Author: citicinn

The way we perceive our world, interact with each other, and make decisions is influenced by our subconscious paradigms and values. We are not often aware of this influence.

With respect to our finances the more we become aware of these viewpoints the better we can make sure they work for and not against us. We use these filters in our daily living.

Confirmation bias is where we focus only on information that supports our already established viewpoint or opinion. This is prevalent in the political perceptions people have, especially with respect to how citizens perceive parties that they are not affiliated with. This can also be a big obstacle in our interpersonal interactions.

Did you know that the most popular item on a restaurant menu is the second most expensive entrée? That is because restaurants are aware of our anchoring bias, where we use the first information we receive to help us process any other information. Therefore the $95 grass fed steak makes the $42 free range half chicken seem like a bargain. I observed this exact pairing on a menu the last time we were invited to eat out. Anchoring bias can also cause us to disregard or discard information that is valuable simply because of our confirmation bias.

Confirmation bias can also cause us to make decisions that keep our status quo. Change is uncomfortable and we factor that into any decision that could disturb our comfort zone. We will of course make changes if circumstances force us. But why wait for that scenario? A lot of financial planning is preventative.

Part of the reason we sort information like that is to reduce our discomfort when information is presented that causes what is termed cognitive dissonance. Most people will do anything to lessen cognitive dissonance and to maintain the status quo, including discarding or disputing information that causes it.

It is easy to rationalize our spending habits and decisions to put more value on items we purchase or experiences we pay for. It is human nature to want to fit into whatever community we are a part of.

Research has shown that many of the decisions we make are not as rational as we believe them to be. Our decision making skills are strongly influenced by our emotions. In my financial planning practice I have seen many instances of that, enough to write many blog posts.

Two books I highly recommend that will be encouraging and edifying are: The Organized Mind by Daniel Levitin and Predictably Irrational by Dan Ariely.
Also if you want to know the source for some of the ideas in this post please contact me.

People are always trying to find a method to help them save money. There is no doubt that there are endless temptations to spend money in today’s society. The research behind marketing works very hard to separate people from their money. I have said it before but it is worth repeating: Spending your money foolishly will ensure that others will benefit more than you.

Here are a few ways you can get yourself into the habit of saving. They are in a sequential logical order which might be the building blocks for success.
1. Yes, cash still exists! If you feel you have a bad spending habit pay for all your purchases with cash instead of debit or credit for a set amount of time eg a week or a month. Those plastic cards serve the purpose of helping people overspend.

2. Get into the piggy bank mode. Find a nice container in your house that you can put your spare change in. Of course it won’t be enough for a nice vacation but it is the beginning of a productive process.

3. Do not wait to be in the mood to start saving. That mood may never happen. Instead save at specific times of the year, or certain seasons. Again this is to start a productive process. For instance start in January to save for a summer vacation.

4. if you do start to save for a specific short term goal and you have a certain place or account for it, give it a name. The Newer Car account or the Paris vacation account, My Sponsored Child’s account, or My Nephew’s Wedding account. Naming the savings could prevent you from pilfering that account for frivolous pursuits.

5. Write down your goal. Try and make it more specific than general. Also record what actions will be needed to achieve it. Then if possible tell a trusted friend or significant other. You can inform them of your progress and they can hold you accountable.

6. You will have a better chance of succeeding if you set one goal and work towards it than trying to achieve multiple goals at once. For instance, when I was trying to change my eating habits for better digestive health I worked in small increments. First I stopped eating after supper. When I felt that was an established habit then I stopped drinking juice and substituted water. Then I cut out most sugary sweets……well you get the picture.

Next blog post I will discuss how your money paradigm can hurt or help you.

Cosmopolitan June 2016

I apologise for the long hiatus. There were topics that readers might have been interested in such as the ramifications of joint ownership, the role of an executor, but nothing to write a proper blog post.

Financial independence in retirement is essential. This blog post stemmed from a conversation I had with a young couple, parents of a 1 year old and another on the way. The mother is a public sector employee, who will take a 1 year maternity leave. I was very surprised when she told me that her pensionable service commitment had to be paid in advance in one lump sum before she began her maternity leave. This was due to administrative logistics. The amount was thousands of dollars. We did discuss what would be a proper course of action, but we did not arrive at a satisfactory conclusion.

I have private sector clients whose companies will continue to pay their pension benefits while they are on maternity leave. It is understandable that the employer would want the employee to continue to pay into the pension plan but to ask for a year’s commitment all at once puts the employee in a tough spot.

Then I read this article that got me really annoyed.

But first some background information.

