Note from Coleman Wealth: Often, we don’t take the time to rethink how we shape some of the basic components of our financial picture. Thinking about using debt in a strategic fashion in today’s low interest rate environment can often be overlooked. Helena Corallo, a banking specialist with Manulife Bank, has helped us and our clients by removing the anxiety around debt and cash flow management by introducing a new solution, the Manulife One all-in-one account. To find out more information or to be put into contact with Helena, please email us at coleman.wealth@raymondjames.ca.
Do you have a plan for debt elimination?
When most people think about retirement planning, they think of building a retirement nest-egg through RRSPs and pension plans. While these are key pieces of the puzzle, it’s important not to forget about another important element of retirement planning – debt elimination. After all, the less you spend on interest payments, the more you can allocate to your retirement savings.
A debt-elimination plan doesn’t have to be complicated. But you should have one or you’ll likely be in debt longer than you have to. There are a few simple strategies for getting out of debt sooner, such as:
Building extra debt payments into your budget.
Consolidating all of your debts at the lowest rate possible.
Using your income and savings to automatically reduce your debt (without giving up access to that money).
When you’re planning for retirement, don’t forget about the impact that your debt has on those plans. With a strategy for becoming debt-free sooner, you may even be able to retire earlier than expected.
A painless way to cut back on expenses
With the current economic uncertainty, many people are looking for ways to reduce expenses. A relatively painless way to reduce your monthly expenses is to have a second look at the way you’re managing your debt.
Over time, most of us take out a variety of loans for different purposes. These can include things like credit card debt, car loans, home renovation loans and, of course, the mortgage. And if you have more than one loan, you’re most likely paying a different interest rate on each loan. One of the easiest ways to reduce your monthly interest costs is to consolidate your debt at the lowest rate. Typically, your lowest-rate debt will be a loan that is secured by an asset, such as your home.
If you have sufficient equity built up in your home, consider switching to a product that allows you to access your equity, such as a home equity line-of-credit. Then, use this line of credit to repay your higher-interest loans. In this way, you’ll be bringing all of your debts together into a single account, at a single rate. Some line-of-credit products even allow you to track debts separately within the account so you can continue to keep track of interest costs and repayment separately. Not only will debt-consolidation save you interest but it will make it easier for you to keep track of what you owe and how you’re progressing in paying it down.
Reducing your monthly expenses is one way to deal with economic uncertainty – and it doesn’t have to be painful. By borrowing smarter you can reduce your interest costs and increase your cash flow each month.
Help out the kids without hurting your retirement
As parents, we want nothing more than for our kids to succeed. Often, we wish to give our children a “leg up” in their transition to adulthood by helping them out with larger expenses, such as tuition for post-secondary education, a down payment on a home or even a reliable vehicle. If you find yourself in this situation, be sure to carefully consider where you take that money from so that helping your kids doesn’t hurt your retirement.
For people who don’t already have savings set aside for their kids, such as an RESP or a savings account, there are generally two options:
Retirement savings. Tapping into your retirement savings may be the quickest way to access cash but it could have some undesirable consequences. For example, you’ll be charged taxes on a withdrawal from your RRSP and you’ll lose that contribution room forever. You’ll also forego any future growth on the amount you’ve withdrawn, which will most likely mean you’ll have less money available at retirement.
Home equity. Some people are reluctant to take on more debt in the years leading up to retirement. However, using a home equity line of credit to help out your kids may be the wiser choice in some instances. Here’s why: you won’t be charged any tax when you access your home equity and your existing retirement savings can remain intact and continue to grow. Some accounts will even allow you to track different portions of your debt separately. This can be particularly useful if you’re providing money to more than one child and/or if you wish to track the interest charged for different portions of the debt.
We all want to help our kids succeed. By carefully considering how you help, you can help to ensure you don’t compromise your own future financial security.