Hello 2012! Shortly before Christmas I had a conversation with a client who was in a dilemma. You know what a dilemma is. It’s when you have two choices and both of them are rotten. Yet the conversation, which lasted about half an hour ended with her deciding on a positive action plan and a more hopeful feeling about her family’s financial future. How did this come about? It was because she was able to talk through her situation with someone that would listen, and ask a thoughtful question here and there. The listening and questioning empowered her to make a decision. I feel privileged to play the role of accountability partner/listener so that clients can organize their thoughts and thereby summon their courage to make the decisions that will be fruitful for their entire future not just financial.
In the spirit of the season just passed, let’s begin this newsletter by making a list and checking it twice. This list will reveal the hitherto untold interdependence of all aspects of your financial situation. It is also a how to list for you to put theory into practice, if you haven’t already.
1. Have a long term perspective of your finances. How to: By understanding 2 facts. It is not how much you earn it is how much you keep of what you earn, and applying a strict definition of the word asset. An asset is something that has the potential to increase in value. The things that most people spend their salaries on are not assets. Ask yourself: Do I want to be one of the 33% who retire with debts? (1)
2. Keep track of your spending for a month. How to: Ask me to provide templates or you can set up a spreadsheet. There is also various software that help you keep track of spending, although I am not keen on the software that you allow to access your various accounts.
3. Challenge yourself to save a certain dollar figure per month. One client does this and her reason is that she wanted to see if they could do without that certain amount. How to: set up an automatic withdrawal plan. You likely will not miss the money that is being saved.
4. Set a goal of increasing savings/investing on a yearly basis. Or you could increase your monthly debt or mortgage payment yearly. Or promise yourself to make one extra debt or mortgage payment annually. How to: ask me to calculate the total interest you would pay if you made only the minimum or regular payments. That dollar figure will motivate you to action so you don’t go to work every day to make the bank rich. Have the goal of being one of the 18% of Canadians who are debt free between 45-54. (2)
5. Do not regard the money on your credit card as yours. It’s not. In fact I wouldn’t be surprised if that little piece of plastic was the property of the credit company. Beware one day two burly men might come to your door grab you by the ankles and shake you upside down til your pockets are empty. Woe to us if credit gets that desperate!
6. The equity in your house is not your personal piggy bank to access at will to purchase things that are not assets. Sure I sound like a party pooping Eeyore but this trend in Canada has caught the attention of even the governor of the Bank of Canada. Home equity is at an all time low and if the Canadian economy is caught in a downdraft, homeowners are at risk to suffer the same fate as homeowners in the US.
7. Realize the importance of protecting your human capital and earning power when you have financial responsibilities. Financial responsibilities are dependents and debts. How to: Get life insurance when you are young and healthy, especially if you anticipate future financial responsibilities. Choose your insurance term according to the length of time you will have these responsibilities.
8. If you can’t face overhauling your entire budget, promise yourself you will improve on one part of it. For example buy a latte 3 times a week or lunch once a week instead of every day. Lattes, lunches, and electronic toys are not assets in your long term plan. If you understand the behavioural financial principle that present sacrifices are felt more strongly than future rewards you can stick to your plan.
9. When the annual insurance renewal arrives in the mail read it carefully, especially the fine print. When I looked at our auto insurance renewal I had several questions that I phoned to ask about, which resulted in a savings of over $100 and a lower deductible.
Some of the ideas on this list plus the idea for the list itself came to me from my clients. These clients have discovered that financial responsibility has rewards. High fives are in order! There is synergy in a client planner relationship. Both clients and planner learn from each other.
As for the survey in the last newsletter. In the original one conducted most people chose the lower salary. It appeared that people would rather earn twice as much as the people they knew rather than the $100,000 because that was less than half of their peers’ salaries. My clients choose otherwise. I wonder if the results of the original survey are urban legend or what!
Tax time is coming soon. It would be a wise idea to start organizing your information now. If you need a checklist of items to collect please let me know. Also I can use tax planning software to give you an idea of your tax liability.
Next newsletter: The reason for increased market volatility. The effect of endless choices in financial services and products. How your life philosophy and values can influence your financial life.
Sources: (1) Canadians’ love affair with credit. Investment Executive, Oct 2011 p 21.
(2) Ibid