Category: Insurance

6 things worth going into debt for when you have a family – and 3 things that AREN’T

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First of all – apologies for not updating this blog for such a long time! I’ve had some major life changes (moved from Canada to New Zealand, pregnant with my 3rd baby, enrolled in a university course…) so it’s taken a while to find my footing again.

Anyway, I was talking about financial priorities with a friend recently and we were debating whether there are any purchases worth going into debt for. My first instinct was NO, there is NOTHING. I don’t like debt as a general rule.

But then I started thinking – I do have some debt (mortgage) and that’s worth it (more below). And I also know that there are somethings that really are more important than money. So, are there some things worth buying, even if they mean going into debt? Yes and here is my list:

  1. Life/Disability Insurance

Even if you are struggling to make ends meet, I really think that having adequate life and disability insurance is a MUST for someone who has a family. In my opinion, families should have life insurance coverage that would cover living and housing costs for 10 years at the very least.

If you earn a lot of money, you should also consider how much money your family would be missing out on if you died or became disabled. For some professions, the disability portion maybe even more important to look into. For example, if you are say, a dentist, you need your hands to be functional to make a living, so even a minor accident can devastate you if you are no longer able to perform your job.

Tip: The younger/healthier you are when you get it, the cheaper your premiums for a long time.

2. Health Insurance

If you live in a country like Canada, where there is universal health care coverage (i.e. paid for by the government), then additional health insurance is gravy – usually something that covers dental care, vision care, massages etc – and is something many employers provide. If you don’t get this extra health insurance, it’s not that big of a deal but still worth looking into.

But if you live somewhere where the isn’t universal health care, like the US, please, please get health insurance. Put it as a priority even above life insurance. Put your monthly premiums on your credit card if you have to. Because medical bills are the #1 reason people go bankrupt in the US. Just one adverse medical problem can devastate a family overnight.  And I’m not talking about a cancer or a major disease diagnosis, but normal life things like birth or accidents can end up costing hundreds of thousands of dollars. Unfortunately, even insurance is no guarantee that you won’t be faced with high deductibles or some out of pocket expenses, however hopefully the brunt of it will be taken care of by the insurance.

If you live in a country that has a two-tier system, like New Zealand, I’d still consider getting additional health insurance especially after seeing the benefits of having it with a family member who was diagnosed with cancer recently.

3. Marital/Relationship Counselling

Divorce/separation is expensive – not just the actual cost of divorcing (legal fees etc), but the aftermath as well. Going from two incomes to one income to support pretty much the same sized family is tough (or having one income support double the living expenses). Not to mention the emotional cost and psychological cost that a divorce has on the children.

As such, I highly recommend that couples seek counselling prior to officially separating and really trying to work on the issues the counsellor identifies. This may take more than one or two sessions so it is important to be patient. But you married/started a family with that person for a reason and it was likely very legitimate! Hopefully a bit of guidance can help you get back to the way you were.

Even if you still choose to separate afterwards, I think that attempting counselling can be good for closure (you tried everything) and you may get tips on how best to go forward to minimize the negative effects on your family (which can have a huge effect on your financial situation).

Counselling doesn’t have to cost a lot either – there may even be great free options at a church or community center.

Of course there are certain situations where divorce is really the best option. But I believe only extreme cases warrant a divorce without an attempt at fixing what is broken.

4. Mortgage

A mortgage is debt – make NO mistake about this. And it can be bad debt if you buy a house that you can’t afford. But it can also be good debt. Good if your mortgage (and other home-ownership costs) can be managed comfortably in your budget (see here for my recommendation on how much of your budget should be allocated to your housing costs). Good if you buy at a time when prices are on their way up (thus creating equity). And good if owning a home is an important life goal for you (it isn’t for everyone, so for those people, buying a home may NOT be the best idea) and you are at a point in your life where you are up for the responsibility.

