In a downturn of this size, it’s natural to assume that you’re falling behind. Many of us lie awake at night worrying about our finances and feeling the stab of envy. Is our net worth crumbling to shameful levels? Are our friends making more than we are? How did our neighbors with the new BMW manage to sidestep the falling stock market that hammered us — or did they?

If you’ve been torturing yourself with such questions, the All-Canadian Wealth Test can shed some much needed light on your personal finances. MoneySense launched the Wealth Test in 2000 and this year’s version is our  most comprehensive yet. Its goal is to let you see how you measure up versus other Canadians. Our research can tell you if you’re earning more or less than your peers, if you’re wealthier or poorer than others, and if your track record in the stock market is better or worse than most investors.

The good news — and, yes, there is good news — is that the average household is better off today than it was nine years ago when Canada was zooming along at the peak of the dotcom boom. Over the past year, the typical person has lost about a tenth of his or her wealth. But the average Canadian household is still 7% richer in real terms in grim 2009 than it was in bubbly 2000. That’s an amazing — and encouraging — fact. Despite the worst economic crisis since the Great Depression, prosperity still appears to be inching ahead.

Problem is, our prosperity comes with warning stickers. One catch is that our increase in average wealth has been accompanied by an increase in inequality. While the rich are definitely growing richer, it’s not clear that middle- or working-class Canadians are any wealthier than they were a decade ago.

Just as worrisome is how we’re getting richer. In recent years, Canadians have experienced little joy from the stock market. More and more, we have come to depend upon the real estate market to drive our wealth upward. Thanks to record low interest rates and innovations such as 35-year-mortgages, eager home buyers have propelled housing prices to double their levels of a decade ago. Real estate now makes up an unprecedented share of our personal balance sheets. If the housing market stays strong, we remain prosperous. But if home prices crack, look out below.

Two types of wealth

Before we examine these issues in more detail, we should explain that there are at least two ways to measure how well you’re doing, financially speaking. One is to look at how much you earn in any given year — your income. The other is to look at how much you would have left over if you sold all your assets and paid all your debts. This is your net worth, or wealth.

You should examine both income and net worth to get a full picture of your financial situation. A recently graduated 30-year-old surgeon may have a high income, but not much net worth — yet. On the other hand, a retired farmer may have only a modest pension income, but an enormous net worth, because of the millions of dollars that his acres of prime farm land would fetch if he chose to sell them to a property developer or the corporate farmer next door.

The paycheque pyramid

The easiest way to start assessing your financial situation is by looking at your income. To give you the most accurate notion of how your paycheque stacks up, we’ve divided Canadians into two groups — those who are single and those who are part of families of two or more people. You would expect families to have higher household incomes than single-person households and so they do. The average unattached person has an income of $37,800. The average family has a household income of $91,500, or 2.4 times more than the unattached individual.

The table below lets you see where you fit on the income ladder. We’ve split people into five equal subgroups based upon their incomes. These subgroups are known as quintiles. Each quintile holds one fifth, or 20%, of the larger group. We put the lowest earners into the first quintile, then the next lowest earners into the second quintile, and so on. You can think of these quintiles as five equally spaced steps up the income ladder.

Looking at the dollar value of each step gives you a sense of what typical paycheques look like at various levels of society. To squeeze into the middle quintile for unattached earners — in other words, to make it nearly halfway up the income ladder, ahead of 40% of your peers — a single person requires an annual income of at least $20,901. To achieve the same status for a family, a husband and wife need combined incomes of at least $59,901.

These relatively low numbers may surprise you, especially if you live in Toronto or Calgary, but they are reality for most of the country. While it’s common to read about about million-dollar executives or multimillion-dollar hockey players, the typical Canadian earns less than a postman. You don’t have to be a CEO, a highly paid athlete, or even a doctor to break into the top tier of income earners. A single bookkeeper who makes $52,000 a year ranks among the top 20% of unattached earners. Two married school teachers who together earn $120,000 a year qualify as a top-quintile family.

Rich man, poor woman If you’re not used to thinking of bookkeepers and teachers as members of Canada’s financial elite, it may be a matter of where you hail from. There are vast differences between provinces. We’ve outlined these differences in the singles scene and the household hierarchy charts below. The tables show the average (not the minimum) earnings for each quintile of society. As you can see, Alberta and Ontario are the highest-earning provinces, while Newfoundland and PEI are the lowest. The average top-quintile family in Alberta earns a joint income of $233,800; the average top-quintile family in PEI makes only $136,300.

