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What comes to mind when you think of financial wellness?
Being able to afford that post-lockdown holiday? Or owning a house, a mid-century modern gem, along with raising three children? Perhaps it’s knowing that you’ll enjoy a sweet retirement, living in the country, or owning a boat after years of hustle.
Whatever the dream, financial wellness today is all of the above – and more. In light of the global pandemic, economic fallout, and personal loss, it’s clear that financial wellness today is about preparation – primarily, preparation for the unexpected.
“Life is about change, and quite often it's about change that's unexpected and beyond our control,” says Noel D’Souza, a Toronto-based financial planner with Money Coaches Canada. “One thing that COVID has really shown us is how quickly and drastically life can change.”
In this article, we’ll explore how financial wellness today can equip us for tomorrow, and take a look at practical ways to plan for the future. How can we prepare for more than just retirement? What happens if a loved one passes unexpectedly – or if we do? How can we ready ourselves and the people we care about for life after death, at least financially?
“Financial wellness means that you're not overly stressed about your current financial situation,” says Clement Chung, a fee-only financial planner based in Burnaby, B.C. “You're in a comfortable spot, you know where it is that you're going, and what you're trying to achieve.”
Financial wellness is all about having a certain level of financial security. In an ideal world, this for a rainy day or an emergency. It means having sufficient liquidity, or access to cash when you need it. It also means having money habits that keep debt to a minimum, while allowing you to pay off anything that you borrow.
D’Souza concurs, adding that financial wellness is “knowing and feeling that you're able to achieve your goals for yourself. You're on the path to be able to do that, and you have confidence in that path.”
As the country was going into lockdown last March, a report by the Canadian Centre for Policy Alternatives (CCPA) revealed that almost half of Canadian renters will be unable to pay their bills should they lose their jobs. According to the research, of the 3.4 million households reliant on employment or self-employment income, 46 percent (1.6 million) have enough money to pay their bills for a month or less. Twenty-four percent (830,000), meanwhile, do not have enough to get through a single week without pay.
As it happened, almost two million Canadians lost their jobs at the height of the pandemic in April, forcing many into difficult financial situations.
That’s only covering job loss. In worse cases, an injury or hospitalization could mean income loss for an indefinite period of time, while death cuts that income stream completely.
“The last thing you want is to be in a position where you need to sell your home because you can't afford it,” says Chung. “You don't want to be in a position where you're trying to get rid of an asset as valuable as real estate. That drives down the value; desperation result=s in sale prices being a lot lower.”
All this illustrates the importance of getting our money matters in order while we can. “Money gives us choices,” says D’Souza. “When you plan, you have the ability to mitigate against some of those negative effects.”
Financial planning isn’t only about “building a store of wealth for the future when you’re retired,” he adds. “It’s also about building your capacity to deal with life changes and uncertainties, and giving yourself options.”
This is one huge component of financial wellness. If you have children or a partner, your lack of financial planning may eventually fall back on them. This can happen in a few ways.
The most common cost is debt. In principle, you can’t inherit the debt of a loved one – unless you co-sign or serve as a guarantor on a debt they’ve taken on. This applies to joint mortgages with parents, a spouse, or children. It’s also possible to take on credit card debt if either of you hold a supplementary credit card, and your lender’s terms specify that all cardholders are responsible for charges incurred on all cards.
Taxes on income and capital gains from the person’s last year of life also need to be paid, as well as probate fees in the execution of a will. On top of that, there are hospital bills and funeral costs.
The shock of losing a loved one is difficult enough. Thankfully, there are ways to alleviate the devastation for the people we leave behind. The sooner we act on them, the better we can be assured that our loved ones will be alright in the future – whether we’re there or not.
Here’s how we can do just that.
D’Souza says it’s important to expand our fields of view beyond financial and retirement planning. “It’s really about life planning,” he says.
Your short and medium-term goals are just as important as your long-term ones. Make sure you’re considering those, not just retirement! What are the life events you’re anticipating, and what challenges might arise along with them? Do you want to buy a home or renovate the one you own? Getting married? Own a car? How can you prepare for the costs these things are associated with?
Financial planning, says D’Souza, “is really about preparing for all the things we want to do – and all the changes that are going to come in our life.”
That said, it’s equally important to consider the risks that come with achieving your goals. This is where insurance comes in – it ties back to protecting your loved ones from being put in a bad financial spot if something happens to you!
Chung advises considering appropriate coverages for your particular life stage. “When you're young, your ability to work and generate an income is going to be your largest asset,” he says. “Make sure that's well protected through things like critical illness insurance, disability insurance, or accidental death and dismemberment insurance.”
