Peter Boys, Boys Financial Services

Are You Sitting On A Debt Time Bomb?

Time Bomb1


Many families today are carrying large amounts of debt and little or no rainy day savings.  They may have small amounts of money in RRSPs, but next to nothing saved for potential emergencies.  This describes a classic “debt time bomb” waiting for the right fuse.

With the cost of living today and high debt, it’s common that both parents are working, and relying on lines of credit or credit cards to carry them through the month.  Without a cash reserve, RRSPs often get cashed in to cover unforeseen expenses.  In the process, value is often lost to withholding taxes, surrender charges, plus the potential loss of value due to market downturns.

Consider these steps for preventing the debt time bomb from getting the better of your finances:

  • The first priority should be a rainy day fund of at least the equivalent of three months income to cover emergencies such as sickness, injury, inability to work, or having the transmission blow up in the family van.  It’s also nice to have some cash on hand for that rare “find”!  I suggest doing this by way of an automatic debit of $25 or $50, whatever is feasible into a high interest TFSA.
  • The next step for the average wage earner is investing in RRSPs, as the immediate tax break and tax deferred growth until retirement is one of the best tax breaks for most families.  One should note however, that if only investing small amounts annually, the net after tax income available in retirement is very similar to TFSA savings plans.
  • The big advantage with TFSA funds is tax free liquidity if large withdrawals are required such as a home renovation.  This as compared to any RRSP withdrawal that is fully taxable as income.  For example, taking $100,000 out of your RRSP would require cashing in at least $139,000, as it would automatically put you in the highest tax bracket.
  • The foundation of all planning is knowing where all the cash is going every month.  Setting up a budget and managing cash flow is vital in order to take control of your finances.  There are a number of computer programs with varying capabilities that can help with this, some are even free.
  • Another plan I recommend combines chequing, savings, line of credit and mortgage all in one account.  Consider a couple with 50% equity in their home, a mortgage, balances on a few credit cards, and auto and RV loans.  Just consolidating all of their loans into one of these plans has the potential to save hundreds of dollars in interest every month. Applying the savings to pay down total debt can get you out of debt years sooner.
  • The extra cash could help you build funds for emergencies, savings for future goals or other investments, as well as update your existing family protection coverage.  There are few things that can put a family into serious debt faster than the death, sickness or disability of a breadwinner.

Learn more about managing your cash flow, how to get out of debt faster and enhance your family’s financial security.  Check out innovative new insurance plans offering life, disability and critical illness coverage, making a cost effective way to build a financial security blanket for you and your family.  Talk to a professional advisor for a comprehensive review of your finances and help defuse your debt time bomb.

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