Your earning power depends not just on your place of residence, but on your sex. Women make, on average, about two-thirds of what men do. While earnings vary widely by age, women as a group earn an average of $31,600 a year, while men earn an average of $47,200. The disparity begins before earners turn 20 and grows until pre-retirement and then narrows a bit after the age of 65. The narrower gap for the younger age groups suggests that women are now placing a higher priority on careers than did previous generations.

There is no sign that the disparities among regions and between sexes are going to end anytime soon. If anything, Canada’s income distribution is becoming even more skewed. The top 20% of all households collect nearly half of all the income generated in Canada. The poorest 20% of households get only 4%. Inequality between the rich and poor has been slowly growing for the past two decades and stands at record levels.

While the rich are gaining ground and the poor are losing ground, the middle is only inching ahead. The average Canadian family saw its after-inflaton earnings tick up a total of only 20% since 1990, or about a percentage point a year. While people who entered the work force in the 1950s through 1970s saw their incomes run up rapidly, the generation that came of age since 1990 has had to settle for slow, grudging gains.

Your bottom line

While incomes are far from equal, wealth is even more unbalanced. The richest 20% of Canadian households control about 69% of the wealth in Canada. The next quintile down possesses a further 20% of our national net worth.

Not much is left over for other people. The bottom 60% of households control only 11% of Canada’s wealth. In fact, the bottom fifth of the population possess no wealth and actually owe a few thousand dollars more than they own.

In are your rich yet?, below, we show you how your wealth compares to other Canadians. The net worth figures in the table include the current value of everything you own — your home, your car, your bank account, your RRSPs, your stocks and bonds, your small business, and, yes, even your company pension. You should total up all these assets, then deduct your debts and other liabilities to arrive at your net worth.

It  doesn’t take a huge sum to be considered middle class. If you’re an unattached individual, you’re richer than 40% of your peers if you have $16,501 in net worth, or about the cost of a very modest new car. A family qualifies for the middle quintile with $167,001 in net worth, which is about half the price of a typical Canadian house.

The average net worth of a Canadian household now stands at $385,000, down almost 10% from the level we hit in the fall of 2007, when the average net worth of a Canadian household hit a peak of $428,000 (in today’s dollars). As we mentioned earlier, though, we’re still doing all right if you take a longer viewpoint. Back in 2000, the average Canadian household was worth only $360,000 (again, in today’s dollars). An optimist might find it remarkable that even after our stock market losses of the past couple of years, our average net worth is still 7% higher than at the peak of the dotcom boom. A pessimist might say that this is a very small advance over a decade.

Up until now we’ve discussed wealth in terms of averages. In many ways, though, it’s more instructive to look at medians. What’s the difference between these two measures? The average net worth is the sum of all the personal wealth in the group, divided by the total number of households in the group. This figure can be distorted by a handful of extremely wealthy households. (If Bill Gates and you and I sit down for lunch, we’re all billionaires on average — but chances are that neither you nor I have anything close to a billion dollars.) In contrast, the median net worth is the wealth of a household that sits right in the middle of the wealth spectrum, with half of all households having more wealth and half having less wealth. (If Bill Gates and you and I sit down for lunch, the median net worth is going to be either your net worth or mine — whichever one of us happens to fall in the middle.)

Average household net worth is pulled up by the 20% of households who control 69% of all the household wealth in Canada. Median net worth is a lot less. In fact, in early 2009, the wealth of the median household was only $170,000 compared to the average of $385,000. The huge gap between median and average is a measure of how much the average figure is pulled up by a tiny number of very wealthy households.

The chart, a slow climb, below, lets you measure your own net worth by age, either in terms of averages or in terms of medians. As you can see, wealth tends to grow slowly over the course of our lifetimes. You typically hit the peak level of your wealth when you are 55 to 64 years of age. By that point, the average household has accumulated a net worth of about $670,000. But don’t forget that this figure is lifted upward by a small number of wealthy households. The median household of the same age is worth only about $420,000.  In general, the median figure is the more representative of a typical household and we suggest you use medians for most comparisons.

Who gets wealthy?

If you’re looking for a formula to become wealthy, let us help. We’ve broken down the key factors for you.

First, it helps to be born male. Households in which a man is the primary earner have net worths that are $36,000 above the overall median for all households of all typesof $170,000.

Next, it’s important to be patient. Wealth grows gradually over the course of your life. A household headed by someone under 35 typically has a net worth that is $145,000 below the median. A household headed by someone 55 to 64 usually has wealth that is $250,000 above the median.

Just like your mother told you, it pays to get an education. A household headed by someone with a university degree or certificate typically has net worth that is $90,000 greater than the median. A hard-working spouse can be another huge advantage. Households with two or more earners have wealth that is $98,000 above the median.

