Just this month one of my clients, a couple with 2 teens, achieved a milestone in their finances. They paid off their mortgage. Their original amortization was 25 years but 11 years after purchasing their house they are now proud OWNERS and can tell their bank to take a hike.
With good reason too. When their own branch was closed on Monday she went to another branch and was told :’If you want to pay off your mortgage you will have to go to your own branch.’ When she did get to put down her final payment she wasn’t told she would be charged a $33 penalty unless she divided the payment over 2 months. They neglected to mention that in person but she was told that on the phone after the fact. So when you see those bank ads claiming to look out for you: not true. She is not the only client that has stories of fees and poor customer service.
But bank bashing is not the big story here. This couple is living proof that financial BEHAVIOR is far more important than financial PRODUCTS. The type of mortgage this couple had their provider, term, and interest rate, mattered very little compared to the discipline they applied to achieve their goal of being mortgage free. Yes there were sacrifices along the way but they still had vacations and a new car.(paid off as well). By the way they are not six figure income earners. There is one fact I have seen repeatedly in my financial planning practice.
It is not how much you earn but what you do with your salary that counts. Hey haven’t we heard that truism somewhere else in life? The operative word is efficiency.
The motto of the story is: Plan your borrowing and spending to achieve the highest standard of living you can MAINTAIN over your lifetime. Sure some of the intelligentsia have given that concept a fancy name. However, the key word: maintain. No peaks and valleys or you may crash and burn. The market antics will affect your finances less if you employ this strategy. The happiness you get from extravagance at any age will never make up for the prison of counting the seconds to your next paycheque at another time in your life.
Remember your financial perspective will affect all your financial decisions whether you realize it or not. For example: I answered a survey and was told I would receive $50. When I received my payment in the form of a $50 debit card that I had to spend instead of a cheque I could deposit I was disappointed. Why? Because I am saving for a newer car. It was still money but not in the form I wanted.
Remember to pause and ask yourself what is the lens I am viewing my finances through. Is that hindering me from reaching my financial goals?
On another vein I am amused when I tell people my profession. Almost always they make some comment about the stock market and the bear market of 2008, and how that must have been bad for my business. It may have been but not in the way they think. Somehow financial planner is synonymous with investment guru or stock broker. Nothing could be further from the truth.
The stock market performance was a small part of my thinking compared to how I feel about the pain of clients who lost their jobs or who were worrying about losing their jobs. People assume what I do involves numbers and more numbers. It is not only a numbers game it is enabling people to manage their behavior. I feel bad when my advice is not taken and the client suffers as a result of a less than ideal decision. For example, about seven years ago I advised a client upon the purchase of a new house to get life insurance. He delayed and finally did not. Now years later and on his second house, married and facing possible unemployment he has a health condition that will make life insurance very difficult to qualify for. Or how about a client who knows their child wants to go on to post secondary studies has money for an RESP but will not take advantage of the government grants?
There has been comments floating around the communication sphere about waiting until later in life to start saving for your retirement. The theory behind that is you can save more in your peak earning years.
There are 2 reasons why that is a poor strategy.
1. If you start your portfolio later when you have a shorter time to save your money will be more likely to be negatively affected by a bear market. When a young person invests, a bear market can be a friend and opportunity.
2. Related to number one, it is the amount of time in the market that is far more important than the amount of money you invest. A 20 year old investing $100/month will able to reliably maintain that amount over 40 years or so. The compounding effect during that time will far outweigh a 40 year old putting in $1000/month which quite possibly would have a greater impact on the 40 year old’s monthly budget than $100 would.
Dear readers we can never turn back the clock. The decisions we make today we will rejoice or regret. It is up to us!!! I look forward to celebrating those milestones with all of you!
With help from Business Week July 2009.