The T.I.D.I.L. Factor: This is What’s Really Impacting Your Wealth
Building wealth is like constructing a fortress. Just as you need a Tough Infrastructure, Durable Interior, and Lasting protection to guard against external threats, your financial fortress needs protection from what I call the T.I.D.I.L. factor: Taxes, Inflation, Disability, Illness, and Loss of life. Let's explore each of these threats and discover ways to safeguard your wealth.
T = Taxes: The Unavoidable Reality
Taxes are like an unavoidable bill. You pay taxes on the money you earn, the things you buy, and even the money you save if you don’t use the right accounts. From the time you’re born to the time you die, taxes are a part of life. They’re like the price we pay for living in a society that provides services like roads, schools, and healthcare. Considering that taxes play a large impact on your wealth creation, you want to implement strategies that will reduce your tax bill on your earnings, savings and wealth transfer (upon death or while living). There are a multitude of strategies and it’s not a one strategy fits all which is important to consult a tax professional and financial advisor.
I = Inflation: The Silent Killer
Inflation is like a sneaky thief that slowly takes away your money’s buying power. Since 1924, the inflation rate in Canada has been about 2.95% each year. This means that over time, the cost of living goes up.
The Consumer Price Index (CPI) is a tool that measures inflation by tracking the prices of a basket of goods and services. This basket includes:
Food: Groceries and eating out. Think of fruits, vegetables, meat, milk, and restaurant meals.
Shelter: Housing costs like rent, mortgage payments, property taxes, and utility bills.
Household Operations: Items like furniture, appliances, cleaning supplies, and services like phone and internet.
Clothing and Footwear: Clothes and shoes for men, women, and children.
Transportation: Costs related to vehicles, fuel, public transit, and vehicle maintenance.
Health and Personal Care: Medical expenses, prescription drugs, dental services, and hygiene products.
Recreation, Education, and Reading: Books, newspapers, recreational equipment, cultural activities, and school fees.
Tobacco Products, Recreational Cannabis and Alcoholic Beverages: Cigarettes, cigars, and alcohol bought in stores or consumed in restaurants.
To keep up with inflation, one solution is to invest your money in something that grows faster than inflation. If you’re careful, you can get returns of 3% - 5%. If you’re willing to take more risks, you could earn 10% or more. Keeping your money in a savings account with less than 1% interest means inflation will slowly erode your wealth. The second solution, earn more. Try asking for a raise that represents the inflation increase. You’ve earned it and deserve it, right?
Protecting Your Ability to Earn
Your life, while priceless, has an economic value called human capital, which represents the money you can earn over your lifetime. If you get sick or hurt, you might not be able to work, which means you won’t earn as much money. This can make it hard to save for retirement, pay for your kids’ education, or keep up with bills. That’s why having an emergency fund is so important and should be your first line of defence.
There are also types of insurance that can help protect you:
D = Disability Insurance: If you get hurt and can’t work, this insurance offers you up to 50% - 100% of your pre-disability income for short term disability and 60% - 85% of your pre-disability income for long term disability. The proceeds can be used to help pay bills and keep your savings on track. According to the Canadian Life and Health Insurance Association (CLHIA), one in three working Canadians will have a disability lasting more than 90 days before they turn 65.
I = Illness: Illness is making reference to a serious illness where critical illness insurance helps if you get very sick with something like cancer, heart disease, or a stroke. It gives you money to help with medical costs, support your family, and cover other expenses while you recover. Many Canadians may face these illnesses in their lifetime. Approximately 62,000 strokes occur in Canada each year, around 2.4 million Canadians are living with diagnosed heart disease, and approximately 50% of Canadians are expected to develop cancer at some point in their lifetime, with about 25% dying from it.
L = Loss of Life: If I were to draw your life timeline from now till retirement, your working years would be marked by goals you want to achieve. Discipline to a financial plan will help ensure you reach these goals. However, an unforeseen event like death can derail the plans and dreams. Life insurance can help keep the promises you’ve made to your family, like providing the financial resources for your kids’ education, buying a home, or that dream family trip.
If you want to protect yourself without insurance, you’ll need a big emergency fund. But until you have enough saved, it’s smart to have insurance.
Conclusion
Now that you know the five factors that can affect your ability to build wealth, it's time to assess how well-protected you are against them. If you're missing any safeguards, don't delay—take action now. "Only put off until tomorrow what you are willing to die having left undone." — Pablo Picasso.
Book a call with us, and we’ll help you figure out the best plan for your situation.
Talk to you soon.