PICKING YOUR DEBT GAME PLAN MEANS PLAYING TO YOUR WEAKNESS
HOW TO CHOOSE THE RIGHT TYPE OF LIFE INSURANCE
If your opponent was your stack of bills, you aren’t alone. The average Canadian consumer debt, not including mortgages, is expected to hit an all-time high of $28,853 by the end of the year, TransUnion says. At the end of last year, Canadians held $1.1-trillion in mortgage debt, up 1.1% from the previous quarter, and $508-billion in credit debt, up 0.5%, according to Statistics Canada.
Here are three strategies for fighting the rising tide of your debt. Pick the one that you are most likely to stick with even if it isn’t the most economical. After all, a good game plan is one that gets you to the finish line.
Destroy the little guys to build confidence and momentum.
Studies show that our instinct is to pay off the credit cards with the smallest balance rather than the cards with the highest interest. Why? Because it feels awesome.
Start by listing all of your debts: credit cards, lines of credit, unsecured loans, automobile financing, student debt, pay advances, outstanding bills, loans from family and friends, etc.
Begin putting your extra money toward the smallest balances to eliminate them one at a time. Fewer bills come in the mail, which results in less stress. Enjoy the positive reinforcement.
Then take the money that you were using to finance these debts and put the extra cash towards the next debt. The strategy ends up having a snowball effect.
On the debit side, from a math perspective, this strategy is not the most sensible. You end up paying more interest in the end as compared to other techniques and it might take you longer to be clear of all of your debts.
Also, if you can’t afford to make your minimum payments and end up in a bankruptcy scenario, your creditors will criticize you for favouring some debts and not paying them all equally, says Leah Drewcock, senior manager at BDO Canada and a licensed trustee in bankruptcy.
Take out the biggest challenge.
Put all of your resources into the debt with the largest balance. When you beat that big guy, it’s going to feel glorious. “If you tackle that one first, you’re going to free up a whole heck of money to pay off the little ones,” Mr. Schwartz says. This action might also improve your credit score since one of the factors that affects your score is how much of your available credit you are using, he adds.
Your biggest debt, however, is likely your mortgage debt and you likely won’t be able to knock that one out right away. But there is a lot of benefit to paying off the mortgage faster, including saving a ton of money.
You can get that mortgage down quicker by simply upping your payments to bi-weekly. Check out this game plan: If you switched from monthly payments (12 payments a year) to bi-weekly payments (26 payments a year), you’ll pay off a $250,000 mortgage at 3.79% three years earlier (21.9 years versus 25) and you’ll save almost $20,000 in interest.
Annihilate the one that is costing you the most.
If you want to be as efficient as possible and save more over time, allocate funds to the highest interest rate account after minimum payments are met. Focus your killer instinct, for example, on your credit card debt; your credit cards can carry interest rates in excess of 18%.
So say you had a $1,000 balance with an 18% interest rate on your credit card. If you just paid the minimum payment of $10 or 3% (whichever is higher) every month, it would take you 10 years to pay it off and it would cost you almost $800 in interest.
Meanwhile, if you spent 10 years paying off the $1,000 balance on your line of credit at an interest rate of 5%, you’d have paid about $273 in interest.
(Going back to your credit card debt: if you put $100 to the debt every month, you’d pay off the $1,000 in 11 months and you’d only have paid about $91 in interest.)
Make a trade.
Transfer your debt from a high interest account into one with a lower interest rate, or consolidate your debts into one low payment. Watch out for transfer fees.
If you transfer your debt, check what these low rates apply to — some don’t cover new charges. Also, how long does this low-interest period last? Make sure you pay down the debt within the low-interest period; sometimes rates can rise higher than what you were paying before.
And shop around. “Much like your cellphone bill, it’s a very competitive industry,” she says. If you get a quote for a lower rate from another company, tell your existing company that you’re considering a balance transfer. “Many times, the existing company will come to the table and help you out.”
