This is an excerpt from my new MasterClass: The 6 Secrets: What Every Business Owner Must ALWAYS and NEVER Do With Their Corporate Cash Flow. Check it out at https://bit.ly/35tRMZY
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NEVER use corporate dollars to quickly pay down your home mortgage.
Why? Because it costs you MORE, not less!
I meet with a lot of business owners who tell me they are rapidly paying down the mortgage on their home. But if you are indeed an incorporated business owner, this does not make sense, at all, from a financial planning perspective.
Let me explain.
There is good debt and there is bad debt.
Nobody is going to knock on your door and say “I want to buy your car loan.”
Nobody is going to knock on your door and say, “I want to buy your student debt.”
Nobody is going to knock on your door and say, “I want to buy your credit card debt.”
BUT…someone WILL knock on your door and say “I want to buy your house.”
So: car loans, student debt, and credit cards are bad debt, while a mortgage on your house is good debt.
Let me ask you: the house you are currently living in – are you going to stay there for the rest of your life?
Most people say “no.” If you are most people, then you have to look at your house as an asset on your balance sheet.
OK. I might be dating myself here. But I am going to turn myself into Lieutenant Columbo from the 1970s TV show. Remember him? The police detective who pretended to be confused but really wasn’t?
Well, I am totally confused. Why are you rapidly paying down your mortgage on your house?
Let’s assume you have a mortgage rate on your home of 5%. Yes, I know your mortgage rate is probably less than 5%, but if you have a lower mortgage rate than 5%, this example will only look better.
Let’s also assume you are in a 30% personal tax bracket. That means for every extra dollar you are taking out of the corporation to pay down your mortgage, you get to keep 70 cents and you are sending 30 cents to Ottawa that you will never see again.
So here is the math: why are you taking that extra dollar out of the corporation and paying 30 cents in personal taxes to pay down a debt – your mortgage on your house – that is only costing you 5 cents on the dollar (i.e. a 5% mortgage rate)? For every extra dollar you are taking out of the corporation to “rapidly” pay down your mortgage, you are losing 25 cents, being 30 cents minus 5 cents.
Why are you doing this?
Also, isn’t your house typically going up in value each year? Perhaps 3%, 4%, or 5%?
So back to Lieutenant Columbo. One of his other acts was to say “Just one more thing…”
So just one more thing: why are you rapidly paying down the mortgage on your home, your debt, when your home is going up in value?
I am so confused.
We could instead leave that dollar inside the corporation and pay the small business corporate tax rate of 11% or 12%. Then you would have 88 or 89 cents on every dollar to invest into a tax-sheltered strategy inside your corporation.
Also, if you have student debt or a line of credit, and you are only paying the minimum amount of interest each month, then you’re better off moving that “bad debt” into your mortgage. Do you see what you’ve done here? You’ve turned it into “good debt”!
This way, you include the payments in your normal monthly mortgage payment, which will save you a ton of interest costs on the personal side.
Over 80% of Canadians who have paid off their mortgages have what? They have a secured line of credit against their house that the bank talked them into taking out. People usually max out that line of credit. So the average Canadian gets into the trap of paying only the interest costs – not the principal – on a monthly basis.
Banks love this. But you are better off having a mortgage vs. a line of credit. Why?
Imagine we take a $100,000 mortgage and a $100,000 line of credit. They both have a borrowing cost of 3%. We make the same payments on both of them. But at the end of the year we will still have more owing on the line of credit! Why?
Because with a line of credit, the interest rate is compounded daily, whereas the interest rate on a mortgage is only compounded twice per year.
The conclusions are obvious:
1.NEVER rapidly pay down the mortgage on your home using corporate dollars!
2.If you have any “bad debt”, like a line of credit or a car loan, restructure your mortgage to include the bad debt and turn it into good debt!
