3 Steps for Understanding Your Financial Situation

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3 Steps for Understanding Your Financial Situation

You cannot plan wisely for the future without knowing where you are financially today.

By Jack Lumsden, MBA, CFP® Senior Wealth Advisor, Assante Financial Management Ltd. Burlington, ON.

The following three steps will provide you a good early understanding of your financial position.

Step 1 - Gather all or your financial information in a single place.

It is important to create a list of everything you owe and own and have copies of all your financial documents in a three-ring binder and/or use a secure cloud storage service. A cloud storage service gives you access anywhere from your computer, and all the documents are stored and backed up for you in a remote secure storage system. That makes it easy to keep track of everything.

All your original documents, such as wills, mortgage agreements, deeds to the house, and insurance policies, should be kept in a safety deposit box.

Step 2 - Understand your mortgage options.

It is often the biggest thing most people owe, coupled with a house, the biggest thing most people own.

If you own a home, your mortgage is a major liability since it is a debt with incurred interest. Yes, it is an investment as well but is considered a liability while you are repaying it. Mortgage payments consist of principal and interest.

Understand that when you pay off a mortgage, you wind up keeping the cash equivalent of all the interest you would have paid over the years. You save a tremendous amount and then you can invest that money to achieve your long-term goals.

Consider if you are “house poor”. You may have a big house, but your monthly mortgage payments are so large, they leave you little room for anything else.

If you pay your mortgage bi-weekly on an accelerated basis vs monthly, your mortgage will be paid off in twenty-two years versus twenty-five years, and this saves a lot of interest.

Jack Lumsden, MBA, CFP® Senior Wealth Advisor, Assante Financial Management Ltd.

Step 3 - Be clear on how you might utilize credit.

Credit card debt is often much “higher” than what people perceive as far as what they owe. Unfortunately, many people will pay off the monthly minimum when they get their bill not realizing how high the interest rate is. Credit card interest rates are usually quite high, up to 20% depending on the card. On a $20,000 balance, you can pay up to $4000 a year, just to keep the balance at $20,000. We suggest that credit cards always have a balance of zero.

That being said, it can be valuable to have an emergency account or a line of credit equal to at least three months expenses that you can get your hands on easily and quickly for emergencies, such as losing your job. The best place to keep your emergency stash is in a high interest savings account.

The ultimate goal is to pay off all your debts in this order: credit cards, personal loans, car loans, and then your mortgage. The first debt to get rid of is the one with the highest interest rate, and that’s usually credit cards.

Jack Lumsden, MBA, CFP® Senior Wealth Advisor, Assante Financial Management Ltd.

Having discussions about the 3 points above, can provide you a good early understanding of your financial position.

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Jack Lumsden, MBA, CFP®

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