Getting ready to turn a new financial leaf
Posted on Sep 5, 2013 in Mortgage Market Updates and News
Financial Post, Personal Finance
When Scott Plaskett sits down with his clients in September, he begins with a simple: “What’s new?”
Usually, a lot. After Labour Day, people have stories, the certified financial planner says. These stories lead to financial conversations.
“January 1 isn’t really the beginning of the year for most families. It tends to be Labour Day because everything starts fresh again,” he says. “September seems to be the reset button for most families. The summer is over. They’ve had time off and now everything gets back to the normal routines.”
September is one of her busiest seasons, says Lise Andreana, a certified financial planner in Burlington, Ont., and author of No More Mac ‘n’ Cheese: The Real World Guide to Managing Your Money for 20-Somethings.
“After a full summer of binging on BBQ, beer and Canada’s Wonderland, it’s time for them to weigh in,” she says. “Their expenditures and wants have exceeded their needs. They recognize that they may have gone overboard. Even if they haven’t, it’s a time of sobering up for clients in September.”
After the summer, the most frequent calls that Ms. Andreana fields are about RESPs and concerns regarding investment returns.
“The summer returns are typically lower than the fall to spring. There’s even a saying, ‘sell in May and go away’,” she says. “They’ll see that their statements are not as productive. They’re going to be calling us about their statement that they’ve received in July. This opens the doors for the conversation that we want to have about looking at their asset allocation, how much risk they’re taking versus the return and is that suitable to that particular client.”
The Post spoke to financial planners about people’s biggest money concerns in September and how to start anew with finances.
How am I going to get myself organized?
The vacation is over. You’ve spread out your bank statements, your investment reports and a financial spreadsheet and unless you’re an accountant or Russell Crowe’s numerically inclined character in A Beautiful Mind — it might be intimidating. And if you’re parents to young kids, you’re being tugged in so many different directions (literally and figuratively): Should the money go to RESPs, RRSPs, mortgage payments, credit card debt, child care, new clothes for school, etc.
“There are only two ways of getting out of the mindset [of being overwhelmed]. One is ignoring it and hoping that la-dee-dah things will be fine. For a lot of people, they just muddle through,” Sandi Martin, a fee-only financial planner, says. “Then there’s the other kind of person who does a lot of homework. They feel like they have it under control.”
Take control by figuring out where you stand. “Go through your bank statements with a fine-tooth comb. Just see where your money has been going and ask how far off am I?” Ms. Andreana says.
Did you put the trip to Disneyland on your credit card? If so, you have to get your consumer debt down. “The debt on my card shouldn’t last any longer than the consumable product,” she says. “A coffee shouldn’t go on a credit card ever.”
Create a budget for the month or year. How much can you spend on back-to-school items, for example? Those with children in Kindergarten to Grade 12 in the U.S. anticipate spending an average of $428 on back-to-school items, according to a Deloitte survey.
How am I going to pay for my kid’s post-secondary education?
TIP: Figure out what your clothing budget is (in an average Canadian household, 6.5% of all household spending was on clothing). Consider portioning out a chunk and giving it to the kids to shop. “It was a tool to teach them how to spend their money wisely: ‘This is it. It’s up to you to budget’,” Ms. Andreana says. “It also helps parents because it stops them from giving in to every request for something new.”
Your little ones may just be returning to grade school. But in the future, you could be standing on the lawn, waving at your son as he leaves for university with tears in your eyes. Let those tears be from joy, rather than from stress at being financially pinched.
To figure out how much you’ll need to save, ask yourself, what are your goals?
“Do they want to pay for 100% of the child’s post-secondary education?” Mr. Plaskett says. “Do they want to pay for half? Do they want to have 100% but not let the child know that so the child can work and contribute?”
The best plan to start with is the RESP, he adds.
The government will give you a Canada Education Savings Grant equal to 20% of the first $2,500 you contribute annually to an RESP to save for your child’s post-secondary education, up to a maximum of $7,200.
“The money accumulates on a tax sheltered basis and it gets topped up. When the child goes to school and the money is pulled out, any of the growth is taxed in the child’s hand … and chances are, their tax bracket is quite low,” Mr. Plaskett says.
“The con would be if your child doesn’t go to a qualified post-secondary school. If they decide to become an entrepreneur and skip the schooling process, then they would have to pay back the grant money on … their redemption.”
If a family contributes $50 a month from the time the child is born to when she’s ready to attend university, they will have almost $24,000 with the government’s savings grant and assuming a 5% rate of return, Ms. Andreana says.
TIP: Take the monthly $100 from your Universal Child Care Benefit (for each child under 6) and put it into your RESP. “Take government money to earn some more government money,” Ms. Martin says.
Am I prepared for the unexpected?
Fifty-one per cent of Canadians have three-months worth of expenses set aside for unforeseen costs such as car repairs and job loss, says a recent BMO report. But setting it aside doesn’t mean hiding it under the mattress or leaving it in a savings account.
“I make a clear distinction between having access and having that liquid sitting in a savings account,” says Al Nagy, a certified financial planner and regional director at Investors Group. “I hate money sitting there doing nothing. People deserve to have their money working for them by investing it…I often recommend establishing a line of credit.”
Over the summer, clients have often spent time with friends and family and may be thinking of better caring for their own dependents or they’ve experienced loved ones becoming ill, Mr. Plaskett says.
“It gives us an opportunity to revisit that part of their financial plan: Let’s have a conversation about what would happen to you?” he says. “It’s not a great conversation to have; but it’s one that has to be had.”
You might want to consider death insurance benefits (life insurance) to care for your loved ones and living insurance benefits (disability, critical illness and long-term care) to protect yourself and the family if you cannot work.
TIP: “[People] say, ‘I’ve got coverage through my employer.’ Have you looked at the booklet to see what type? It’s typically not enough. Let’s determine if you might want to top it up,” Mr. Nagy says. “Ask about the definition of disability in your work policy, the limitations and exclusions, and the waiting period before your benefits kick in.”
Will I have enough to retire on?
There’s no magic number to retire on. It will vary depending on your lifestyle. Do you think you’re going to be spending your time reading on the porch and bike riding into town for groceries in retirement? Or will you be traveling the world and sailing on a yacht in the Mediterranean?
“People ask, ‘Is there an actual number that I should be shooting for?’ That number is about how much you’ll spend,” Ms. Martin says. “The only way to rationalize what you will spend in retirement is to look at what you spend now. How much of it is absolute necessary living expenses? Is your mortgage going to be paid off? Are your kids going to be out of your house? Are you going to downsize your home?”
Remember to take into account how long you think you’ll live. Also, will you be getting income from other sources such as an employee’s pension plan or the Canada Pension Plan and Old Age Security?
TIP: Don’t wait. Start early. Time is a huge advantage. If you begin saving at 25, putting $2,000 away a year ($166 a month) until you’re 65, you’ll have $560,000, assuming an 8% annual rate of return, according to Bankrate.com.
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