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Will Your Future Self Thank Your Present Self?

Here are 5 questions to ask yourself to reflect on your future financial goals and to hopefully help you to be prepared for whatever the journey may bring:
What are your top 3 financial priorities or concerns?
Who do you care about and/or are financially responsible for?
Where do you want to be 5 years from now?
What do you want your money to do for you?
How old will you be when you are debt free?

It can be helpful to think of life’s milestones as well; when will your children go to junior high, high school, university? How old will my parents be in 5 years 10 years? How old will I be or my spouse?

The pace of our lives has us mostly focused on today. Asking these questions will allow you to have a plan for the future. As always I am happy to discuss the answers to these questions in a meeting.

Borrower’s Remorse

Two recent client situations led me to write this blog. There is a myth that is perpetuated that financial success is achieved by choosing the right investments with a good return.

That is untrue. Your own financial behavior will have a greater effect on your outcome. Nowhere is this more true than in the realm of borrowing and lending.
Canadians are the most indebted citizens of the G7 countries according to the latest Stats Can report. For every dollar of income Canadians have at least $1.60 of debt. We are more indebted than Americans were in 2008 before the start of the financial crisis.

Lenders have made borrowing cheap, easy, and attractive. Along with societal peer pressure to have the newest and best, attitudes towards borrowing and carrying debt, and high prices for any major purchase can have a not so happy ending. Canadians need to learn more about borrowing.

Most people are familiar with how a mortgage works. Within the last decade variable rate mortgages have become popular. However, as interest rates have increased it would be wise to plan further than the next year or 2. Variable rate mortgages work best when you have extra money to pay the principal before or when rates rise.

It is the line of credit(LOC) that can trap borrowers into a never ending cycle of indebtedness. A line of credit is an on demand loan. In theory, the lender can ask you to pay off the entire loan anytime. They would probably never do that as they profit handsomely from collecting the interest on a loan that may never be repaid.

The borrower has options as well, having the right to pay off the entire loan at any time, unlike a mortgage. Lines of credit offer flexibility in payments unlike a mortgage. As long as the borrower pays the minimum interest there is no requirement to pay more. They are often very easy to get especially if the line of credit is unsecured. Unsecured means there is no collateral against the loan. For that privilege your will pay a higher interest rate, and that interest rate is calculated more frequently than a mortgage. This can become a debt trap where a large amount becomes harder to repay. It is called revolving debt for a reason!

The problem with borrowing money is that the borrower only focuses on the monthly payment they can afford and not the total interest cost. Lenders are loath to correct that tendency because if you the borrower knew the total interest cost you would never enter into the agreement. The interest cost can exceed either the amount borrowed, and/or the values of the purchases made with the borrowed money.

Secured lines of credit have higher limits because the collateral is your house. Recently one of my client couples was offered a LOC for $150,000, when they had requested less than a third of that amount. They were smart and used a little 3 word phrase: No thank you. I suggest you go to the mirror and practice that sentence, as good preventative financial planning. They told me the bank was mystified why they didn’t accept: “You can take it you don’t have to use it.” “Precisely why we don’t want it.” they said. I was proud of them that they had remembered and applied the advice from our discussions of the past.

I have seen maxed out LOCs where the only way the borrower will get out of debt is to do something drastic like sell their house, or something even worse. The problem is debt creep, you borrow from the LOC a little at a time until it becomes a huge unmanageable number that you don’t want to look at or deal with.

Remember that only making minimum payments and owing close to, or the maximum you can borrow will hurt your credit score.

Recently I helped a client walk through the process of refinancing a line of credit and her mortgage. She had used the LOC to buy a car. I don’t blame her with the price of car financing. I am sure you have noticed that the most attractive financing is on a new and expensive car. But with a salary that hadn’t risen significantly in 3 years, she had to do something. In the end I got her to negotiate a better deal. That was very gratifying work to me, when I used my extensive experience and knowledge to empower her to get a better outcome.

And here is the second exercise I would strongly suggest you do which will take less than a minute.

Ask yourself; How old will I be when I am debt free? Don’t say something academic like my mortgage/LOC/car loan will be paid off in x years. Nah that is an theoretical number devoid of meaning. If you say I am 48 and my mortgage is going to be a minimum of 21 years I will be 59….

Let’s practice some financial preparedness. Don’t let life just happen to you.

Your Income and Out Go

Happy 2018 everyone! Hope your December was fun and relaxing!

The times I have spent with clients to help them get a handle on their monthly spending has always been very fruitful. At first some are reluctant to put in the effort to track all of the transactions for a month but they are always glad they did. And since most of us pay with a debit or credit card there is always a paper trail.

