Feedback on my newsletter indicates some clients would like the latest information on financial products. I want to differentiate this space from the thousands of other columns and blogs on financial matters. We probably don’t need more financial information. We need to know how to use the information we already know. That is not to say I will never discuss financial products or financial news.
The value I bring to your financial situation if you let me is to help you gain a new perspective on your personal finances. For example, say I am trying to get a client to pay off a debt. When I point out to him that he will be rid of his monthly payment and he would save the interest cost when he retires the debt, that fact does not motivate him enough to take action. But what if I told him that his net worth(assets minus liabilities) would be a million dollars if the debt was gone? Might he then consider it?
Let me begin this newsletter with a description of two new clients. A couple with one child and one on the way, they were referred to me by a co worker.
This couple in their early 30s have a mortgage balance below the average for their stage of life, due to prepayments. They have no other debt other than the mortgage(YES mortgage is a debt), They have worked hard to pay off debts as they wisely used a financial gift, and at present have only one vehicle. The lower mortgage balance, wise use of a little extra money, and only one vehicle by choice makes them unusual in their peer group. They wanted to meet with me to gather all the pieces of their financial situation to get a sense of the big picture. They are again unusual in being aware of their cash flow and very organized with all their financial information. They want to plan for the decreased income once she went on maternity leave, and to set a course for their long term goals. They are well on their way because they truly understand the value of planning and sought advice to achieve their goals.
Please if you will indulge me to go off on a related rabbit trail. When I was shopping for a newer vehicle I checked out dealerships. The second time I was shown a brand new small truck with manual transmission, an unusual choice and what I badly wanted. The salesman had me sit in and walked me through the financing were I to purchase it. Needless to say I was very tempted and gave it 10 minutes thought as to what it would be like to own this unheard of luxury. But in the end like the couple I mentioned I decided I won’t afford it. Not can’t afford it but won’t. Won’t as in will not which involves will power. This couple exercises will power and common sense which is why they will achieve their goals while others may not.
In a recent professional magazine there was a review of a book dealing with how people purchase material possessions with the expectation it will make them happier. According to Harvard professor D. Gilbert this is a fabrication, because we are ‘hopelessly inaccurate’ about predicting our future happiness The process of our decision making with respect to buying material wants is called prospection and the cycle of continual purchases without some balance of saving means a person could die with many toys but broke nonetheless.
In the last newsletter I asked clients to answer the question: What is the definition of affordable? I wanted to get a local sense of the word, because in a forum of financial planners the answers they got from their clients were both intriguing and disturbing. I wonder if my clients think the same way. Is affordable really whether your current cash flow will allow you to service the debt incurred to acquire the shiny new bauble? You can be sure that some company will be more than willing to give you credit to allow you to fulfill your want. Has the recession taught us anything?
So is there hope for a better future that isn’t built on the false security of credit, material possessions and debt? Will future generations have true financial success?
Let me conclude with a personal example. My daughter, now 20, wants to buy a used car. So we sat down to do a plan. She decided how much she would spend to buy it but then I went one step further. I had her list the ongoing expenses related to car ownership calculated on a monthly basis. Our estimate, before gas shot up to $1.17 (your guess is as good as mine what the price will be when you read this), for monthly expenses was $322. Then she used an online calculator to estimate car insurance which turned out to be double my estimate of $100. She was flabbergasted at how every single day whether she drove the car or not she’d be paying $14. She has grudgingly decided to delay her purchase.
So do you know someone that has a money disorder? What is the money script you act out in the theatre of your life? What is your definition of living within your means?
Tax filing tip: Tax documents dribble into your mailbox from January to March, so it can be difficult to keep track of them. Here is an organizational tool to ensure they are in one place when you are ready to do your tax return. On January 1 get a brightly colored file folder.( a regular colored one will go unnoticed.) Keep it where you open your mail. As the documents come in immediately put them into the folder. The key is to do it as soon as you open your mail. Here is a brief schedule of what to expect: January previous year RRSP receipts, access codes for Netfile, charitable donation receipts, T4A for your Co-op dividend. February and March T4, T3, T5, T4A for other pensions, other T slips universal child care benefit, and other RRSP receipts. It is also a good idea to keep your previous year’s tax assessment in that same folder.
Next up The Trivia Hall of Fame: the hype behind critical illness insurance.
Sources: Mackenzie Professional January 2011, Advisor.ca Final Words