To see where you should be in life (at least, according to the stats), use our wealth calculators. It allows you to compare yourself to similar Canadians. You input your age, your marital status, your education level and other criteria. The calculator shows you the median net worth accumulated by other people with the same characteristics as yourself. If you’re ahead of the median, you can pat yourself on the back. If you’re behind, you may want to think about the reasons why.

No matter how you score on the Wealth Calculator, keep the results in perspective. Our calculator doesn’t account for factors such as bad health or divorce that can devastate your net worth. Neither does the calculator reflect location. If you’re living in a small town, or in an area with lower incomes, your net worth is not going to be as high as someone who has benefitted from the higher salaries and more exuberant real estate markets of a big city.

Our calculator also ignores the question of how you got your money. Canada is still a land of opportunity, but in an age where middle-class incomes aren’t budging by much, inherited wealth can play a big role in determining where you wind up. According to Statistics Canada, 36% of families in the wealthiest quintile of the population have received an inheritance; the average amount of that inheritance was $136,000. In contrast, only 10% of families in the bottom quintile inherited money and the average amount of that inheritance was only $13,200. No matter how hard you work, it is also good to be born into, marry into, or know people with money.

Warning signs

Despite the recession, most of us can take some satisfaction in how our net worth has grown over the past decade. But we should be aware of three warning signs that may indicate trouble ahead.

Warning Sign No. 1 is our addiction to debt. Back in 1990, the typical Canadian owed 91% of his or her disposable income. By 2000, our ratio of personal debt to disposable income had grown to 111%. It has now soared past 140% and is still climbing. We appear to have compensated for our stagnant paycheques over the past couple of decades by borrowing to make up for the raises we missed.

High debt levels are an excellent predictor of bankruptcies, so the galloping increases in our personal debt makes it likely that we will see more insolvency during the years ahead. We are already witnessing a dramatic increase in insolvencies among older Canadians.

Call this Warning Sign No. 2. Since 1990 the rate of insolvency among Canadians 55 and older has shot up by more than 500%. It is a striking and worrisome fact that more and more Canadians are reaching the end of their working lives encumbered by debt. It seems that as the boomer generation edges into their 60s, a significant number are finding themselves unprepared for retirement.

This brings us to Warning Sign No. 3: our fascination with real estate. One reason that so many Canadians — even older Canadians — have large amounts of debt is because of our growing reliance on real estate and hence mortgages and lines of credit backed by this real estate. Back in the mid-1990s, real estate constituted about a third of a typical household’s assets. It now accounts for 40%.  If real estate prices remain strong, our willingness to go into debt to buy homes will be justified. But our wealth could take a major hit if prices dip.

Looking ahead

We can take some comfort in the resilience of our economy. Sure, you’ve probably lost money, as have most of us. But despite the plunging stock market and dismal economy, we are still a bit richer than we were back in 2000.

That said, we should be conscious of the risks around us. Inequality is a pressing issue and could become even more so as trends continue. Meanwhile, unprecedented levels of personal debt and a frothy home market add up to a dangerous combination. If you don’t think that a U.S.-style housing crash could happen here, think again. Canadians are now carrying debt levels very similar to the ones in the U.S. before its economy began to implode in 2006.

If one theme deserves to dominate the next few years, it’s the rebuilding of personal balance sheets. Given our high amounts of debt and heavy reliance upon real estate, it would make sense for most of us to pay down our loans and diversify our assets.

Every situation is different, of course. But we hope that we’ve given you the tools to see how your finances compare to other Canadians and help you to make the right decisions for you.

Roger Sauvé is President of People Patterns Consulting and author of The Current State of Canadian Family Finances published each year by the Vanier Institute of the Family.

But now is not the time to get all comfortable and trusting. As aging baby boomers try to make up for lost time, the years ahead are shaping up as prime time for con men. “There’s going to be a whole lot of vulnerable people looking for a quick fix for their retirement savings,” says Neil Boyd, associate director of the School of Criminology at Simon Fraser University in Burnaby, B.C. “These sorts of schemes are only going to get worse.”

Boyd has some particularly bad news if you’re an experienced investor. Your experience makes you the perfect victim.

To better understand the psychology of fraud, Boyd interviewed hundreds of victims of Eron, a British Columbia mortgage scam that cost investors an estimated $240 million before collapsing in 1997. He discovered that it was the people who knew their way around the world of stocks and bonds who lost the most money. In fact, the people who considered themselves to be knowledgeable about the securities industry lost 75% more money than those who admitted knowing almost nothing of the markets.

Part of the problem was overconfidence. While some of the Eron investors borrowed to invest in the company’s mortgages, only half read the prospectus or even looked at photos of the properties they were investing in.