5. Car loan

A car loan is debt. For some reason, I’ve met many people who seem to think that their car payment doesn’t count. Sorry, but yes, if you have an obligation to pay for your car – whether it is to the dealership, a family member or the bank, it is debt. And yes, a lease is debt too!

However, in this day and age, having a car is pretty important – especially if they need it to get to work (and especially if public transportation options are not available, very limited or plain inconvenient). So I think going into debt to buy a car is usually totally acceptable. That said, I don’t think going into any amount of debt is justifiable – and I discuss how to determine what a reasonable amount for car ownership/lease is in greater detail here.

There were some other things that I considered and things that I’ve seen mentioned on Facebook or whatever as worth going into debt for.

But I disagree –  here are some of the things that did NOT make the cut:

  1. Travel to make memories

Sorry, but going into a lot of debt to “create memories” is not a good reason. You can make memories with your family by organizing a great “stay-cation” and exploring your home town, choosing cheaper activities (camping vs going to a resort), cheaper travel methods (driving vs flying) and my favorite, SAVING for trips. These are the best way to really give your family experiences and creating memories because you will be doing so without the stress and burden of debt.

In my mind, the only exception for going into debt for travel is for something like visiting a loved one who is sick or dying or perhaps attending a funeral.

2. Once-in-a-lifetime experiences

OMG – the Rolling Stones/[Insert your favorite band or singer] are coming to your city! Tickets are expensive but it’s their LAST TOUR.  You HAVE TO GO.

No, no you don’t. If you don’t have the money saved, don’t go into debt. Its not worth it. Unless you can squeeze it into your budget or take away from an unnecessary category (for example, taking from your vacation budget or forgoing going out for dinner for your next three date nights), then sure, go for it. But if you really don’t have the money to pay upfront for those tickets, it’s NOT justifiable.

3. AH-MAZING sale or offer

Recently I went to the jewellers to get a ring I have fixed. It had a design flaw and the stones on it were always loose – I even lost the centre stone one time (luckily found it) and I was worried it would happen again. I had avoided wearing it for fear of losing a stone again so when I noticed that the jewellery store had a policy where you can “upgrade” your jewellery by trading in your older piece for a new one, if the new one was more expensive, I decided to look into it.

At first, this seemed like a great deal. Not only could I use the value of my ring as credit towards my new item, the manager at the store offered me a further discount. I’d be getting a way bigger stone ring, worth $3,500 and would ONLY be out of pocket $900.

Except $900 is a lot of money. And even though we actually HAD the money was this really something worth doing? Did I NEED a more expensive ring? A ring that I didn’t even know existed until that day?

No. I didn’t. Other than the opportunity to get a nice piece of jewellery for a great price (it really was a great price), there was no benefit. Especially when I did the math and realized I’d have to lose and replace the loose stone of my original ring like 6 times before I’d be out of pocket $900.

This applies to everything – whether it’s a handbag you’ve been coveting, a great deal on an appliance or whatever, if you don’t have the money saved for it, it’s NOT WORTH going into debt for. Because at the end of the day, if you are paying interest on it, you aren’t *really* getting a deal. And remember, these deals come around again and again you will have plenty of opportunity to take advantage of them in the future. My advice? If you really, really, really want it, start making it a priority to save for it!

 

Credit Card Do’s and Don’ts

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Credit cards have a bad rap. On the TV show “Till Debt Do Us Part,” (which I totally love) the host Gail Vaz-Oxlade often starts the show by having the participants cut up their credit cards. Indeed, having a credit card can be dangerous to those who don’t use it responsibly. Many people see credit cards as “free money” or think that they are on top of their credit card debt just by paying the minimum payment, when really they are just getting into debt faster.

But I’ve always been taught (and still believe) that credit cards are a useful tool.  And if you use credits cards responsibly, they are a great way to keep track of your purchases (excellent for budgeting), can earn you great rewards and many have added benefits, such as travel insurance and can help you establish a good credit history.

DO:

  • Have one credit card available for emergencies.

