Three steps to building a rainy day fund

Three steps to building a rainy day fundAt some point in life, you’ll need a new roof. You might need to fix your car brakes. Unforeseen events happen, and when they do, it’s important to be financially prepared.  Budgets are an effective way to plan your month-to-month expenses and savings. They can also help you keep money available for the unexpected.

Here are three steps to start building your rainy day fund:

Determine the amount you’d like to save. This could be any amount you feel would cover your expenses in the case of an emergency. A common measure is six months of expenses in the case of job loss.

Once you’ve determined an amount, work your rainy day savings into your budget until you’ve hit your goal. If you’d like to save $5,000, for instance, you might want to stash away approximately $200 per month over two years.

Determine where you’d like to save your rainy day fund. It might be appealing to keep your money in investments that earn interest, but watch out for early withdrawal penalties on investments.

If you need guidance in planning your rainy day fund or your savings strategy as a whole, a financial advisor can guide you through the process and be your coach when it comes to finances. It’s never too late to become an engaged, informed investor.

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Benefits of planning for retirement at an early age

Benefits of planning for retirement at an early ageNowadays, Canadians will generally need over $1 million to live comfortably in their golden years when taking into account the average household wage, retirement age and life expectancy. Though this news may seem frightening, there are many programs and strategies out there that can help you plan accordingly.

For instance, through the Canada Pension Plan, most of us are contributing to a pension that will replace up to a quarter of the average income in retirement. With changes coming to the program starting in 2019, CPP benefits will begin to grow to replace up to a third of average work earnings.

If you work in Canada, contributions to the CPP are automatically deducted from your paycheque, and any funds not needed to pay current beneficiaries are invested by Canada Pension Plan Investment Board. This ensures that the CPP is sustainable for generations to come so that even your grandkids can rely on this stable source of retirement income when it is needed most.

But what about the remaining portion needed to make up your retirement income?

By investing into your personal retirement savings plan at an early age, you may get closer to your goal than you think. Take, for instance, the effects of compound returns. It might change the way you look at discretionary spending that could otherwise be put towards your life savings.

Instead of buying an iPhone X, which currently retails at around $1,500 after taxes, say you invested that money. Using CPPIB’s current 10-year average return of 6.2 per cent, your original investment would grow to $1,582.88 after one year. While this may not seem like much, compounding returns on that initial investment over 40 years would net $16,531.18.

You will receive exponentially more money the longer it is invested, but anything helps and the earlier you start the better off you will be in the long run.

So, when you save that $1,000 for retirement, don’t think of it as saving a measly $1,000 — think of it as saving $10,000. That’s a lot closer to what its actual value will be when you need it.

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How mortgages have changed

How mortgages have changedIf you’re like millions of Canadians, you’re busy paying down your mortgage. It could take 25 years or so, but it can be a great way to accumulate personal wealth, especially if house prices rise. However, with changes to mortgages in recent years, it’s important to understand just how they are different if you want to fully benefit from your home’s potential to build your personal wealth over the long term, rather than your debt.

Today, to finance your house most banks will offer you a readvanceable mortgage if you have a down payment of 20 per cent or more. It combines a traditional mortgage with a home equity line of credit (HELOC). There’s a big difference between these two forms of debt.

First, your mortgage debt only goes one way — down — because you must make regular payments against both the interest and the principal borrowed. This increases the equity you have in your home, meaning the difference between what you still owe and the value of your home.

But as you pay down your mortgage, a HELOC lets you borrow against your growing equity as part of your mortgage. Unlike your mortgage, you only have to make regular payments against the interest. You can ignore the principal until you sell the house. This short-term credit advantage can mean a long-term debt problem.

With flexible repayment terms, low interest rates and a credit limit that rises with your equity, a HELOC can be used to pay off other, higher-interest debt or home renovations.

But would a HELOC tempt you to use your home like an ATM? Mounting HELOC debt could put you at increased risk if you lose your job, get sick or injured, interest rates go up or your home decreases in value. If it consumes too much of your equity, you might end up owing more than your home is worth, lose your home or have to sell it to pay down your debt.

To use this borrowing tool wisely, stick to a plan to pay it off fully and avoid continually borrowing against your home equity.

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