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Business owners: want to see a live illustration of this secret and the 5 other big secrets? And get some great bonuses? Just watch my new MasterClass. Here’s the link: https://bit.ly/35tRMZY
From Chapter 9 of Heal Thy Wealth: How Doctors Are Misdiagnosing Their Own Financial Health And What They Can Do About It. KINDLE NOW ON AMAZON: click here
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Wills and Powers of Attorney
Do you need to have a will? The answer is simple: Yes. However, 7 out of 10 doctors who I meet with have not made a will. Do you really need to have Powers of Attorney in place? The answer is also an emphatic yes.
I would like to acknowledge that some of the doctors reading this chapter are aware of Powers of Attorney and that the following scenario could happen to you too. Picture this: You are in a car accident, are being rushed to the hospital, your spouse has been informed, and they are also en route to the hospital. A critical life and death decision needs to be made, and to protect him/herself the doctor turns to your spouse and says, “In order for you to make this decision, I need to see the Powers of Attorney for Personal Care.” If your spouse cannot produce this document, then your spouse has no authority to make any decisions on the course of your medical treatment.
The Will
If a person passes away without a will, it is referred to as “dying intestate.” If this occurs, then the property of the deceased will be distributed according to the provisions of the provincial law relating to intestate succession. However, this can be challenged if a surviving spouse files a claim under the provincial family property law. These challenges by your surviving spouse can sometimes take years to settle.
I witnessed a case in which someone had passed away intestate, and they had a spouse and three children. All three children were under the age of 10. The provincial courts decided to split up the deceased’s estate into four equal parts, and the spouse ended up with 25% of the estate. The remaining 75% was placed into trusts for the children, and when they reached the age of 18, they were to be given their share without any strings attached. I am confident that this was not what the deceased wanted to happen, but if you pass away without a will, you leave it up to the courts to decide what is in the best interest of your estate.
Do not trust the “instant wills” on the Internet. If you use a will template from the Internet, the company that supplies this template will not take any responsibility for your will being made correctly. If you make any mistakes that cause problems when your will is read, there will be no legal recourse at all. Furthermore, using the wrong wording could mean that your instructions will not be followed, or that your will not be valid. If your will is determined to be invalid, then the government may still decide who your assets should go to. The bottom line is that you should work with your financial planner to get the necessary components of your will thought out, and then meet with a lawyer to get your written will finalized.
Four Reasons Why You Need To Have A Will:
1. It will make it much easier for your family to sort everything out upon your passing, and it will alleviate some of the stress that comes from losing a loved one.
2. A will can help to reduce the taxes that may be payable on the value of the assets that you leave behind.
3. If you don’t write a will, then everything that you own will be divided out in a standard way as defined by law, which might not be the way that you wanted it to be.
4. If you have children or other family members who are dependent upon you financially, then it is especially important that you have a will to indicate how they will be cared for upon your passing.
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From Chapter 9 of Heal Thy Wealth: How Doctors Are Misdiagnosing Their Own Financial Health And What They Can Do About It. KINDLE NOW ON AMAZON: click here
Welcome to an excerpt from my new MasterClass, The 6 Secrets: What Every Business Owner Must ALWAYS and NEVER Do With Their Corporate Cash Flow: Click here to watch!
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That’s right, business owners: NEVER pay into an RRSP! The only one who wins is the federal government.
I do not want you to fall into the RRSP trap – like so many business owners do.
RRSPs are not a tax-deduction strategy. They are a tax-deferral strategy.
Let me explain.
Let’s assume we have a husband and wife who are both 45 years old and they are 20 years away from retirement. Let’s also assume they want to contribute $30,000 annually to an RRSP, and they are in a 30% tax bracket. This means that in order to get $30,000 of cash free and clear from their corporation, they would need to actually withdraw $42,900, upon which they would pay $12,900 of personal income tax.
Depending upon their tax situation, when they complete their income tax return, they might get some of the taxes back in the form of a refund, true. But let’s be serious: most people spend that refund. They do not reinvest it in an investment account.