Even if you are uncomfortable having one, I think that having access to one for emergencies (say your car breaks down somewhere and you need a tow, or your suitcase gets lost when you go on holiday and you need to buy some essentials etc). Make sure you have clear rules about what constitutes an emergency and stick to them.

  • Research the different cards available.

Make sure that you are aware of any additional fees or costs to the card that you may incur. Some cards have a promotional low interest rate to start, but it might sky rocket after a few months or even by just one late payment.

  • Pay your balance off IN FULL every month.

This is extremely important, as you will be charged interest on your ENTIRE original balance, not just the unpaid part. So say you have a balance of $1,000. You decide to pay $900 off and leave a $100 balance. You will be charged interest on the FULL $1,000.

  • Pay your balance ON TIME.

Not only will you be charged interest on your full balance, but your credit score will take a hit.

  • Check your statement every month for errors or fraudulent charges.

I’ve had my credit card compromised twice and each time I was able to get a full refund because I alerted the company right away. Make sure you do this, because most companies will assume the charge is legitimate if you don’t address it within 30 days of the statement date.

  • Fight your interest or other fee charges whenever you can.

I once paid my balance a day late due to submitting the payment online after banking hours and was charged interest. I called the company and told them that I always pay my balance off in full and on time, and that I shouldn’t be punished for a timing error. They waived the entire amount of interest and all it took was a quick call. Another friend never pays his annual fee because he calls the company a month before it is due and threatens to cancel his card if they don’t waive it.

DON’T

  • Take cash advances on your credit card.

They will charge you interest from the MOMENT you take the cash out. I don’t even give myself the option to do this – I rip up the PIN the moment it arrives.

  • Only pay the minimum the payment.

Not only does paying the minimum amount usually so small that it doesn’t make a dent in the debt you owe, but it will trigger interest charges.

  • Own too many credit cards

Specifically store credit cards. It seem like every store nowadays has their own credit card. But unless you really shop at a particular store regularly, there is no point. Also you want to make sure you are on top of all the bills you have to pay, and it gets hard the more cards you have to remember.

  • Max out your credit card.

Maxing out your card (when you hit your limit or go over it) will cause your interest rates to sky-rocket and could affect your credit rating. This is why it’s a good idea to have a high limit. I always ask for as high a limit as I can get not so I can spend a lot but so I have a lot of buffer room. I like to keep within 30% of my limit.

  • Buy something that you can’t afford to pay off right away.

It’s always a good idea to save money in cash for big ticket purchases, like say a couch. You can still use your credit card to pay for it in the store (I always do) because you can get some great points but then just use the cash to pay it off right away.

 

 

Top 4 tips to be prepared for the worst

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I was chatting to my friend recently about a friend of hers who recently broke up with her long-term boyfriend.

“You know what she says one of the hardest things have been for her?” my friend asked me. “How much harder it is now for her financially. Now its not just that she is heartbroken, but she is heartbroken AND her living expenses pretty much doubled overnight.”

I’m not surprised at all. Whether or not your partner/spouse is the primary income earner or not, you are likely very dependent on their income to maintain your current lifestyle. And while I’m not suggesting that one should live so frugally that they could do without an income without breaking a sweat, I think that there are somethings that you should prepare for, especially when you are also a parent, if your spouse or partner died or became disabled.

Now, I’m not going to discuss how to prepare for a relationship breakdown or divorce in here – even though it was the inspiration for this post. I think there are ways to always be a bit prepared to be on your own, however not all marriages and relationships breakdown but EVERYONE dies at some point, so its good to be prepared for the sake of your family.

1. Get life insurance

If you are married or have children with someone, you AND your spouse NEED life and disability insurance. And not a ridiculous amount like I always seem to see on TV that would just barely cover the cost of a funeral, but a decent amount – at least enough to cover your mortgage and 10 years worth of other housing costs. Also, its better to get life insurance earlier rather than later – you will pay much lower premiums.