So far the people that have committed to this exercise have been surprised at how much they spend and always vow to do better.

So let’s begin 2018 with a to do list. The goal of the to do list is to be kind to your future self.
1. Allow yourself to keep a part of all you earn. Put another way don’t spend all that you earn.
2. If you allow yourself to keep a part of all you earn then you will be prepared for a period of less income. This period can happen for a number of reasons, unemployment, disability to name just a couple. Almost every wage earner will have a period of lower income and it often is a complete surprise.
3. Balance the wants and needs of today with your future life and financial goals,
4. Then you will not fall prey to marketing and advertising.
5. Avoid unnecessary debt. Canadians are among the top in the G7 in terms of indebtedness. For every dollar of disposable income, Canadians owe at least 1.60 in debt, according to the latest Statistics Canada figures.

To emphasize that last note, in late 2017 a consumer advocacy agency did secret shopping at car dealerships in Canada. They discovered that car purchasers for the most part were given few choices when it came to financing a new vehicle, nor were they given the details of the loan they did obtain. It is now standard to offer financing for 7 years. At that 7 year mark a car owner will have paid more than the car is probably worth and may not even still own the car. Remember a car is NOT an asset, because it doesn’t appreciate in value. Don’t be swayed by the low interest rate. What is more important is the total interest cost. The total interest cost will not be offered to you, you must ask for it.

The way to achieve your future goals and to weather any storms along the way is to be prepared and have good financial habits. We all know our incomes. We also need to know  where that income is going. I am here to be your coach and accountability partner on that journey.

Next up: Important questions to ask yourself and looking at your financial life in blocks of 5 years.

Our Future Planet

With regards to responsible or sustainable investing a client recently asked me: Are you recommending this investment for moral purposes? He wanted to know if he would be sacrificing a good rate of return for doing the right thing.

Maybe in the past that might have been a concern but today the opposite is true.
First of all let us establish the background to this discussion. There are many terms to describe sustainable or responsible investing. In the past the focus was on excluding companies that made their money on weapons, or tobacco, or even non renewable resources. The term green investing was a narrow definition that, especially in Alberta got a negative connotation.

But sustainable or responsible investing is all encompassing. Let’s give it our own definition: It is investing that seeks to leave the planet in a better condition for future generations by dealing with the issues of resource management and the challenge of population growth. It is investing that has a long term focus and seeks to reward productive company behavior.

With respect to Environmental, Social, and Governance(ESG) the investing public probably has a good idea of what the E and S represent. When you read news articles on the polluted ocean or child labor in developing countries that would fall under the E or S. But this blog post will discuss the G for governance. Responsible investment companies are beginning to use their power as shareholders to influence company behavior for the better. And data is being compiled that show the companies with good governance outperform the companies that behave in an unethical manner. Sometimes the term impact investing is used but let’s not get hung up on phrases.

Governance involves such topics as executive compensation, risk management, independence of boards and directors, combined CEO and chair role, business ethics.

The bigger the shareholder the more sway they have on company management. Companies take note. Investment firms that have clout can get a company to change. So even companies that are in sectors that most people would think don’t belong in a sustainable investment category could be chosen if they are open to improving their governance. An example of this is Walmart, who even 5 years ago would have been an untouchable candidate. But they have responded to shareholder concerns in a positive way with respect to worker rights, pay equity, and supply chain monitoring.

Closer to home a sustainable investment firm in Canada expressed concern that Dollarama’s board lacked diversity. When a majority of Dollarama’s customers are women, shouldn’t they be represented when developing company policy? The firm was successful in getting Dollarama to change the board composition.

Companies with good governance practices will avoid share destruction. Think Volkswagen, Wells Fargo, Equifax or Home Capital. In the age of the internet bad behavior will get busted sooner rather than later. Sustainable investment companies that use due diligence focus on good or bad governance will provide value to their investors. It is risk mitigation which does contribute to a better rate of return. And you have the opportunity to participate in this.

What You Need to Know Heading Into November

This blog post will follow the format of a news article by listing noteworthy financial events that will affect many Canadians. Here they are in order of importance:
Bill C-27 is rightly back in the news. The government has quietly tried to slip this into law, changing defined benefit plans into target date benefit plans. The employee then assumes more investment risk, and this creates uncertainty for their final retirement benefit. Although it will only affect federally regulated employees, other jurisdictions are already adopting target date plans.

Morneau Shepell the management company connected to the federal Minister of Finance may stand to benefit if the bill becomes law. That same company was also appointed to manage the Sears pension plan. Sears pension plan holders could lose a portion of their retirement benefit because of the Sears bankruptcy.