Like Madoff and Jones, Eron promised investors a high rate of return. It told investors that they were putting their money into mortgages secured by real estate developments. But investors were actually buying into a classic Ponzi scheme in which money from new investors is used to pay earlier investors. Because early investors get money back, a Ponzi scheme can appear to be a well-functioning business, right up until the moment it collapses.

So how do you spot a Ponzi scheme or evena straightforward con job? A bit of sleuthing can help, says Michael Linthicum, a private fraud investigator in Florida. Many scam artists have left a long trail of deceit behind them. Before you hand over a big cheque to anybody, head online and find out as much as you can about them.

In particular, check out the websites of provincial securities regulators, such as the Ontario Securities Commission and the British Columbia Securities Commission, as well as regulatory organizations such as the Mutual Fund Dealers Association of Canada and Investment Industry Regulatory Organization of Canada. These groups post the names of people who have broken the rules.

While you’re at it, look for news stories that mention the key names at the top of the company or organization you’re considering investing in. It’s a bad sign if the CEO has previously declared bankruptcy or been involved in other unpleasantness. “I had a client who was going to invest $39,000 into a company supposedly working on electric cars. It turned out the person running the company was already in jail,” says Linthicum. “I found that out just by doing a Google search.”

Even if all the key people in your new investment check out, think twice before jumping in. Ask yourself if you understand—really understand—how the investment works. Yes, that means reading the prospectus and getting acquainted with how the numbers work.

If you don’t understand how the investment generates the returns that it promises, don’t hand over your money. It doesn’t matter if friends and family tell you they’ve already invested and gotten their money back—they could simply be early investors in a Ponzi scheme.

If an investment is being sold by an adviser, check out his or her professional credentials. Jones, the Montreal financial adviser now under arrest, was neither a Certified Financial Planner, nor was he registered with any professional group such as Advocis or the Financial Planners Standards Council. But don’t take the mere factof membership in such an organization as being a guarantee of high ethics. Even if a fraudulent adviser was registered, it’s almost impossible to get your money back, says Ken Kivenko, with the Toronto-based Small Investor Protection Association.

Kivenko suggests you avoid letting anyone control your investments. “Look into doing your own investing online.” If you do need help, consider using a fee-only planner. These advisers (you can see a list at moneysense.ca) charge by the hour and can focus on giving you the best advice rather than selling you products.

The past year has provided an ideal test to see whether the balanced approach works in reality as well as in theory. By tracking how balanced funds weathered the recent ups and downs, we can asses whether they actually added value. Did their managers boost returns and reduce risk by adjusting their portfolios? Were these managers good at predicting which way the market would move next?

To find out, I examined the portfolio allocation of the largest 15 balanced funds in Canada that disclose this information. The funds that I scrutinized account for more than 44% of the $84 billion that Canadians have invested in balanced funds. Among them, these 15 funds reap close to $1 billion in management fees each year.

I compared the portfolios of the 15 funds at two points — the second quarter of 2008 versus the first quarter of 2009. The former was when Canadian equity values were peaking, right before the crash. The latter was when stocks were bottoming and getting ready to stage a 50% rally.

If balanced funds could have foreseen the future, they would have lightened up on stocks at the peak of the bull market and then jumped back into stocks before the recent low. This is presumably what you’re paying a balanced fund to do.

But it’s not at all what happened. The managers of these funds appear to have been asleep at the wheel. In fact, the data strongly suggest that balanced fund managers added hardly any value during the crisis. Contrary to public perception, those managers did not actively manage their asset allocation by moving from one investment category to another based on market factors. As you can see in Asleep at the wheel below, these fund managers barely budged their asset allocation, either at the recent peak or at the recent low.

The balanced funds that I examined seem to follow a very simple strategy. They stick to a stable asset allocation regardless of market direction. For example, if a balanced fund has decided that the best asset allocation is 45% stocks and 55% bonds and cash, it keeps to this split regardless of what happens in the market. If stocks plunge in price, reducing the value of the stocks below 45% of the fund’s total, the fund buys more stocks to bring its exposure back to 45% (and vice versa).

In general, there is nothing wrong with keeping to a fixed asset allocation. The strategy works because it forces you to add stocks when prices drop. It prods you in the opposite direction when stocks get expensive. In that case, a fixed allocation forces you to sell some of those overpriced stocks and buy bonds instead.

But you do not need to pay a balanced fund more than 2% a year in management fees to do something that anyone with a tad of discipline can do more cheaply.