As a side note, I’d also caution against buying mortgage life insurance that your mortgage broker or banker will try to sell you when you get approved for your mortgage. All that will be covered is the mortgage BALANCE, not the amount you originally borrowed. The premiums are usually higher than regular term life insurance but they stay the same even as your mortgage balance decreases. So if you are paying $30 per month when you get your $300,000 mortgage, its still going to be $30 per month when your mortgage balance is $250,000. Also, because often the bank employees selling the mortgage insurance aren’t licensed, they may not recommend the correct type of insurance and the insurance company has the right to decide that you are NOT eligible, EVEN after you’ve been paying your insurance for years.

Please contact a licensed life insurance broker to discuss the right options for you.

2. Make/update your will

I’ll admit it – we only finally got around to making a will after my second son was born, over six years after getting married. We just kept putting it off and my husband just did NOT want to talk about it and told me to handle it and he would just sign it. But getting the will done was a huge weight off my shoulders.

I get it – there is something incredibly morbid about drafting a will – but we need to face the fact that we are ALL going to die at some point. And as parents, we need to make that our children will be taken care of as best as possible if the worst were to happen and that it is OUR version of what is best,and not what someone else’s version of best, is what is done.

Picking someone to be your child(ren)’s guardian is important. Don’t put that burden on your families to have to decide (or worse, fight over). Also, making a will forces you to think about how you want your children raised over the long term and how YOU would spend your money on them. For example, you may want money left for your children to be used for private school tuition or saved for university but unless you have a will that expressly states so, your children’s guardian may decide that the best use of your money is to use it for travelling around the world. It makes you think about how you want your children to inherit (everything at 18? Some at 25?) and picking trustees and executors (if you die before your children are adults, wouldn’t you want to make sure there is someone you trust and who is smart to manage their money until they are ready?).

Its also just good to make sure you and your spouse are on the same page about what you want for your children – because realistically, its more likely that you and your spouse will die at different times (as opposed to a tragic accident killing you both at the same time). For example, I’m Catholic and it is important to me that my children are raised Catholic and attend Catholic school. My husband isn’t Catholic but he knows this is important to me and promised to continue to raise our boys Catholic if something were to happen to me.

An added benefit to making a will is it gets you to list all those assets and organize your finances in one place.

If you already have a will, it’s good to update it every few years, especially after any new children are born, you obtain a valuable asset or something happens to your appointed guardians/trustees.

3. Have an income back up plan

One of the greatest things about our house is that we have a basement apartment in it – and its a huge comfort to know that if we really need to, we can always rent it out. I think every family could do with a back up income plan – whether its an asset that can be rented (like a basement apartment or cottage) or a skill that can be put to use. This is especially important for families that have a stay-at-home parent – that parent should try to either continue with some sort of education in the field they were in before choosing to stay at home or take courses in something that interests them so that if they do suddenly need to re-enter the workforce, they will be somewhat prepared. This is good too if the stay-at-home parent simply decides they want to return to work or if the working parent can’t for whatever reason (due to job loss, illness etc).

4. Have an emergency fund – and make sure you BOTH have access to it

You should already be contributing to an emergency fund through your budget, but I wanted to reinforce the importance of one in this post too. While in theory you may be covered for all costs of losing a loved one through insurance and wills etc, sometimes the process of getting your hands on those funds may take a while – especially as you or whoever will have to navigate through it all while dealing with grief.

That is why you AND your spouse (or someone you trust if you are a single parent) NEED to have easy access to your emergency fund – money there to help you through those tough days and weeks. Make sure the account is joint and you both know how to access it.

Hopefully these plans never have to be put to the  test or at least, not before your children are grown and able to care for themselves. But I truly believe that the test of whether or not someone is a good parent isn’t excelling at the easy things – like kissing away boo-boos or serving up made from scratch organic meals or buying thoughtful presents. Its also doing the hard and unpleasant things – like taking your kids to get their shots, disciplining bad behavior and drafting plans of what to do if you or your spouse die.