The caveat here? “You can’t borrow your way out of debt,” Mr. Schwartz says. If you have trouble managing your money, creating more room on your existing credit cards could create too much temptation, he adds.
Use your last resort play. Sometimes you have to use that play that you were saving for a sudden-death round.
Do you have a lump of money sitting in your savings account or a tax-free savings account earning less than 1% interest? Is this your emergency fund? You might want to consider taking some or all of it and clearing some high-interest debt.
Once you are debt-free, the money that went to servicing the debt can go back to your emergency fund or retirement savings. The obvious snag to this strategy is that you’ve depleted your “just-in-case” funds and if there’s an emergency, you might have to resort to borrowing.
Get extra coaching. If you need someone to help you set and meet goals, try seeing a financial advisor. They will look at the big picture and help you create a budget.
Consider talking to your financial institution about your debt. “It’s surprising how many people get scared and don’t actually talk to those they owe the money to,” Ms. Drewcock says. Your bank or creditor might be able to assist you; ask them for reduced interest rates for a period of time so you can do some catching up.
Source: Melissa Leong, Financial Post, April 26, 2014
Deciding what to buy – term, permanent or universal life insurance – doesn’t have to be an either/or choice. You may need more than one type.
If you’ve spent any time researching life insurance, you know that there is a long-standing debate about the benefits of term versus permanent insurance. It’s often presented as an either-or decision, as if one is right and the other wrong, depending on your situation. Don’t be fooled.
A short primer to start. Term and permanent aren’t the only kinds of life insurance. Universal life is another. Unlike health insurance, which generally speaking pays out when you get sick, life insurance pays a tax-free cash benefit to your beneficiary or beneficiaries when you die. A lot of Canadians have group life insurance provided to them as an employee benefit. Many don’t, and many others choose to top up their group plans with individually purchased life insurance.
Here's how they work:
Term life insurance is a relatively inexpensive form of life insurance that provides protection over a pre-defined period of time (it gets more expensive as you get older). Typically, consumers purchase this temporary insurance to protect their dependents during times when they have significant financial obligations (like a mortgage, for example). Let’s say you owe $400,000 on your mortgage. Holding half-a-million dollars’ worth of term life insurance for a period of time would prevent your family from experiencing real financial hardship if you died.
Permanent life insurance provides guaranteed lifetime protection. Younger Canadians will find it more expensive than term. But your premiums remain constant, so at a certain point in your life it will be cheaper to pay for your permanent life insurance than it would be to buy additional term insurance. (Some permanent life insurance products are adjustable, which is to say that their premiums change over time.) A participating life insurance policy — which is a kind of permanent life insurance — can provide policyholder dividends. You can use the dividends to buy more coverage, take a cash payment or decrease your annual premium, or you can save the money with your insurer and earn interest. Over the long term, you’re probably better off owning permanent than you are continually renewing term insurance.
Universal life insurance is more complex. In most cases, it provides consumers with lifetime (or at least long-term) protection while at the same time making possible tax-deferred savings. Some universal life insurance products feature premium payments that remain constant over time, some require payments that rise over time and others combine both. Payments made over and above the cost of the insurance can be invested and your savings will be held on a tax-deferred basis.
I’m only scratching the surface here on how these products work. Please research the options available, and talk with a financial advisor.
In my opinion, the term vs. permanent debate is a false choice. For me, permanent life insurance plays a fundamental role in my family’s financial plan. I’m lucky enough to have group life insurance and I’ve topped that up with additional permanent life insurance I bought myself. I also added term life shortly after my wife and I bought our first home together. We’re covered for about twice the value of what we owe on our mortgage.
In other words, for me the question was never term or permanent. It was: How much term and how much permanent?
Why so much life insurance? Partly because as a 20-year-old I saw firsthand what happens to a family when a parent dies (we lost my mom to a heart attack at 44). Mostly though, this is simply a matter of how I think about and manage risk.
Source: Kevin Press, Sun Life Financial, August 29, 2017