Let’s imagine that five years ago you had placed 45% of your money in a low-cost equity index fund, 35% in a bond index fund, and the remainder in cash. Assume you rebalanced once a year to keep to those proportions. Following this simple strategy, you would have achieved an average annual return of roughly 5.1% and beat 90% of balanced funds. Not only that, but your bear market losses between June 2008 and February 2009 would have been around 18%, versus an average loss of 23.5% for balanced funds.

No magic is involved in these results. The returns from a do-it-yourself strategy are nearly sure to be better than the typical balanced fund because of your much lower fees. A typical balanced fund holds more than 50% of its portfolio in bonds and cash — two types of assets that require little if any active management. Problem is, a balanced fund still charges full management fees on those assets. In fact, you’re paying the manager to hold cash for you, which is truly senseless!

A big slice of the 2.4% or so that you pay in management fees on a typical balanced fund is wasted. Even if you’re a fan of active management, you could cut your fees by a third simply by investing in an actively managed fund for the stock component of your portfolio, buying a low-cost bond fund or an ETF for the fixed-income portion of your portfolio, and holding your cash in a high-interest bank account or money market fund.

My research indicates that only two balanced funds deserve recognition in terms of both minimizing losses and maximizing returns. The BMO Asset Allocation Fund and the RBC Monthly Income Fund (series F) outperformed the index portfolio on three important benchmarks — the extent of their bear market losses, the magnitude of their subsequent recovery between March and June of this year, and their five-year average returns.

You should give these two funds a look if you’re set on buying a balanced fund. Or you may simply decide to save money and allocate your assets on your own. One advantage of this do-it-yourself approach is that it allows you to choose an asset allocation formula that suits your personal circumstances, rather than the one-size-fits-all approach of a balanced fund.

Some people use fancy computer models to decide on a suitable asset allocation. I think a better approach is to avoid putting yourself in a situation where the worst case leaves you in a situation that is too horrible to contemplate.

Your experience during the recent market turmoil should determine your asset allocation going ahead. If you lost sleep, or couldn’t eat, at the very bottom of the bear market this past year, you should never put yourself in that position again. Never mind probabilities and standard deviations. If you are not prepared to face another 20% loss in the future, do not keep 45% of your investment in equities.

Worst cases (left) summarizes the losses that you would have suffered with different mixes of stocks and bonds during the meltdown. Let those losses be your starting point for deciding on your future asset allocation. If you want to make sure that your portfolio is not going to go down by more than 15%, you should not hold more than 40% of your money in stocks.

I acknowledge that the losses of the past year were a rare occurrence and are not likely to be repeated. But if events do surprise and you lose half of your retirement money, it’s no comfort to tell yourself that you were hit by a low probability event. Far better to plan your portfolio so you never have to face that possibility.

Asleep at the wheel

Balanced funds barely changed their asset allocation, either at the market high or low

Worst cases

How different asset allocations fared during the meltdown

But how much can you really get for your rings and necklaces? Unfortunately, very little. A jeweller or pawnshop will pay only 25% to 50% of what you bought a diamond ring for in a store. And you’ll get 10% or less of the retail price for jewelry that’s going to be melted down for its gold. “Most people assume jewelry is an investment that rises in value. But that’s an urban myth,” says Debra Sawatzky, a gemologist and estate jewelry appraiser in Toronto.

Even if you have a certificate from a professional attesting to the value of your ring or brooch, don’t expect to receive the amount on the certificate. An appraisal merely represents the retail value of your gems for insurance purposes. The price you paid includes the store’s retail markup and the labor that went into crafting the ring. Jewellers and pawnshops deduct those costs when they buy old diamond rings, says Renée Newman, a Los Angeles gemologist and author of the Gemstone Buying Guide.

If you’re still intent on selling your jewelry, follow these tips for the best deal:

Don’t accept the first offer

Diamond rings especially need to be shopped around to more than one store. A former co-worker of mine had a diamond ring appraised at $8,500. He visited several jewellers and found offers all over the map. The lowest was $900. The highest—$2,900.

Avoid the melting pot

Old necklaces, rings and earrings are usually worth more as jewelry than melted down for their gold content. Avoid shops that only offer to pay for the value of the gold. If your jewelry is not that expensive, go to a jeweller or pawn shop that specializes in reselling jewelry rather than one that sends it to a refinery. If your jewels cost you more than four figures or come from high-end jewellers such as Tiffany or Cartier, consider putting them up for auction. There are two main auction houses in Canada: Dupuis Fine Jewellery Auctioneers (Dupuis.ca) and Waddington’s (Waddingtons.ca). Dupuis’s commission is only 10% to 25% ofthe sale price at auction. The rest of the money goes to you.