An annuity is a cousin of the pension benefit. The way it works is you give a big amount of money to an insurance company and in return you get a predictable monthly income for a guaranteed period of time. The retirees who would benefit the most from annuities would be those who want security and are aiming to become centenarians. Retirees in poor health or who don’t like to be locked into certain monthly amounts that cannot be changed should avoid these.

It is a little known fact that females who purchase annuities with the same initial deposit and at the same age as men do not get the same monthly amount. A woman who purchases an annuity at age 65 will get $474, a man of the same age will get $519. If they both wait until 71 to purchase their annuity the woman will get $548 the man $603. Being the data geek that I am I went and worked out that if both those 71 year olds lived to 85 what each in effect paid to get that predictable monthly income. The man comes out ahead, at $101,304. The woman actually paid over $8000 because she would get only $92,064.

When questioned about this insurance companies trot out the usual statistics that women usually out live men and therefore since they live longer it costs the company more. But consider that the Canada Pension Plan benefits are determined by age and contributions to the plan through time in the workforce. Private pensions are prohibited by law to not base their benefits on gender.

There should be no distinctions between women’s and men’s dollars. The European Union agrees, and 5 years ago outlawed discrimination based on gender for annuity pricing. Canada needs to follow suit.

I would be the first to say that being a mother is one of the most satisfying roles in life. But women are certainly punished financially for the time they take away from the workforce to raise their children. It seems unfair to put them on unequal footing in their golden years.

(1) The Globe and Mail, Elizabeth Shilton May 18, 2016

During a recent client meeting, we were reviewing the family budget. This is a couple with 2 young children. At present only 1 parent works. I assured them that their budget was in the ballpark, that they were not spending in an outlandish way. Still, one of the parents felt that the amount they spend every month was a lot. He then asked me: what kind of jobs do people have to spend that amount every month?

Indeed! That was a very astute question, and got me wondering. And being the data geek that I am, I went home, got pencil and paper, and started crunching numbers. His question has stayed with me since he asked it. And please forgive me, but this blog post is going to take you around and around the mulberry bush, for those of you old enough to remember that rhyme.

Why the dance around the mulberry bush? Well it has to do with percentages. Let’s pretend for a moment that you are applying for a loan at the bank. In order to assess if you are a good candidate for a loan the bank will want to know your income and how much debt you have. They look at percentages of debt to income.

Let’s get 1 thing straight here. Debt DOES include your mortgage. And me being a cautious and prudent financial planner, I am much less generous than the bank when it comes to that crucial percentage. And this is because I want you to have more than water and crackers on your dinner table.

The range of debt to income should be between 30-35%. So here is the mulberry bush dance. A lot of people have the following as debt: Mortgage, car loan, credit card, or line of credit. When a wage earner starts listing their monthly spending scheme, starting with the fixed expenses it might look something like this:
Mortgage 20%, car loan payment 10%, line of credit payment 5%, credit card 2%. property tax etc etc. If those categories exceed the recommended percentage you know that the other categories are going to suffer. Or the only debts that will get paid are the mortgage and car loan. Because if you look at the overall percentage you should have, and see the categories that must be included in the debt to income ratio you might start to feel like it is a dance around the mulberry bush. Or the wage earner will start to feel his or her boss is underpaying him or her, because he or she thinks that a higher salary is the answer.

From my years of observation, to live in Calgary you would need the following yearly salary: Single $40,00-$60,000, no mortgage. Couple no kids, or mortgage $70,000. Family $90,000 with a mortgage. The bank will not look at anyone who wants a mortgage unless they and their spouse have close to 6 figures. Feel free to debate me on these observations.

So if you want a review of your family budget I am happy to oblige. Believe me after 16 years in the profession, I have seen a lot of budgets. That experience is invaluable to you.

Recently 2 of my clients, a couple with grown children, reached the end of their 20 year life insurance term. They are 50 and 53 years old. The wife showed me the options presented by the insurance company, and asked my advice. My first question to her was: Do you think you still need life insurance? In other words do you still have major financial responsibilities and how are you doing on building your estate?

They are the first clients of mine who have arrived at an important juncture in their financial plan. Having paid off their mortgage in the recent past, with grown children, and a disciplined savings plan, whether to renew or purchase life insurance deservedly requires serious discussion. By the way I have been their financial planner for almost 17 years.

Here are some points to ponder.
Hopefully, like my clients when life insurance is purchased, you bought it when you were young and healthy, and you bought it for the proper term. I have seen too many cases where a 10 year term was purchased. But almost always your present financial responsibilities will last longer than 10 years. You can’t send your kids out to work at 10 years old, nor do most homeowners pay off their mortgage in 10 years.

