4 Ways to Get Your Finances and Taxes in Order While in Lockdown
Let’s face it — the last 12 or so months have been difficult to say the least.
For many of us, our lives have been completely upended. We’ve had to figure out how to do our jobs from home, or we’ve had to go into work while wearing a whole lot of Property, Plant and Equipment (PPE).
Either way, we’ve all had to face a number of changes along the way and learn how to adapt to them.
One positive that has come out of the current situation is time. For a lot of people, they now have more time than they ever did because, well, there is not much to do. You can’t go out and have dinner with your friends. You can’t visit your family. You can’t take your kids to soccer practice. As a result, you have a lot more time on your hands.
While watching the latest episode of your favourite show on Netflix is a great way to spend your extra time, there are a couple of other things you can do.
At
Bridex Accounting Services, founder
Baldip Moore, CPA, CGA, recommends spending some time reviewing your finances and
taxes.
Why not take a few minutes each day to get your finances in order so that you’re better prepared for the year ahead — and can keep more of your money in the bank along the way.
Here are the top 4 things you need to look at:
1. Look at how much cash you have on hand and review your savings
This is a great time to re-evaluate your budget, spending, savings, and cash flow. It’s likely your budget has changed over the last year because of the differences in your lifestyle.
For example, are you still spending money on commuting to work or your business, or is your commute now just a walk down the hall?
Similarly, are you still spending money on entertaining clients and friends, or has that money moved into your grocery bill? Do your kids still go to their after school program, or are they spending more time at home?
Figure out what your financial needs are vs. your financial wants.
Take a closer look at your monthly living costs now and how they compare to your “normal life”. It’s likely there are some changes — both positive and negative — you can make to your budget.
Once you know how much money you’re spending, think about how much you should be saving. Most people save around 5% of their earnings. While a good start, it’s simply not going to be enough should you have a life emergency.
It’s best to save at least 10% of your earnings on a monthly basis.
This will provide you with a solid rainy day fund you can use when times get tough and you need a little extra help.
2. Consider life insurance as a savings strategy
There are many ways to more effectively save your money and grow your net worth. A low-risk but high-benefit option is to use life insurance as a savings strategy.
Life insurance policies vary by provider and plan, but the base concept is the same: you put money aside each month — which grows with the investment component — towards a sum that your family can access when you’re gone. Essentially, it’s a fancy savings account with certain benefits.
While it’s certainly a good idea to put money aside for your family to rely on should you pass away, your life insurance can actually help you in the present, not just in the future. When you’re putting money into your life insurance plan, you’re saving it — not spending it.
Depending on your plan and whether it has a cash value, you may also be able to access those life insurance funds before you pass away. This means that if you're planning on making a big purchase or investment, like buying a new house or car for example, you could potentially use those funds for this purpose.
A life insurance policy offers you tax-sheltered growth, because you don’t have to pay taxes on your investment earned until you withdraw the money. You can access the funds now or leave them for your family for later. Regardless, you have a nice sum of money in the bank that steadily grows your net worth.
3. Update your estate plan
Have you thought about what would happen to your business, your practice, or your finances if you were to pass away? The current health crisis has forced a lot of people to take a long, hard look at their finances. While life insurance is a good option to grow your savings, you also need to consider setting up or updating your estate plan.
How would your family carry on if you became injured, ill, or passed away? You have worked your entire life to build your estate. Ensure there is a plan for it for after you're gone so that your investments and business are protected.
An estate plan is a way to manage, arrange, and organize your net worth and finances for after you pass away. With an estate plan, you can distribute your assets as you intend — instead of your estate going to the government. Plus, there are significant tax advantages with an estate plan.
You can ensure that your loved ones have to pay minimal estate taxes and probate fees if you plan your estate in advance, ensuring your family keeps your hard-earned money with them — instead of having to part with it during a difficult time.
4. File your taxes to date
This is a big one that everyone needs to look at: make sure you file your tax return — and file it on time.
In addition to following the law, there are many benefits to filing your tax return:
- You can avoid late filing penalties if you have taxes owing. These can add up each year.
- Even if your income is $0, you can grow your contribution room for your Tax-Free Savings Account (TFSA). This is a great way to save your earnings tax-free each year.
- If you earned an income, then you can grow your Registered Retirement Savings Plan (RRSP) contribution room, helping you save tax-deferred for your future.
- If you have paid taxes which are withheld, you could be eligible for a tax refund. Even a few hundred dollars can be a big help. Plus, you could be able to get a Goods and Services Tax (GST) / Harmonized Sales Tax (HST) credit for low and modest income earning individuals or families.
- If you have children, you can apply for the Canada Child Benefit, which is available in non-taxable monthly payments.
And if these benefits aren’t enough, you also get peace of mind that your taxes are filed and out of the way — and you don’t have to think about them again till next year.
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