Understand the value of your gold

If you do end up selling your gold for scrap, it’s important to know how much gold your jewelry has in it and what it’s worth. It’s an easy calculation. First, go to Kitco.com and find the current price of gold per troy ounce. As I write this, the price is $935 (U.S.). Convert that amount into Canadian currency: $1,030. Then multiply by 0.0311. That’ll give you the price of gold per gram, in this case $33.11. You need to know that number because when a jeweller weighs your jewelry he’ll tell you how many grams of gold it has.

An 18K wedding band might only have five grams of gold, which means the ring has $166 worth of gold. Most jewellers will offer you less than half that amount: $50 to $75 would be typical. But if you know what the gold is worth, you can haggle for more money.

While these funds have since recovered a bit, many are still down over the past couple of years. The losses have surprised many investors who figured that a target-date fund was the ultimate in safe investments, especially if the target date was close at hand.

Dan Hallett, president of Dan Hallett & Associates, an investment research firm in Windsor, Ont., says it’s a natural misunderstanding. Many target-date funds become highly conservative as their target date comes near — but not all target-date funds do. In fact, two funds with the same target date can hold entirely different mixes of assets. A recent study by Watson Wyatt, a U.S. investment consulting firm, looked at a variety of shorter-term horizon target-date funds and discovered that the amount of their portfolios invested in the stock market ranged anywhere from a relatively conservative 32% to a very risky 80%.

Despite what many investors think, target-date funds aren’t guaranteed, except for a few that offer capital guarantees, which are expensive. “If you really want guarantees, just buy a guaranteed product,” Hallett says. “Whenever someone is taking risk out of your hands, you’re shifting that to someone else and you’re going to pay for it one way or another.”

Target-date funds are best for someone who wants to hand over all their investing decisions to someone else. “When you take a long-term view of someone investing and looking to progressively become a little more conservative when they approach retirement, then it is a fairly good product,” says Jean-Daniel, a principal at consulting firm Mercer in Montreal. But be sure to look at the asset mix of the fund and make sure that its definition of conservative matches your own.

Most kids I grew up with were as carefree about money as I was, and our parents didn’t worry a bit. They figured that life would eventually teach us everything we needed to know about mortgages, car payments and the like. But that’s no longer the case. In an age of ETFs, TFSAs, RESPs and a dozen other acronyms, more and more people believe we need specialized education in how to manage our money. Every day I read of another politician demanding that our schools teach financial literacy.

It sounds like an excellent idea. But there is no evidence that a classroom can turn people into better savers or investors. Lauren Willis, a professor of law specializing in consumer finance at Loyola Law School in Los Angeles, says numerous studies have demonstrated that high schoolers who’ve taken personal finance classes are just as likely to bounce cheques or miss a credit card payment. Financial literacy courses can actually hurt students by making them overconfident about their ability to make financial decisions. And there’s no guarantee that a bit of education about today’s market will prepare kids for the next wave of financial come-ons. “A lot of personal finance stuff becomes irrelevant fast,” she says.

One reason that financial literacy courses fail is because most financial decisions are emotional. You can’t teach kids to be good savers and smart investors the same way you teach them algebra or chemistry.

Lewis Mandell, a professor of finance and business economics at the University of Washington who has studied financial literacy for 40 years, says kids learn best about money when they actually handle it — without their parents stepping in to correct every blunder.

Mandell believes that giving kids an allowance is stupid: “It’s like putting them on welfare.” His studies show that kids who get a regular allowance score worse on financial literacy tests than those who don’t get one.

Here are a few good ways to give your kids the financial experience they need:

Buy them a stock

Some schools try to teach kids about investing by staging stock market competitions that allow them to compete against other students using fictional money. All that does is to encourage kids to take unnecessary risks to come out on top.

Letting them play the stock market for real teaches much more useful lessons.

Mandell gave his daughter control over her college fund when she was a teenager. The fund had been invested in shares of Southwest Airlines, the budget air carrier. Mandell’s daughter thought Southwest was boring and after seeing a TV ad for Pepsi she decided to invest half her money in the beverage maker. Southwest’s shares kept rising as fast as its airplanes, but Pepsi stock fizzled, dropping nearly half. Mandell’s daughter learned that the stock market is volatile and you should do your research before buying. “There’s no way she could have learned that in a high school class,” says Mandell.

Encourage entrepreneurs

There’s nothing like running a business to teach them responsibility. Once I realized my portfolio of hockey cards wasn’t going to make me rich I turned to cutting lawns to save money for college. I started off with one client, then got another, and another and another. If I wanted more money, I had to work harder.

Running a business teaches you not only to manage your money but your time. Soyeon Shim, a professor of consumer and family sciences at the University of Arizona, says kids who are better time managers are also better budgeters.