Let’s assume that the husband and wife follow this RRSP plan for 20 years. From age 45 to age 65, every year they take out $42,900 from their corporation and contribute $30,000 to their RRSP. If we assume a 6% average annual rate of return, then at age 65 their RRSP would be worth $1.2-million.
Let’s assume that at age 65, they stop contributing to their RRSP, but they want to let it grow until they reach the age of 71, when they must convert it into a RRIF. At that point, they must start to take income out, even if they don’t need it.
So, the $1.2-million at age 65 will have grown to $1.7-million by age 71.
In 2019 the RRIF minimum withdrawal rate – the minimum percentage of the RRIF that you must withdraw each year – was 5%. Due to Covid-19 in 2020, the federal government reduced the RRIF minimum to 4%. But longer term, it will probably revert back to the 5% minimum, so let’s use 5% in our example.
So, the husband and wife must take out $85,000 ($1.7-million x 5%) per year. This is 100% fully taxable income! So, if they are in a 20% tax bracket, $17,000 of that $85,000 goes back to the government in taxes.
RRIFs are designed to be depleted by age 90, so the annual minimum withdrawal rate will go up each year until age 90.
What happens when either spouse passes away? Here are the scenarios.
If one of the husband or wife were to pass away, the RRSP/RRIF will rollover on a tax-free basis to their spouse (but if you happen not to have a spouse, they will be 100% taxable income on your terminal tax return). When the second spouse passes away, the remaining money inside the RRSP/RRIF is, you guessed it, 100% taxable on their terminal tax return.
For example, let’s say you have a $1-million RRSP and you pass away. 100% of it will rollover, tax-free, to your spouse. And if you have no spouse, $500,000 in taxes will go to the government on your terminal tax return. Then, when your spouse passes away, the $1-million will be treated as 100% taxable income, leading to a 50% tax bill – $500,000 – on the terminal tax return.
That’s why it’s called the RRSP TRAP! Because you have no control!
· Because you must start taking the income out at age 71
· Because the income is 100% taxable
· Because when both you and your spouse pass away, the remaining amount inside the RRSP/RRIF is 100% taxable on your terminal tax return
· Because in the example above, over $500,000 in taxes will go to the federal government
No wonder the federal government wants you to have an RRSP!
Here is the good news. You can AVOID the RRSP Trap. I have a terrific solution for you, coming soon in a new blogpost, the link to which will be posted here. Stay tuned!
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Business owners: want to see a live illustration of this secret and the 5 other big secrets? And get some great bonuses? Just watch my new MasterClass. Click here.
From Chapter 3 of Heal Thy Wealth: How Doctors Are Misdiagnosing Their Own Financial Health And What They Can Do About It. KINDLE NOW ON AMAZON: click here
Critical Illness Insurance
An estimated 50% of Canadians today will develop cancer in their lifetime, and 25% will experience coronary artery disease, heart attack or stroke. The fact is 90% of disability foreclosures are due to illness, not injury. In referencing the Canadian Cancer Society’s 2015 report, males have a 45% lifetime probability (or a 1 in 2.2 chance) of developing cancer. Females have a 43% lifetime probability (or a 1 in 2.3 chance) of developing cancer. An estimated 225,800 new cases of cancer will be diagnosed in Canada in 2020. More than half (52%) of these will be lung, breast, colorectal and prostate cancer.
Forty years ago, approximately 80% of those diagnosed with a critical illness would die and 20% were treatable and went on to live a normal life. Today, due to advancements in medicine, those numbers have reversed, and there is a higher probability that if you are diagnosed with a critical illness today, and receive treatment immediately, you will survive. Due to these changing statistics, more than 30 years ago, Dr. Marius Barnard of South Africa developed what we now know as critical illness insurance. Motivated by the financial hardships he witnessed his patients suffering while undergoing treatment, he convinced South African insurance companies to introduce a new type of insurance to cover critical illnesses. On August 6, 1983, the first critical illness insurance policy was launched and has become one of the most recognized plans today.