The CRA is revising the eligibility requirements for the disability tax credit(DTC). They are within their right to do so, but they are also going further by examining existing DTC claims. Sometimes they have revoked existing claims. The latest puts diabetics in the spotlight, where the CRA is requiring proof of the amount of life sustaining therapy that is performed weekly.

Revoking the DTC can have repercussions such as having to revise past tax returns, or closing the Registered Disability Savings Plan, or the repayment of RDSP grants. Mental disabilities are also being examined more closely.

Homebuyers who have a greater than 20% down payment will now be subject to a stress test, to see if they can afford their monthly payment if interest rates rise. Of course you already know that lenders would prefer to charge a higher interest rate to borrowers. The Bank of Canada still sees consumer debt as a vulnerability in the Canadian economy, which I agree with.

The proposal to change the taxation of investment income within a corporation is ongoing. The government has backtracked on its initial proposals and there are changes almost weekly it seems. Nothing has been finalized so please contact me if you have questions.

The Canada Child Benefit will be indexed.

Please contact me if you would like to discuss any of these topics further

Déjà Vu Montreal October 2017

For the most part my blog posts have leaned towards the more factual side of topics related to your money and finances. I thought I would make this blog post more personal where maybe you could get a glimpse of my personality and values, so you would know I am more than a data analysing, geeky professional.

I just returned from our annual conference this year held in Montreal, Quebec, a city I like to call my second home. I lived there briefly in the late 70s and that was where I met my future husband.

The conference was information intensive, with little free time, but fun. It is good to get exposure to new ideas even if I may not use them in our client meetings. An advisor who strives for excellence must always be aware of the latest events in the financial world, especially in terms of compliance and regulation. My favorite part of the conference, however, is making new connections with other professionals and getting their opinions.

Montreal is a beautiful city and I learned more about Canada’s early history. Knowing our country’s history is humbling and keeps me grounded. Montreal is 375 years old. For one of its birthdays Germany gifted a piece of the Berlin Wall, which is located in the Centre de Commerce Mondiale in downtown Montreal.

One thing I found very disturbing about Montreal is that the number of homeless people seems to have increased since we were last there in 2014 for the Grand Prix. The disparity between those who have a comfortable life and those who are struggling is very evident. I am bothered by that because I still remember being a poor student.

This is similar to San Francisco which we witnessed in 2015. Every street and metro station had several people begging for money, food, or even a smile. Some had their pets with them, and one sign referenced a child. I found it heartbreaking. The early morning we left it was raining and we passed several people huddled in doorways, trying to shelter from getting wet. Businesses have adapted to this homeless population in various ways. At our AirBnB there was the usual front entrance code, but after 6 and on the weekend there was also a code to use the elevator.

Montrealers have accepted this as a fact of life. There seems to be little evidence of social services to enable these people to break the cycle of poor decision making, and to work towards a more hopeful life. It is easier to fall on hard times in Quebec, as they are heavily taxed and I am guessing wages are not high for many people. In addition to the GST they also have a 10% provincial sales tax. We are very fortunate here in Alberta that we have no provincial sales tax.

I came home grateful for what we have in Calgary. We are a very community minded city. Where else in the world would one be able to get free food for 10 days during the Stampede? Think of the way neighbors and strangers helped people during the 2013 flood. Or the winter transit strike a few years back where drivers would pick up people at bus stops. Or during the few crazy winters we have had where strangers would help drivers jump start their cars or get them out of the ditch.

With the civic election behind us, now is a good time to reflect on all Calgary has to offer, one of the most important being that there is a commitment here to give as many people as possible the opportunity to work towards a more hopeful life. There is an acknowledgement that each life has value and everyone deserves to be treated with dignity. Of course any city can improve but I am proud of what Calgary has done to help every one of its citizens if they so desire.

Check this Yourself More Than Once in Your Lifetime

We do a lot of verification in our lives. Is the front door locked? When does the oil in the car need changing? We go to the dentist for a checkup.

Your credit score and report are 2 items in your financial life that are rarely given a thought. That is until you find out it will affect you, usually in a not so fun way. This blog post will outline what you need to know.

First off, many readers might have heard that one of the main credit reporting companies, Equifax, was in the news because of a widespread hack which exposed over 100 million citizens’ sensitive personal information in the US. Canadians are affected as well. Make no mistake, personal information has become valuable currency when in the wrong hands. Equifax should be punished for the lack of oversight and slowness to report. Indeed, US investigators are looking into whether laying criminal charges are warranted for other related matters.

