run your budget you may have CPP and EI deduction being taken off or you may not. If you earn $44,000 or more you will max out your contributions to CPP and EI. Once you have reached this amount of income you will no longer have those deductions.

TIP:  If you make more than $44,000 the easiest way to deal with those deductions is to take the max CPP and EI amounts for the year and divide them by 12 and subtract that amount off your income. (2010 MAX CPP premium $2163.15 /12 = $180.26, MAX EI Premium $747.36 /12 = $62.28 )

If you are self employed, commission income, or variable income; take the income from last year and give serious thought as to whether this years income will be more or less and try your best to estimate what you think you may earn. Speak with your bosses about what they think is realistic and then once you have determined a number take off 20% to be conservative on your budget. Any extra that you do earn can to a seperate fund to pay for your “Nice To Have” goals!

If you have two or more incomes contributing to the expenses you need to do this for each one and add them all together.

To help you identify other income sources such as dividend and investment income, rental income, alimony/child support, etc; it is easiest to take last years tax returns and go through the 100’s and 200’s section of the T1 General. This is where you list all income.

Watch for my book “One Day A Month To Financial Success” due out October 2011!

The 4 Most Common Budget Mistakes!: Budgeting 101

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When building a budget many people get to the end of the process and are surprised by the amount of money they spend, and or are surprised by how much money they should have left over every month! This is primarily due to the fact they are not calculating their budget properly.

Mistake #1 – Not everything is paid or charged on a monthly basis!

This is the biggest error. If you get paid $2000 bi-weekly you don’t make $4000 a month! You actually make $4333.33 a month! Your hydro bill comes every two months so if you didn’t account for it in your monthly budget you will be short $200 in your budget to pay for it. If you did account for it but included the entire amount in that month, your budget will show you spending more than you really are!

Solution: Identify how often something is paid – to you or by you!

Once you have identified this apply the following formulas to determine the monthly budget amount:

Weekly = $amount  X  52  /12

Bi-weekly = $amount  X 26  /12

Monthly = you don’t need to do anything here just plug it into your spreadsheet

Semi-monthly = $amount  X  6  /12

Quarterly = $amount  X  4  /12

Semi-Annually = $amount  X  2 /12

Annually = $amount /12

Mistake #2 – Not all pay cheques are equal

Many people who have salaried positions will have an easier time with this. Although there are still mistakes made. The most common is that your deduction for Employment Insurance and Canada Pension Plan max out at a certain point (depending on your income). So if you used pay cheques from the first part of the year to calculate your income, you may have underestimated the amount of income you have coming in. Bonuses, commission income and irregular hourly work can also throw a wrench into the numbers.

Solution: Use last years tax return to identify exactly what income you had.

This won’t work for everyone as variable income is hard to predict but try to identify how much you expect to make in a year and divide it by 12.

Mistake #3 – Double counting.

This is typical when people have money taken off their pay cheque for pension or RRSP or other savings. They will tend to list it again when they fill out their budget as it is top of mind! Other examples are when you include eating out or ordering in under entertainment, but also under “food” (i.e. groceries).

Solution: Be sure to start by categorizing each expense only once as you go through your credit card statements and bank statements. Do not start filling in the budget spread sheet until this is completed. If there isn’t a categorie that it will fit into than create a categorie for it. Even more so – be patient and dilligent in preparing this important document.

Mistake #4 – Not including everything!

Without going through a full years worth of statements, it is very easy to miss or forget about some items. Especially those that you only pay once a year! Maybe it is an annual dividend that is paid, or association membership, professional dues, or annual insurance premiums. What ever they are they can really throw a budget out of whack.

Solution: Build an annual payment section to your budget!

This may include memberships, dues, insurance premiums, magazine, newspaper, and website subscritptions, car registration, kids school fee’s, etc.  Once you have grouped them all together take the total and divid it by 12 to add to your monthly budget.

Watch for my book “One Day A Month To Financial Success” due out October 2011!

4 Ways To Save Up To 40% Off Your Grocery Bill!: Budgeting 101

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1) Make a Grocery List and Save 10% – Like this one: groceries list

By going into a grocery store and just walking around randomly picking out items that look good will end up costing you a lot of money. By making a grocery list that is derived from a meal plan will not only save you at least 10% at the register but likely even more as you will throw away less food. You can probably save yourself 20 – 30 minutes as well.