So what is critical illness insurance? Critical illness insurance is a type of insurance policy that pays out a lump sum once you have been diagnosed with one of the covered conditions and you have survived for at least 30 days since the diagnosis. Healthcare costs are ever-increasing, and waiting lists get longer each year. You want to have choices available to you in order to deal with your critical illness, and having a lump sum of money provides you with options. Over the past five years, major insurance carriers have worked together to standardize the definitions of the critical illnesses covered in the plan, and they cover a variety of major illnesses, such as heart attack, stroke, life-threatening cancer, Alzheimer’s, multiple sclerosis, Parkinson’s, and occupational HIV; the list covers a total of at least 25 critical illnesses. Additionally, certain carriers have included a long-term care feature in their plans called a “Loss of Independent Existence” rider. This rider means that if you cannot perform two out of the six daily activities of living (bathing, dressing, toileting, bladder and bowel continence, transferring, and eating) or have a cognitive impairment, you will also receive a lump sum. Once you receive this payment, there are usually no restrictions on how the money can be spent.
The younger you are, the easier it usually is to qualify for critical illness insurance. I always recommend to my clients to try to put a critical illness plan in place as soon as they can. You might also want to consider placing a critical illness policy on your children while they are young, and then once they reach adulthood, you can transfer the policy into their name. You never know when life will throw you a curveball and make you or your children uninsurable.
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From Chapter 3 of Heal Thy Wealth: How Doctors Are Misdiagnosing Their Own Financial Health And What They Can Do About It. KINDLE NOW ON AMAZON: click here
Eighty-five percent of Canadians worry about getting a critical illness. But if they actually become ill, only 5% have an insurance policy that will act as a paycheque. Want to be in that 5%? Then watch this video.
Make sure you click on the video to subscribe and see other great content on my channel – including an exciting new MasterClass!
It’s the big launch of my new YouTube channel today – and as a bonus, I am delighted to share this second video with you: Bullet-Proof Financial Planning!
Make sure you click on the video to subscribe and see other great content on my channel – including an exciting new MasterClass!
Today: Good debt vs. bad debt — and yes, there is a difference!
The third in a three-part series by John Moakler, BMath, CFP, CLU, CSC
With many people out of work, or with their income drastically reduced, the pandemic is the time to manage your cash flow more carefully than ever. And, with our opportunities to spend so drastically reduced, new spending habits are taking shape — so this is the perfect opportunity to think about making them permanent. Today, we look at good debt vs bad debt — and yes, there is a difference!
Nobody is going to knock on your door and say, “I would absolutely love to buy your credit card debt.” Likewise, don’t hold your breath for someone to ring your doorbell and announce that they want to buy your car loan. So you can understand why we consider these kinds of debt to be “bad.”
However, somebody will indeed knock on your door and offer to buy your home. Your mortgage in this instance is, clearly, “good” debt. Making that debt even better, the value of your home will generally increase over time.
So, be more willing to incur good debt than bad. And, look at restructuring your bad debt. For example, if you own a home with a mortgage — and you have a car loan, or you’re having difficulty paying off your credit card on a monthly basis — look at consolidating these debts into your mortgage payment. Why? Because credit cards have incredibly high interest rates, and also because interest on your credit card and car loan is compounded monthly — or in some cases, daily — which makes the overall bill higher. Interest on a mortgage, on the other hand, is only compounded semi-annually, which will serve to shrink your overall debt.
Here’s something else: more than 50% of home owners who have paid off their mortgages have a Home Equity Line of Credit (HELOC) with an outstanding balance. Are you one of them? If yes, your outstanding balance can be in the thousands or hundreds of thousands of dollars. The interest rate on a HELOC is compounded daily, and what often happens is that you get into the habit of only paying the interest each month — which compounds your debt problem even further because you are not paying down the principal.
If you have a mortgage and not a HELOC, you can be much better off — because every payment has some portion going to pay interest, and also a portion that goes to paying down the principal.
