No, this is not a John Lithgow long-distance plan commercial. Remember these numbers, however, when allocating your paycheque.
All too often, people experience financial stress when something happens and they haven’t done a proper job of allocating their income. Ideally, an allocation plan will become a habit that leaves you prepared for just about any eventuality. Here’s how:
10% for Lifestyle Protection – Disasters happen and most rarely make the news. You have likely experienced at least one already. Very few people are in the financial position where they can cover the cost of an event without the help of insurance. Use life insurance to cover debts, last expenses and income replacement on death; vehicle insurance to cover the costs of damages or injuries; property insurance to replace lost or damaged property; critical illness insurance to help recover from a serious illness; disability insurance to replace a portion of your income if you can’t work because of illness or injury; travel insurance if you become ill while travelling outside your province or country.
10% for Savings – There will come a time when you will need funds for a certain event in your future. Put aside these funds regularly for things like education, home down-payments and, perhaps most importantly, an emergency fund. Eventually your savings should be at a level that will allow you to allocate some of these funds to other things.
10% for Investing – An investment is something that will generate an income, either right away or sometime in the future. This includes retirement savings, a business, income generating real estate, or funds that generate a regular income.
10% for Giving – There are financial benefits to you for giving to charity. The first $200 generates a non-refundable tax credit or 15%. Everything above that, within limits, gets a credit at the top tax rate no matter what tax bracket you are in. In Alberta, for example, the maximum credit is actually 50% which is 11% higher than the maximum tax bracket of 39%.
60% for Lifestyle – This is where everything else comes from – your home, your vehicle(s), your food and clothing, your vacations, your entertainment and hobbies. All too often, this portion gets too much income allocated to it and is the first to suffer when something goes wrong.
Your income is what makes your lifestyle possible. However, if your income stops due to illness, injury or death, will there be adequate funds for you and your family to maintain your lifestyle? Will your resources be adequate if you experience a short period of unemployment, when a child is ready for post-secondary education, or if you need legal help with an unforeseen problem? Will you have enough independent income in the future or will you have to keep working at a time when you would have preferred retiring?
If you don’t have a problem tipping a server 15% to 20%, why not pay yourself a little better than that? – M Dumond