2) Make a Meal Plan Based On What Is On Sale That Week! Save At Least 10%

When you are sitting down to make your grocery list, take the weekly flyer’s or go to websites such as www.flyerland.ca to see what is on sale. From that make a meal plan based on the sale items.

3) Avoid The Fancy Grocery Stores. Save 10%

By shopping at places like No Frills and Food Basics and avoiding the Longos, Sobeys, and big Loblaws; you can cut the cost of groceries by at least 10%. The cost making the store fancy and nice has to be recovered through the price of the groceries.

4) Shop At Your Local Fruit and Vegetable Stand. Save 10%

You will typically find that the produce at these small local venders is fresher as this is all they sell and they have huge inventory turnover. They usually have specials where if you buy multiples of something it is cheaper. There prices on most things are at least 10% cheaper and the money you spend stays within your community, not big corporate shareholders!

Bonus: Do You Ever Have Pizza Night?

Typically when you order in pizza for a family of four it will cost $30 or more! Check out your flyers for the frozen pizza’s! These have come a long way and many of them are very good. They always go on sale and you should be able to feed a family of four for $10 or less!

Extra Bonus: Starting eating up what you have in the house!

If you are like many, you have a pantry full of food. I would think a conservative estimate would be between $200 and $300 worth of groceries! So for the next 10 to 15 weeks eat around your pantry and save yourself an addditional $15 per week in groceries!

Have you come up with some great ideas to save you money on your groceries? Please let me know! Thanks

Watch for my book “One Day A Month To Financial Success” due out October 2011!

What Is A Budget and How To Get Started?: Budgeting 101

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The dreaded ‘B’ word! There is absolutly no reason to fear preparing a budget. I think the reason why many people do is that they feel it is a lot of work, they don’t really know how to do it, and those that have tried have never been able to keep it (likely because it was done wrong).

Yes! It does require some work. The good thing is that with today’s technology it is getting less and less.

So what is a budget?

Simply: a budget is a record or projection of all the money coming into the house and all the money going out of the house. Another name for it is a cash flow statement. This makes it easier to visualise. Money flows in and money flows out, and flows out, and flows out…

Why is a budget important?

A budget is paramount to financial success! You need to know how much you have and what it is being spent on to be able to prioritise spending and allocate funds towards different goals. Whether it is retirement, traveling, buying a new car/house/boat, the kids education, pay off credit card debt, or maybe a wedding – you need to understand where you will be able to get the money to pay for these things.

How do you get started?

First – prepare yourself that in order to prepare a good (i.e. accurate) budget you (and your partner) need to set aside 4-5 hours of time to complete it.

Secound – Gather up at least the last three months bank statements and credit card statements! ALL THE CREDIT CARD STATEMENTS! Not just the ones you tell your spouse about 🙂 .

Third – Use this Budget Worksheet as a guide to identify the various categories to seperate out your spending. It is important to understand how much you spend on various items so you can identify where you may be overspending and can cut back.

Forth – Start going through all your statements line by line noting the category that each one belongs.

Fifth – Start fillling in the spreadsheet to determine how much you earn and spend every month!

Sixth – Once you have tallied up the income and subtracted off the expenses ask yourself this: I SPEND HOW MUCH?!?!

Be sure to read The Most Common Budgeting Mistakes!

Watch for my book “One Day A Month To Financial Success” due out October 2011!

Study Shows: Wellness programs deliver savings!

July 12, 2010  

Canadian employers are implementing wellness programs and drug cost-containment strategies in an effort to battle rising health care plan costs. And according to a new International Foundation of Employee Benefit Plans (IFEBP) survey, they’re making headway.

The 2010 Group Health Care Cost Control in Canada, a poll of 665 Canadians from the employee benefits industry, finds that the proportion of employers offering wellness initiatives rose nearly 20% to 78% in 2010 of employers, from 61% in 2009. Further, nearly one in five organizations currently not offering wellness initiatives anticipates doing so in the future.

http://www.benefitscanada.com/benefit/health_wellness/article.jsp?content=20100712_163057_6684

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What is the process of a comprehensive financial plan?

A proper comprehensive financial plan takes on average 20+ hours to prepare and depending on the complexity could take many, many more. If the following steps aren’t taken then you have to wonder how comprehensive the plan really is!

Initial Interview (1-2 hours)

The process begins with a 1-2 hour interview where many questions are asked to get a big picture of your situation and you are encourage to think about areas you may not have considered. It concludes with the signing of an engagement agreement outlining both parties roles and responsibilities.