If you truly want to get a handle on your expenses during the pandemic — or at any time, for that matter — seek the advice of a professional Certified Financial Planner (CFP) or Chartered Life Underwriter (CLU), two crucial certifications I have earned. Get help with developing a monthly budget. Most financial planners have developed their own tools or templates to help you with the budgeting process.
JOHN MOAKLER BMath, CFP, CLU, CSC
President and Senior Executive Financial Planner Moakler Wealth Management Inc.
The second in a three-part series by John Moakler, BMath, CFP, CLU, CSC
With many people out of work, or with their income drastically reduced, the pandemic is the time to manage cash flow more carefully than ever. And, with our opportunities to spend so drastically reduced, new spending habits are taking shape — so this is the perfect opportunity to think about making them permanent. Today, we consider The Latte Factor: the seemingly minor expenses that add up to a big difference.
It is absolutely amazing how much we actually spend on coffee at Starbucks, Tim Hortons, McDonalds or wherever else we get our java fix. Especially if we are buying $4 or $5 lattes. Then there is the money we spend on drinks and dinner, lunch whether for business or pleasure, etc. etc. The money just seems to magically disappear.
It’s something I call the Latte Factor. Here’s the super-simple way to beat it: over a three-week period, monitor what you’re buying. By tracking what you are spending on — surprise, surprise — you will have a better understanding of where your money actually goes.
Then, review the products and services you’re buying each month and ask yourself: “Do I still need to buy this stuff?” Often, we get into habits and continue to pay for services we no longer need, or we could reduce.
Also pinpoint at least one or two expenses you can slash right in half. That’s right: by a full 50%. Once you come to terms with how much money you’re actually spending on things that aren’t that important, you might be surprised how easy it is — and how satisfying it is — to cut back.
Then you can develop a monthly budget — and stick to it. And if you do, retirement will be within reach before you know it.
If you truly want to get a handle on your expenses during the pandemic — or at any time, for that matter —seek the advice of a professional Certified Financial Planner (CFP) or Chartered Life Underwriter (CLU), two crucial certifications I have earned. Get help with developing a monthly budget. Most financial planners have developed their own tools or templates to help you with the budgeting process.
JOHN MOAKLER BMath, CFP, CLU, CSC
President and Senior Executive Financial Planner Moakler Wealth Management Inc.
The first in a three-part series by John Moakler, BMath, CFP, CLU, CSC
With many people out of work, or with their income drastically reduced, the pandemic is the time to manage cash flow more carefully than ever. And, with our opportunities to spend so drastically reduced, new spending habits are taking shape – so this is the perfect opportunity to think about making them permanent. In the first post of this three-part series, John asks some tough questions about your credit cards.
When was the last time you put away your credit cards, and only used debit or cash to make your everyday purchases? If it’s been awhile, it’s something I strongly suggest you try. You’ll be amazed at how much more conscious you become of your spending. Because the truth is this: constantly using your credit card blurs the reality of what you can afford – versus what you simply want to purchase. It’s a question of what you want, versus what you actually need.
So, try putting away your credit card for just three weeks.
And then ask yourself, “What am I really buying?” Only using debit or cash provides you with an awareness of what you are actually spending on. Consider this statistic: according to Bailey Peterson, a research analyst at ValuePenguin, people are willing to spend as much as 83% more when they use a credit card versus cash or debit.
Just ask yourself: “How would I like to have 83% more money in my pocket right now?”
Exactly.
If you truly want to get a handle on your expenses during the pandemic – or at any time, for that matter – seek the advice of a professional Certified Financial Planner (CFP) or Chartered Life Underwriter (CLU), two crucial certifications I have earned. Get help with developing a monthly budget. Most financial planners have developed their own tools or templates to help you with the budgeting process.
JOHN MOAKLER BMath, CFP, CLU, CSC
President and Senior Executive Financial Planner Moakler Wealth Management Inc.