Give them credit

Most parents abhor the thought of children heading off, credit card in hand, to university. I disagree. Just as kids never learn to ride a bike if you don’t let them fall, they won’t understand late payments and sky-high interest rates without experiencing them.

To make sure your kids don’t go bankrupt, suggest they keep their limit to $500 or so. But resist the temptation to co-sign for the card. If your kids rack up huge bills, it’s their responsibility to pay them off. That can be a painful lesson, for sure. But unlike a classroom lecture, it’s a lesson they’ll never forget.

The market collapse of this past year put those dreams in jeopardy. At one point, the Sandersons’ investments had lost 35% of their value. If Rick retired at 60, the couple was no longer sure that they would have enough to afford their entire wish list. Should Rick continue to do a job he disliked to ensure the retirement they desired? Or follow his heart and say good-bye to the office forever?

If you’re in your 50s or early 60s, you may be facing exactly the same dilemma. Many Canadians have had to re-evaluate their early retirement plans after watching their portfolios plunge in value over the past couple of years.

But don’t give up on your dreams of early retirement just yet. You may be able to make early retirement affordable if you’re willing to cut back, just a bit, on how you plan to enjoy life after you quit work. “I think most people do have an ability to cut back on the extravagances and live a life that’s less expensive but not much less enjoyable,” says Malcolm Hamilton, a consulting actuary with Mercer, a human resources consulting firm in Toronto.

Rick Sanderson is a case in point. After weighing the alternatives, he decided to plunge into early retirement despite his depleted portfolio. “I just had enough [of my job] and figured it was time to go,” he says. “If we have to, we’ll change our lifestyle to accommodate what we have.”

Rick is enjoying the early days of his retirement, doing small jobs around the house and golfing. Heather, 58, is still working, but hopes to also retire in the next few years. They’re confident they have enough money, even if they’re not so sure they can afford all their dreams. “If it’s a choice between renovating and traveling, we decided that we would travel,” Rick says. They are planning to drive across Canada with a trailer and visit Australia, but aspirations for further trips to South America and Europe will depend on how their finances hold up. “We just decided to do what we can with what we’ve got.”

How much is enough? As the Sandersons demonstrate, an early escape from work may be more affordable than you think, especially if you’re willing to scale back on some of your ambitions.

Consider a typical Canadian couple who earned average incomes during their working lives and don’t have a defined benefit pension plan. A nest egg of about $400,000 should be sufficient for them to retire at 65 and continue to live at the standard they enjoyed while working, says Hamilton. For that same couple to retire at 60 and live their accustomed lifestyle would require a nest egg of more like $600,000, estimates Hamilton. Yes, that’s still a fair amount of money, but it’s not anywhere close to the million dollars that many people think you need.

The 3% solution. If you plan to leap into retirement early, you must be careful about how much money you withdraw from your nest egg every year. That’s because you have to make your nest egg last a longer time. Let’s assume you have a balanced portfolio of both stocks and bonds. If you retire at 65 and want to minimize your risk of running out of money, researchers advise you to plan on withdrawals of no more than 4% annually of your initial portfolio value (plus inflation adjustments). If you retire earlier, you need to go even easier on your withdrawals.

How much easier? If you retire at 60, you would be wise to scale back your withdrawals to around 3.5% a year, say some experts. Retire at 55 and a withdrawal rate closer to 3% makes sense. But use these withdrawal rates as rough guidelines, notas precise markers. You may want to withdraw a bit more in the early retirement years when you’re most active, and less in your later years when you have less get-up-and-go. Moshe Milevsky, a professor of finance with York University’s Schulich School of Business, says it’s fine to withdraw more if your investments do particularly well—but you should also withdraw less if they do poorly.

No helping hand. Don’t expect a lot of help from government if you want to retire early. Government programs are geared to benefit you once you turn 65. If you retire at that age, you can expect to receive a combined total of up to $18,100 a year from three programs: the Canada Pension Plan (CPP) or its Quebec equivalent, Old Age Security (OAS) and the income tax age credit. You can also tap the Guaranteed Income Supplement (GIS) if your income is particularly low.

Early retirees get a lot less. While you can begin taking CPP as early as 60, it’s at a permanently reduced level. Except for a few special cases, you will not be eligible for other government stipends until you turn 65. A typical 60-year-old retiree can expect to get $7,600 a year or less from government, all of it in reduced CPP.

It’s all in the pension. If you’re fortunate enough to have a defined benefit pension plan where you work, it can be a big help in making early retirement affordable. In fact, if you work in the public sector, your pension may be sufficient for you to retire in your mid- to late 50s even if you have no other savings.