Most people know in a general sense how your credit history can affect your ability to borrow. But I would like to take a deeper dive for your edification.

To begin, you should check your credit report on a regular basis. Note I said regularly not often. Regularly means more than once in your life. You want to ensure that details reported are correct. And if not to get it fixed. Don’t rely on the few times the bank or other authorised personnel look it over. If you regularly check your credit history you will be in a much better position to deal with the fallout if you become a victim of identity theft or fraud.

Secondly, the higher the score more likely you are to be allowed to borrow on terms that are favorable to YOU. Of course you can always borrow money but the interest cost must be affordable. You want to be in the driver’s seat not the lender.

Here is how to be a responsible attractive borrower:

Pay all your bills on time, allowing time for the payment to reach the receiving institution. Don’t wait until one minute to midnight on the due date. Did you know that if you are even an hour late in paying, the entire balance will attract interest charges back to the beginning of the period? And then you are recorded as being delinquent.

Your credit report is looked upon more favorably if you are a responsible borrower with different types of credit accounts. And interestingly enough, someone I know well who has paid off their mortgage has been penalized because they don’t have a mortgage debt anymore. How ironic that careful financial management can be NEGATIVE.

Your credit score will be lower if the total amount owing is more than 35-50% of available credit. So get out your calculator if needed and do the math. These percentages are in line with the Total Debt Service Ration(TDSR) lending institutions use when assessing would be borrowers.

Delinquencies and derogatory items(no I am not making that up),will remain on your report and affect your score for years.

Too many inquiries by lenders will hurt your credit score. Also interestingly enough so will cancelling credit accounts such as credit cards. But given how identity theft and fraud are ongoing concerns, the less inactive accounts on your credit report the better. I know I am guilty of this. In 2015 when I went to a major hardware chain to buy our flooring, the amount owing was too high to pay by debit. And I usually don’t carry my credit card. So I had to apply for their store card to be able to pay. And I never used it again.

If you are a Royal Bank account holder you can access your credit history for free. In your online banking portal you will be directed to the TransUnion website. TransUnion is a competitor of Equifax.

Long term financial peace of mind depends on your proactive maintenance and productive habits. Please don’t wait until a crisis to manage or correct your credit history and score.

The Vanilla Index

Remember that line from Toy Story 2 when with reference to the limbo dance Barbie asks: “How low can you go?” Well I couldn’t resist taking the photo in the email because the last time I looked at the price vanilla it was just shy of $30. I feel like saying “How high can it go!”

That price indicates the forces of supply and demand. I am sure the increased price reflects a lower supply. More importantly however, retailers are testing how much consumers are willing to pay for a bottle of vanilla. Are you willing to spend almost $40? Would you spend even more than $40? How high do you want to go?

I was racking my brain recently trying to figure out how banks are extremely profitable. Then I witnessed 2 examples of accountholder behavior that gave me the answer. The banks have nailed accountholder psychology and used that knowledge to their maximum profit.

They know that in today’s society people are willing to pay for convenience, rapid solutions, and rewards and are often indifferent to the cost to do those.

Take for example the e transfer fee. It is $1.50 per transaction. Not bad if you only do 1 or 2 a month. But what if every week you did an e transfer? Over time that would add up. But people think it’s only a $1.50 no big deal. And if millions of transactions are done, well you do the math. And if you are accessing your cash from an ATM that is not your own bank branch there is an additional fee on top of that.

I happened to see a statement for a credit card with rewards attached to it. The interest rate was not your standard 19.99%. It was a full 5% higher at 24.99%. Does that 5% justify the reward of a free movie if you spend enough? Only if the cardholder can pay off the balance every month. How many do?

But the most egregious application of the banks’ knowledge of our psychology is how they behave when people get into credit trouble. This can happen when credit card holders are late on their payments or make interest only payments. I wouldn’t go so far as to say they prefer that credit card holders stay in debt but it becomes much more difficult to get out of debt when a cardholder gets in financial difficulty. This is compounded when someone would prefer to borrow a lump sum just to be able to pay off the offending card. The more prudent path would be to rearrange or cut monthly spending to be able to pay off the debt with their own money rather than borrowing again to get out of debt. But society is so conditioned to a quick fix that many consumers reject a longer term solution. As I said the banks know their accountholders’ psychology and they are not shy to profit from it.

Make no mistake credit is a huge business for banks and is extremely profitable. Recent events in my own life attest to this. During the summer I was shopping at a major retailer that I usually never patronize. The cashier was very persistent in trying to get me to sign up for their store credit card. She kept asking even when I kept saying no, repeating the supposed benefits over and over.