Once you buy a house or have dependents, you’ll also want to look into life insurance. If you have a 30-year mortgage, for example, a 30-year life insurance policy means the full term of your mortgage payments will be covered in the event of your passing. You can also consider kids! They’ll likely be financially dependent until they finish school and get a job. If you die before then, you'll want to ensure that your life insurance policy will cover their childcare expenses and education.
Life insurance covers any outstanding debt you might have in the event of your passing. It also helps, of course, to pay off as much debt as you can, while you can. But what if somebody else passes away – say a parent or a child, with whom you’ve co-signed on a debt?
It’s best to take steps that minimize the chances of this happening. “For some clients, if they haven't made the loan, I may advise them not to do it, frankly,” says D’Souza. This has more to do with anticipating life changes that may come unexpectedly, rather than opting out of the opportunity to help a loved one. This is especially the case if you’re not prepared to absorb the cost of that loan.
For those in a situation where they may have to cosign on debt or serve as a guarantor, D’Souza says it’s important to at least consider the full implications. “Before you sign on the dotted line, test it out. What's it going to look like for your finances when you do that? How comfortable are you with this new kind of spending plan?”
Chung observes that many individuals sign off on their parents’ mortgages, for instance, without understanding the full implications of the transaction. “Even if it’s mom and dad, you want to make sure the correct procedures are taken and documented in the event that something were to happen,” he advises.
Don’t stress if you’re locked in – it’s not all doom. It’s all about preparation. Start creating room in your cash flow in case you have to take over these payments. Set aside money in a separate emergency fund if you can. That way you can cover the outstanding debt should something happen to the borrower. This helps you avoid digging into your own savings or retirement fund to pay off somebody else’s debt.
Once you have three to six months’ worth of emergency funds set up, you’ll want to start putting away savings for life after the hustle.
Get an estimate of how much you’ll need to support yourself annually during retirement, then multiply that by 20 years (a good estimate for how long retirement might last). The figure you come up with will be your target retirement savings. If you wish to retire early, factor that into the computation as well.
Then think about how much you’ll need to start putting away today to reach that goal, and start contributing that amount to your registered retirement savings plan (RRSP) or a tax-free savings account (TFSA).
If you have assets and intend to leave an inheritance for your spouse or children in the event of your death, estate planning is key.
Write a will that clearly specifies your wishes. Who will inherit your house, for example? How will your wealth be divided among surviving loved ones? If you have young children and decide to set up a trust, how will your assets be distributed? Who will execute your will for you?
You’ll also want to think about granting a power of attorney (POA) to someone you trust, such as your spouse or a relative, in the event that you are unable to make financial or medical decisions for yourself.
Having all of this clearly in writing will spare your loved ones the trouble of making decisions on your behalf, especially if it involves large sums of money and assets. It also prevents the kind of conflicts that arise from dealing with a deceased person’s wealth after they’re gone.
If you can, set aside funeral funds that your loved ones can access, or consider pre-paying for memorial arrangements. Purchase your burial plot if you want to be buried, or let your partner know you want to be cremated and purchase an urn ahead of time.
While you do, keep in mind why you’re doing this and the people you’re doing it for. Instead of feeling morbid, you’ll likely rest easier, knowing your loved ones won’t need to fuss over these arrangements in the future. They can spend time healing, not stressing over finances.
This is easily one of the most practical things we can do to prepare for the future. Keeping detailed records of everything, including:
Make sure you keep everything in a place that is easy to locate – people need these papers if something were to happen!
Be sure to update your documents if anything changes as well. For example, your marriage dissolves, or your executor gets sick and is unable to carry out your will. Making plans, financial or otherwise, is not a one-time thing, says D’Souza. “As soon as we do this plan, your life will probably change, and we’ll have to adjust something. It’s an ongoing process. We need to be flexible and adaptable to that.”
And finally, ensure you communicate all of the above with your loved ones. Let your most trusted relatives and friends know what to do in case something happens to you. It may feel too taboo of a subject, but when the time comes, your loved ones will thank you for it.
The reality is that change is an inevitable part of life, and things happen that we don’t expect when we least expect them.
“People often assume that life is going to be the same, that it’s going to largely be under their control,” says D’Souza. “They're going to graduate from school, get a job and work their way up, or start a business and then build that business. They're going to get married and have kids. And then they'll work until they're 65, or 55. Then they’ll enjoy a fun retirement.”
“And really, I think they underestimate how much their life will change,” he adds.
But both D’Souza and Chung remind us that the point of preparation isn’t to be fearful about the future. Rather, it’s to ensure that what we do with our finances today will ultimately be beneficial to us and our loved ones in the future, come what may.
“Understanding your current financial situation and placing the appropriate risk management strategies in place is what everybody needs to truly focus on,” says Chung.
The good news is that it can be done – starting today.