So what happens at the end of 10 years and you most likely still need life insurance? You are 10 years older, and possibly in poorer health. Therefore premiums will cost more. Purchasing a proper term is an altruistic act, you are thinking about the people that are important in your life.

If a client has been properly advised, and has followed that advice by being disciplined in their spending and savings habits, he or she can definitely arrive at the point of being self insured. I know there is a camp that claims the need for life insurance is permanent, but there is no good general answer to that assertion. Every family is different and as always proper discussion and evaluation is necessary.

Questions and comments are welcome.

Are you getting a refund on your tax return this year? If so have you thought about what you will do with the money?

Let me set the perspective for you. This money is not found or even fun money, like the toonie in the couch cushions or the twenty you forgot in your pants pocket. No, your tax refund is the government paying back your loan to them for the year. Therefore, this money has purpose.
Here are 3 actions I recommend you take with your refund. They are in order of importance:
1. Start or add to your emergency fund. In these times, I would advise at least 3 months of living expenses.
2. Pay down or eliminate your high interest debt, such as lines of credits or credit cards. And resolve afterwards not to carry a balance on them.
3. Open a TFSA or add to your RRSP.
4. If you have done all of the above treat yourself or your family.

Questions and comments are always welcome

I would be remiss to not write a blog post on the recent federal budget, even though it is not an exciting topic except for a data geek like me.

It was a rather ho hum budget but there are 2 relevant facts to note. First some of the more important announcements came long before the actual budget. For most income earners the 3 most important were:
1. Changes in tax percentages. The most notable is a reduction in the second tax bracket to 20.5% from 22%.
2. Also any income over $200,000 will be taxed 33% instead of 29%.
3. A decrease in the TFSA limit from $10,000 to $5,500, but indexation of the limit was restored. The $10,000 limit was not repealed which was something I was wondering about. So in total the maximum room to contribute to a TFSA in 2016 if you have never contributed is $46,500.

It is also important to note that the Finance Minister has announced post budget that the new government has not completed their review of the tax code. I am sure most financial professionals would like to see a simplification of the tax regime, because that would increase successful compliance which in turn would save taxpayers money in the long run.

So what changes are relevant to most Canadians? The majority of items in the new budget deal with tax credits (remember from a past post that credits reduce tax owing). Families with children under 18 and students will take an interest in these changes.

So what credits got axed? There have been a number of changes on Schedule 1 the page where you record all your credits.

The child tax credit and the the family tax cut have disappeared.
The fitness and arts activities for children 16 and under are cut in half for the 2016 tax year and will disappear in 2017.
The child care expense deduction has been increased by $1000.
The textbook and education credit will be gone starting in 2016. Tuition expenses will still be a credit. The new government has said they will bring in a nonrepayable, nontaxable grant program for low income students but no details have been released.

So that’s it. If you have any questions please let me know. I am sure there will be more announcements as the year progresses, I will keep you posted.

In the last blog post Evelyn Jacks, tax expert laid out the analogy of our financial lives being the floors of a building. It is the stage of our life where we have discretionary income that will determine if we get to the room with the best view.

If we manage our financial capital wisely in our later years we will become less dependent on our human capital. Remember the old board game Mousetrap? The most fun was in setting up the various components of the game, and watching the series of contraptions work in sync. And the mouse would not get trapped unless everything worked properly. Clients who recognize the interconnectedness of their financial decisions are going to be the ones to get to the room with the best view.

Jean Freed, a financial advisor and professor of finance at Concordia University, keeps a box of Kleenex in her office for the times when clients’ emotions overflow into tears. In her interview with CBC news she outlined the following negative assumptions about spending that she has seen time and time again:

Clients overestimate their earning power, especially in middle age and later.

They buy houses that they can barely afford. Housing costs should not be more than 35% of your income.

Clients buy brand new fancy cars and buy them too often. Both the house and car decisions are often based on whether the monthly payments are affordable. That is a mistake, because the interest costs are more important than a low monthly payment.

Clients eat out too often or eat out at expensive restaurants.

The attitude towards debt is too casual, because interest rates have been abnormally low for a long time and borrowers assume this is the new normal. Also: People assume that if the lenders keep lending them money they must be OK. “‘Why didn’t the bank stop lending me money?'” Why would they? It’s profitable. They don’t care if you can eat. (1)

It all boils down to how kind you are going to be to your future self. Are you going to make your future self work well into your golden years because of less than ideal choices to spend and borrow when you are young?

