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