In my financial planning practice I find that if a client asks a question or makes a comment it is probable that someone else had that same thought but did not take the opportunity to ask me. The ensuing discussion or explanation sometimes should be shared with a wider audience
So this newsletter is a result of one of these rabbit trails that present themselves from time to time. The second part of my newsletter will discuss another financial topic that recently came to light in my personal life.
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.
I recently started a serious fitness program that involved one on one sessions with a personal trainer. The first time we met she had me record what I had eaten for the past few days.
What an eye opener. My diary showed that although I wasn’t eating enough calories per day, too high a percentage of those few calories were from fat. She told me that in order to be successful in my workouts I would have to increase my protein intake and decrease my fat. No lecturing just a matter of fact tone of voice. And during the ensuing months she would inquire: Are you eating your protein? The reason for my perseverance in the program she set up for me? It is her encouragement and positive feedback.
Let me introduce Dennis to you. He was featured last August. Dennis had a busy summer. Here are a few random financial tidbits he discovered.
In one survey of Canadians aged 35-44 90% agreed that it was important to have a financial plan in place at age 35. How many of those respondents actually walk the talk? Less than half did.(1)
Only one third of Canadians who were allowed to make RRSP contributions in 2008 actually did so.(2) Less than 28% of private sector employees have an employer sponsored pension plan.(3)
Most pension plans are now defined contribution plans where the responsibility for managing the portfolio has been passed from expert, educated professionals to the inexperienced, time deprived individual investor.
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.
This is the time of year when we reflect on possible seasonal excesses and think sober thoughts of cutting back, diets, etc. In the past I have mentioned variations of the dreaded ‘B’ word , and have provided a tool for keeping track of your spending.
Before you yawn and say ‘Not again Cindy Scrooge.’, let’s look at finances from a fresh angle.
What does this saying mean to you? “A part of all you earn is yours to keep.”(1)
Some of you may have seen the commercial of the young guy on the street where different strangers are helping themselves to money from his wallet. Eventually he is left with nothing except an old
woman warning him she will be looking out for him, or more likely, his wallet.
‘A part of all you earn is yours to keep.’ Yet we willingly enable others to become richer and what does that do to our bottom line? It’s red and thin and theirs is thick and black.
How does this enriching of others at your expense happen in real life? Consider a typical month: buy a coffee or 2 or three go for lunch a few times a week, buy gas, clothes, gifts, pay your cable cel phone etc etc.
At the end of the month have you paid yourself? ‘A part of all you earn is yours to keep.
Here we are in the season that is supposedly summer. Hopefully everyone is enjoying their holidays.
A couple ‘events’ that my clients have experienced highlight the importance of keeping up with paper correspondence. I can see you all rolling your eyes equating ‘paper’ with ‘dinosaur era’.
Paper correspondence in the financial industry is issued for regulatory reasons. Regulations exist for the client’s protection as an investor. You will see why this is important later on.
Here are examples that highlight the importance of due diligence on your part as a responsible financial citizen.
Here is a personal story on everyone’s second favorite time of year. Tax time!
2008 was the first year my daughter had an official job. Her T4 arrived the other week in the mail. So we sat down to do her tax return. Being that the T4 was the only official document she needed to record, we did a paper return. (Readers with good memories will remember that I advocate software to do most tax returns. However, the visual representation of the paper return is a good teaching tool.)
When my daughter saw her T4 she was incredulous. “I did not make that much money!’ she exclaimed. (How many of us have felt the same way). The reason she didn’t believe the number in box 14 was that her bank account was more or less at the SAME balance as before she started her job.(Can anyone identify with her?) After some mental calculation she concluded that yes she had made the official few thousands. Interestingly enough she has now set herself a budget as to how much she can save and spend from each pay cheque. I will report back to you later this year on how long that vow will last, (with her permission of course)
So she diligently started filling out the lines and numbers as I showed her. Being that she is under 18 she did not have to pay CPP. She wasn’t too impressed that one of the perks of turning the age of majority is that one now has to pay CPP. Basically she would get back the minimal amount of tax she paid.
About three quarters of the way through the forms she started grumbling: “All this work to get back $26. “ “It’s not worth it.” she said. She was not impressed that we had to put it in an envelope and wait several weeks for the refund to come back. “Let the government have the $26 they can spend it better than me.”
What do you think dedicated readers? Are you going to bet on the Stephen or the teen?
Zany Zant had just invented a nifty device that measured indifference and disgust. He wanted to test it and to observe if there was correlation between the two emotions. So he asked his best friend Fast Hopper if he would wear it for a day. “No prob” said Fast Hopper.
The temperature the day Fast Hopper had to test out the device was -25C. He had forgotten to turn on the timer for his car’s block heater. “Doh!” said Fast Hopper.
His wife reminded him over breakfast that he had promised to help her with their incomplete 2007 tax returns weeks ago. “Meh.” said Fast Hopper.
As he entered the office one of his colleagues asked him if he had heard the news on the radio about the budget update. Fast Hopper had to confess he had only half listened to a few words. “Meh,” he said. “I’ll listen to the TV news tonight.”
His boss had left him and email requesting to meet with him later in the morning. There was also a phone message from his financial planner asking him to return his call. He added those to his to do list for the day. “Meh, I have all day to get to it.”.
He had Zany had decided to go out for lunch. Zany asked Fast Hopper if he had made any New Year resolutions. “Meh,” grunted Fast Hopper, “what use are those, I never stick to them for more than a week.” Zany said he was going to keep track of his spending for a month to see if he could save more.
“People are living longer than ever before, a phenomenon undoubtedly made necessary by the 30 year mortgage.”(1)
Want to know how quickly financial facts change? Consider that since I intended to write this newsletter the government has instituted a 360 degree change in the way banks will now be able to lend money. Previously the sky was the limit with 40 year mortgages being touted as the answer to buying that dream home. Down payments were considered unnecessary.
Now a homebuyer must have a minimum 5% down payment and an amortization period of no more than 35 years effective October 15, 2008.
What was the reason most potential homeowners went for a long amortization and no down payment? It is because the banks know human nature well enough to exploit this one tendency:
