Today, I was speaking to an advisor I know about a client who was interviewing for a new advisor. The client asked another advisor what they would recommend for their portfolio. At first, maybe a simple question; however, when you put it in context, it’s not a very financially savvy one. This doesn’t mean it’s not important, it’s just that the key is to find an advisor who understands your philosophies and your goals first.
I have these conversations all the time – the situation is so common it could be called a pandemic. As far as the economy goes, it’s just as bad as having too much debt – too much savings sitting idle seeming to not be ‘losing’ money – but in reality heading for a time bomb. In Canada, the government sponsored retirement savings program for personal savings means you contribute money to your plan and get a tax deduction for the amount you put in. That money is sheltered from any tax until you are forced to start pulling it out after a certain age. The amount you are forced to pull out is fully taxable at your marginal tax bracket – yikes!
People who think they’re doing all the right things by saving money, keeping it in something ‘low risk’ and work hard to pay no interest on their credit cards and to pay off their mortgages early are in fact many times inadvertently costing themselves thousands of dollars.
Their ‘savings’ isn’t actually set up to be tax efficient at a time when they need it to be most. The money they put into savings hasn’t lost any market value but because it also hasn’t done anything more than simply be ‘saved’ it has indeed many times gone backwards compared to the purchasing power of their money. The no interest they pay on their credit cards can infact be a detriment to their credit score and because the only aspect of credit they see as being valuable is the free points, they miss the opportunity to use credit to leverage their current assets and income to create more wealth, to get their money working for them, and to earn more income – like for example what happens when the mortgage is eventually paid off – now there is a lot of equity sitting idle that requires an income to maintain. And the extra money that was previously going to pay the mortgage is now going to additional savings which is also not tax efficient, or income efficient. And, so our hard working couple works harder and harder and longer and longer just to seemingly stay ahead of the game when in fact they are getting further and further behind.
The secret is to use your current income to get your money working for you to create more income and to wealth which creates even more income to go to work for you to create more wealth and so on and so on….
The idea of putting on paper either your existing financial situation, or your desired future, can be fearful; yet this is the only way you can properly plan. It is not enough to “guestimate” the expenses. You must know exactly what you are spending each month in order to do any future planning as well as to be able to make informed decisions about your current financial situation. The exercise of gathering this information is not to judge the spending; rather it is simply research required to help you become more informed and more in control.
How? Start with gathering the receipts of existing expenses; then write them down; then categorize them; then consider what you would like to ideally have for each of your categories; then analyze “the current” versus “the desired” and start to make some decisions. You will likely modify the current, postpone some items and explore options to realize the idea. Take small steps in the direction you want to go, find others who have what you are considering, and keep moving in a forward direction. Enjoy today and the process along the way.
Sometimes it’s easier to adapt to the uncomfortable situation you know rather than create a new and unknown one. The best way, easiest way, least expensive way, fastest way to learn about anything different, therefore making it less uncomfortable, is to read. Read about how others have, what others are doing, why you might do something, and how to do something different. Reading positive, inspirational, encouraging books will first give you belief, then support and then the how to. Do your reading in that order, meaning read books about belief before books on “how to”. You can get more from a book than from your immediate peer group because in all likelihood they haven’t done what you want to do and could even be resentful or fearful of you moving forward. Read from a positive thinking book at least 15 minutes a day and by the end of a year you will be further ahead than 95% of the population.
Where to Start? Start with the classics, like Napoleon Hill’s Think and Grow Rich – originally printed in 1937 and still being printed and read today. It’s a book you could read once a year and still get great value from it.
Losing money is never easy – it’s even harder when you must consciously decide whether to lose money because your investment hasn’t performed as you’d hoped or planned. This is why it’s critical to have an exit strategy planned BEFORE entering into any sort of investment or financial transaction. However, if you haven’t, you’ll likely need to make some choices at a time when you might be facing a loss or hefty fee as in the case of dropped values of investments in volatile markets, or locked-in loans when your situation has changed. To alleviate some of the emotion to make a business decision about the best action to take, it’s important to step back and look at your original intentions and apply a systematic, calculated analysis on the money in question.
How? First, remember that your goal with any investing is to eventually convert savings to income so that when this happens, it’s a smaller number (i.e. $100k might be down $10k; the income on the $90k is still likely in line with your expectations). Likewise, if a fee to refinance or pay down a locked-in loan is $10k, you will have to calculate the long-term costs of doing, versus not doing, the refinance. A financial calculator is an invaluable tool for this purpose. Second, review your original risk tolerance on your investment that’s dropped in value. If the percentage of loss stated was a worst case comfort level (and has been met), then a sell decision was already made – you just may not have considered that given the current market value of your investment. And, if your original loss comfort level has not yet been reached, then you can relax and watch knowing that if the situation worsens, you might need to realize a real loss. And third, when planning your exit strategy in a volatile market, it’s best done while considering your entire portfolio and individual investments. For example, if an investment has dropped in value by 20%, but your entire portfolio is only down by 3%, then you’re in a better position to hold on to the investment that has the large loss because it’s not creating a significant impact overall.
Can you still manage your money even if you’re not that interested in ‘money stuff’?
Staying in control of your investments and your financial planning does not require you to become an expert on all the technical aspects; it requires you to know what your responsibilities are and how you will fulfill them. For example, if you are investing in stocks, bonds or mutual funds, you will be in more control if you have read the investor material presented to you, written your letter of understanding, know your exit plan, and know how, where, and what to look for when monitoring the investments.
Why? Even the most knowledgeable advisors with the most experience are still not living your life. You are ultimately responsible for each financial decision you make so learn from the experienced advisors what your responsibilities are, and what you need to know, and what you need to do to stay in control.
This seems to be the week for dealing with financial stress. Likely because the third week of January is when many people have fully settled back into a routine after the Christmas holidays and… the shopping bills arrive in the mail. The credit card statements and December bills are in the mailbox and due now. That will force a good hard look at the current state of affairs, regardless of whether it’s additional debt from December shopping and entertainment. Or, perhaps it’s just regular bills that are due – that on top of the Christmas expenses seem to put a drag on the bank account. Or, maybe you didn’t put the same attention you would have normally towards your business or your investments and now you are looking at the results from last month and not impressed.
Whatever the reason, the best place to start is at step one: where you are, then get clear on where you want to be, and grab a pen and paper and start documenting exactly where you are. Get the current reality in writing so you have the details to take to a professional to help fill in the gap between where you are and where you want to be.
Something that will hold you back and can create unexpected risk is excess clutter in your life. This clutter can be stuff, paper, activities, or even people. It’s anything that blocks the calm space you need to address changing financial issues. You must have the time, energy and space to work, learn, manage and grow. If this is your situation, you first need to acknowledge the obstacle and risk it creates, then handle one decision at a time until you have the surroundings that support you in your financial growth. If this doesn’t seem significant, ask yourself whether the clutter, the negative people, or the activities exist in your vision of your ideal life. And, what is the cost of the clutter? What will it cost you if you lose an important financial paper during a tax audit, for example? Likely your ideal lifestyle is not cluttered with papers and stuff and negative people – therefore, this needs to be cleared up before you can move ahead.
How? Start with a list of all the areas where clutter is bothering you, and then list all the stuff. After you have a list, you start to prioritize rooms, areas, and sections in your home and your life. Then make a plan, set some dates, book some time and follow through.
If you have an idea for business, but still need to pay your current expenses, there are two types of obstacles: time to work on your business, and money. If you had the money to pay your current expenses, then you would have more time to work on your business. There are two ways you can get that money: work longer and harder at your current work to fund your business, or go out and get the money you need for your business idea.
How do you know where to start looking for the extra money needed? Start asking. If you don’t know how much money you need, then start asking for help putting a business plan together so you know how much money you need and how it can be used for your business as well as how it can be paid back to wherever you get the initial funds from. Keep asking until you find answers and money to do what you need to do with the time you have available.
Bank accounts, savings and investments need to have specific functions. For example, an account for holiday spending is best kept separate from savings for a rainy day. Likewise, saving for larger purchases or treats can be done with cash in a nice jar at home, rather than lumped together with the holiday money. And, a jar of loose change is not as inspiring as a jar of $10 bills that is designated for family meals in a restaurant.
Why? Money can become like clutter if it’s left lying around or tossed in a jar. The smaller amounts of change are still real currency and need to be treated respectfully. You can keep all your smaller change together then have a young person roll it and keep the money, or you can dedicate a particular type of coin or bill to be used for a specific purpose – perhaps for something you wouldn’t normally spend money on or feel guilty about spending. A great example is the often-abused café latte. What if you saved your nickels and dimes for that purpose? It’s not hard to imagine handing over $3.50 made up of thirty dimes and ten nickels and sitting back to enjoy guilt-free coffee that didn’t create a money mess down the road.