Our bank sent us new credit cards without us asking, even though we had recently received new ones. And you guessed it they are rewards cards. When my husband phoned to activate his, as the primary cardholder he had to listen to a long spiel of all the extra services he should buy that were associated with the new card.

In the near future I will be discussing the importance of understanding your credit score and report.

The Scariest Thing a Client Can Tell Their Financial Advisor

Ten days ago the Bank of Canada raised interest rates for the second time in less than 2 months. The prime rate is now 3.2 %. This increase will affect variable rate mortgage holders and those who carry a balance on a line of credit. The reason for the increase is that the Canadian economy is healthy. Collectively, Canadians carry a large amount of debt, and perhaps the Bank of Canada would like to curtail Canadians’ love of borrowing, since more rate increases are predicted.

This event nicely dovetails with a question clients have asked me a few times recently. It is also related to the title of this blog post.

The question I have been asked is: Which is better: To pay off your mortgage faster or to invest? I would answer: Both or it depends. No I am not playing round and round the mulberry bush.

Mainstream media has a habit of making generic pronouncements without too much background information. In order to properly answer that question to get the maximum benefit for your personal situation your own unique financial factors must be considered.

A general rule of thumb is that if your borrowing rate is less than the rate of return you could get to invest then it is more profitable to invest. However, with careful planning both objectives could be accomplished.

There could be situations where the debt would take precedent. Two examples of that would be where future income would be lower, or where the interest rate on borrowing is obscene(think rewards credit cards.)

An increasing rate environment is not good news for those with unproductive spending habits. If someone lives pay cheque to paycheque when times are good(full employment, ample salary, 2 incomes, or healthy), the inevitable financial storms will find them unable to cope with unexpected events which oftentimes are expensive.

So what is the scariest thing a client can tell their financial advisor? It is: ”I don’t care about next year!!” Since this is a blog post I will have to add this was said with emphasis, despair, and a bit of panic.

Unfortunately how this person arrived at this point could have been completely avoided if there had been FULL disclosure of financial factors that would have to be considered in any advice given by a professional. The advice a professional gives will only be as good as the information that is disclosed. Professionals are not mind readers!

Don’t let market forces of the economy persuade you to deviate from your future financial goals. I could write a book on the many wild goose chases and rabbit trails that can tempt clients off their financial journey.


Alberta Through the Eyes of a Visitor

It has been a while since I wrote a blog post. There were many topics and events I could have blogged about, but the chances were few readers would have been interested.

I hope all of you had an interesting and enjoyable summer! This summer will be memorable for me because of the vast amount of time I spent watering(did I plant too much?) and our visitor from Trinidad.

My husband’s cousin had never been to Western Canada. She spent 10 days with us, and I played tour guide, taking her to the sights of Alberta. We had a lot of fun together. The conclusion I drew from her visit was very humbling. We citizens of Alberta have a lot to be grateful for and proud of! The everyday things we take for granted are not lost on a visitor. She remarked on the clean and wide streets and logical layout of the highways. She noticed how everyone she met was so friendly and welcoming compared to the only other part of Canada she has visited.

While she was here we went shopping a few times. Now some of you probably know shopping is not one of my favorite activities. My goal when shopping is to spend the least amount of time in the store, focusing with laser precision only on the items I need. For instance, we went to Dollarama(the only dollar store I go to). Usually I make a beeline for the bags of dirt and try to get out the door in under 5 minutes. But she got a cart! So I was forced to browse, and actually got an education on what Dollarama sells. And I learned another humbling lesson. She wanted to spend and shop in Alberta because the other provinces she would be visiting had sales taxes. Not only that when she calculated the conversion from Canadian to Trinidad dollars she found the prices here to be very reasonable. And I was shocked at what she would have to pay for those items in her home country.

Which brings me to the lesson I learned. Sometimes I grumble at what I consider to be inflation creep or companies that have expensive prices. However, what we pay in Alberta is less than prices in other parts of Canada or elsewhere. I should never take my buying power for granted and use it carefully as she did.

Here is an anecdote on how prices involve a lot of perception and comparison. Before she came I found out from a friend that the gondola ride in Banff was a must see and cost $35 which at the time we agreed was pricy. The day before we planned to take her in August the website was giving the price as a minimum of $56 and a maximum of $62. That made $35 seem reasonable, in comparison. But was it? We decided not to go. This is why in restaurants the second most expensive item is the most sold, because people use the most expensive one as an anchor to help them decide what to order.

Next up: Should you be concerned about rising interest rates?