Data Gathering

You are asked to fill out a comprehensive questionnaire and supply copies of investment documents, insurance policies, mortgage documents, Wills, Powers of Attorney, Trust indentures, incorporation documents, tax returns, and any other pertinent information.

Data Analysis (5-6 hours)

All the data is taken in conjuction with the information from the initial interview and an initial draft of the plan is drawn up with some solutions and recommendation.

Draft Plan Review Interview (2-3 hours)

A draft plan is reviewed and open discussion about your likes and dislikes about it and you are encourage to offer up additional suggestions as to how you would like see the plan. This typically takes about 2-3 hours depending on the complexity. 

Preparing the Plan (3-5 hours)

Following the review, the plan is refined incorporating the ideas and solutions identified and suggested. Then the final plan is put together.

Plan Review (2-3 hours)

The plan is reviewed thoroughly to ensure you completely understand and agree with all aspects of it. The plan is continuly adjusted until you are 100% satisfied with it.

Plan Implementation (2-3 hours)

The solution needed to implement your plan are sourced and presented to you. All aspects of those solution clearly explain to ensure you are 100% comfortable and begin the implementation process.

Regular Follow Up

This is especially crucial in the first three months following the implementation of the plan to ensure that all questions and concerns are addressed and the implementation has been a success.

Following the completion of a plan we offer to answer any questions or concerns you have at anytime. As a trusted resource for unbiased financial information we are here to guide and advise you. We will work with you at no cost to update and change your financial plan through every significant life change and or every 18 months. It is important to know that your plan is on track and have the confidence to go out and live your life!

To start your financial plan or to learn how I may be able to help you please contact us.

The Value of Financial Planning

Individuals with Financial Plans Feel Better Prepared to Deal with Difficult Economic Times; Feel More Apt to Achieve Life Goals

FPSC Releases Highlights from Value of Financial Planning Study

Toronto, June 16, 2010 — Canadians who have engaged in comprehensive, integrated financial planning are significantly more optimistic about their personal wellbeing as compared with those who have not. Individuals with comprehensive, integrated plans feel better prepared to deal with financial emergencies and manage through difficult economic times, and are more confident about reaching a wide spectrum of life goals. Furthermore, there is measureable
proof that those who have engaged advisors for only piece-meal, “as needed” financial advice are being left behind by Canadians engaged in comprehensive, integrated planning. 

These are just some of the findings of the Value of Financial Planning study,
which was conducted by The Strategic Counsel and commissioned by Financial Planning Standards Council (FPSC). The first phase of this five year study was conducted during one of the most difficult economic periods in Canada’s recent history (between August 7, 2009 and January 21, 2010). 

The study defined ‘comprehensive, integrated financial planning’ as that in which one’s main financial advisor has provided financial planning for major life goals and events, or at least three of the following planning components: household budgeting, tax, retirement, estate planning, investing, debt or risk management. ‘Limited financial advice’ was defined as engaging in just one or two of the aforementioned components. 

“Never before has there been such concrete, empirical evidence confirming the
value proposition of comprehensive, integrated financial planning, and its impact on people’s confidence in achieving life goals and managing through difficult times,” says Cary List, President & CEO of FPSC.

“These results further underscore how comprehensive, integrated financial planning is salient for one’s financial and emotional wellbeing — not just in the good times, but particularly through the tougher times, “says List. 

“Financial planning is about putting financial strategies in place to help you manage your finances to achieve a wide spectrum of life goals in both the near- and long-term. Undertaking ad hoc, or limited financial advice, while clearly better than nothing, just doesn’t have the same impact as taking a comprehensive view of how to best manage one’s finances to meet your life goals. And those who are doing no planning at all are being left far behind,” says List. 

The research also revealed that 61 per cent of individuals who engaged in comprehensive, integrated financial planning felt confident that they will be satisfied with their financial situation in retirement, as compared with 27 per cent with no financial planning and 46 per cent who had engaged in only limited advice. 

“The research proves that those engaged in comprehensive, integrated planning
have a far more positive outlook regarding their financial affairs, especially with regards to their longer-term financial wellbeing, ” adds List. 

To see the full study and get more information please contact the FPSC http://www.fpsc.ca/

Copyright 2010 Financial Planning Standards Council. All rights reserved.

Reprinted with permission.

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