Sometimes I feel like my message is monotonous but the challenging times we live in bear repeating the message that we must be good stewards. And obviously other financial professionals are observing the same trends.

If you have mastered your lifestyle you owe it to your friends to pass on this knowledge so their future selves will thank them.

(1) http://www.cbc.ca/1.3395639

Most of my blog posts stem from the situations that I observe in both my professional and personal life. However, sometimes other financial professionals set out a very good case for financial planning that needs to be shared with my readers. Therefore the next 2 blog posts deal with 1 topic: How to get the room with the best view.

When I attended our annual company conference in San Francisco, our hotel room was on the third floor. The view from the window looked out onto another tall building. However, the top of the hotel had a conference room with huge windows on all sides which enabled one to see a panoramic view that was always interesting.

This blog post is based on a conference call with Evelyn Jacks a renown tax expert and founder of Knowledge Bureau. She compared our financial life to the floors of a building. We start out on the ground floor. With our precious human capital, skills and talents we get on the elevator to the second floor. Our human capital enables us to start building our financial capital.

On the second floor our financial capital is all non discretionary. Every dollar is allocated to one expense or another. These are our tuna sandwich, macaroni and cheese, university and just beginning working life. Very little play money here. But we are determined and forge ahead.

The next floor is the most important floor that will determine whether or not one gets to the room with the best view. On this floor we have some discretionary income which can allow us to increase our financial capital. But here is the floor that some people can get stuck on. It is lifestyle choices that determine whether you will push that elevator button to go to the next floor. That is the topic I will discuss in the next blog post.

The floor above is where you will manage the risks of inflation, taxes, and fees that can affect your investments.

Finally if you have created lasting wealth there is the possibility of leaving a tax efficient legacy to the next generation. Here, in the room with the best view you will be able to look back on your life and give yourself the lifetime achievement award because you have been a careful steward of your resources. At that point will you be able to say that your financial capital has benefited from lifelong compounding?

As the CEO of your own financial company here is a motivation to do your tax return in a timely manner. Most clients reading this blog post will get a refund. Take the amount of your refund and divide it by the number of hours it takes to do your tax return. For most of you it should not be more than 2 hours, if you follow the method below. If you are not motivated by that hourly rate you calculate, go buy yourself a tub of Fiasco gelato or tickets to the symphony as your reward for a job well done.

As your tax information arrives in the mail(usually), be prepared. Have a file folder in your favorite bright color or an envelope with your favorite brightly colored post it note labelled Tax Info. No I am not being silly. If you have either of these items that are the same color as everything else in your workspace, you might waste valuable time looking for it, during which time your motivation to stay organized will diminish rapidly. If you approach tax time in an organized manner you won’t have to punch pillows, yell at the cat, or eat a pile of dark chocolate.

Tax information doesn’t always arrive in its own envelope. Sometimes it comes with a year end statement. So don’t let your mail pile up for months unread. Believe me I wish I was talking fiction.

Also some companies get you to access your T slips online. CRA will not accept ‘I forgot.’ as a reason to not record income on an account. On the other side of the coin they will not help you remember a deduction or credit.
You should have all your required information by the end of the first week of March. If you are expecting a refund now is the best time to beat the rush and file quickly, so you can get your money faster and eat your gelato. Or you can contact the tardy companies for your T slips.

To start the tax return, get yourself a large workspace, and a couple of uninterrupted hours. Preferably those 2 hours are not on April 30th at 10 pm. Of course you already know that April 30th is the deadline to file if you owe taxes.

Start by making 3 piles. An income pile, a deduction pile, and a credits pile.
The income pile is all your T slips, T4 T3 T5 EI and other income.
The deductions pile are items such as pension plan contributions(on the T4), RRSP contributions, child care, union dues, moving expenses, and other specialized deductions. The whole deduction is applied to reduce your taxable income and can increase a tax refund.

The credit pile will include medical expenses,(including premiums you pay for a private health plan) child fitness or arts receipts, tuition and student loan interest forms and donations. Only a percentage of these expenses will reduce your tax owing, and they will not generate a refund.

If you are using software(which I highly recommend) you will generate the necessary pages in your program and carefully enter in your numbers.
Remember that for RRSP contributions, medical expenses, and donations you can maximise their usefulness by choosing the best time to claim or carry them forward. Please let me know if you want more details.

Why did I refer to tax return as a treasure hunt? Did you know that you can go back 10 years to adjust a tax return where you may have missed information that would have given you a more favorable outcome? The T1 Adjustment form can help you do that. Please let me know if you need more information.