A defined benefit pension provides you with a set amount every month—the “defined benefit”—once you retire. The amount you get is usually based on how much money you were making toward the end of your career, as well as how many years you were covered by the plan.

Public sector pensions usually pay 2% of your peak earnings multiplied by your number of years of service. Someone who worked 35 years for a government department could typically expect an annual pension worth 70% (35 times 2%) of his or her final salary. The resulting amount is often fully indexed for inflation.

Most private plans are nowhere near as generous. Pensions are typically calculated based on only 1.5% of your peak earnings,multiplied by years of service. The payouts are often not adjusted at all for inflation.

In most cases, this pension math is based on the standard case of retiring at 65. If you retire earlier, you’re more expensive to the plan because it has to pay you for additional years of retirement. Who pays for that extra cost? It depends. Sometimes your employer pays through higher contributions. Sometimes you pay through a reduced pension. In fact, with many private sector plans, you can lose 4% or more of your annual pension for every year before 65 you start collecting.

But other plans are more generous to early retirees. Many public sector employers and a few private sector ones allow you to retire years early with no reduction in pension. To qualify, you must satisfy a formula that combines age plus years of service. Federal government employers, for example, can retire at 55 with no reduction in their pensions if they have 30 years of service. In that case they get a fully indexed pension that is at least 60% of their peak salary. Many experts say that should be enough to retire comfortably, even without additional savings. Thus, while the dream of Freedom 55 may be dimming for many Canadians, it continues to shine brightly in the public sector.

David Aston writes about personal finance. He is a certified management accountant with an MBA and MA in economics. For more Reward Years columns by David visit moneysense.ca.

Courts generally insist that you must take reasonable — but not extraordinary — steps to make sure that anyone visiting your property is safe from injury. So long as you’ve shoveled your porch stairs within 12 hours of a snowfall, you’ve taken reasonable precautions. If you cut off the guest at your Saturday night dinner party who’s had a few too many drinks and wants to jump into the pool, you’ve also taken reasonable measures. But no one expects you to have your stairs ice-free within 20 minutes of a midnight snowfall or foresee that a perfectly sober guest will injure himself climbing in the pool. To find out the nitty-gritty details, go online and read the occupier’s liability act for your province. The act provides general guidelines for what a homeowner needs to do. “It’s easy reading for most people,” says Mehran Yazdani, a personal injuries lawyer in Toronto. “All homeowners should familiarize themselves with it.”

Protect yourself

Write down the details of any accident. Get names and phone numbers of witnesses. Take photos of the scene and note the time and weather. Also write down any details that may help prove the injured person was partially or wholly responsible — for instance, if they were wearing high heeled shoes on a snowy day or carrying parcels that may have blocked their view. “If the injured person makes a statement about their conduct like, ‘Gee, if I had been wearing my glasses I wouldn’t have fallen,’ you should write it down,” says Miles Obradovich, a personal injuries lawyer in Toronto. “On the other hand, if they suggest that the fall was your fault, tell them that you are unable to comment.” It’s up to a court to determine responsibility, not you.

Talk to your insurance agent — fast

If you receive a notice in the mail informing you that you are being sued, don’t try to settle matters yourself. Instead, phone your insurance agent and forward a copy of the letter to him. Be aware that, depending upon your province of residence, an injured person may have up to six years after an accident to start a lawsuit against you, so you may not even remember the incident in question. Whatever the case, it’s your insurer’s job to play defence. “Your home insurance company has the duty to defend you, and all home- owners have enough insurance coverage to deal with these claims,” says Yazdani. “Even the most basic homeowner’s policy will cover you for up to $1 million in liability — more than enough for any claim. Of course, if you don’t have homeowner’s insurance, you will be on your own when it comes to paying the legal bills.”

Relax

You may have to go to a court reporter’s office with a lawyer from your insurer. Under oath, you will recount your version of events as well as answer any questions from the plaintiff’s lawyer. The plaintiff will also be there to recount his or her version of events. The aim is to determine who was at fault for the accident. But don’t worry. Most cases are settled quickly and never go to trial. “Anything you remember that shows that the plaintiff was partly or fully to blame for the accident will help when it comes to deciding the amount of the settlement,” says Obradovich. “Of course, if the two sides agree that you were not negligent, then the case will be dismissed and no settlement will be required.”

Don’t stand on principle

If the insurance company decides to settle out of court, let them do so. The vast majority of claims are settled before trial for under $25,000. Only 1% of cases wind up in court. “If someone twisted their ankle, a $2,000 payment is likely,” says David Farrar, a personal injuries lawyer in Halifax. “If it’s more significant, like a broken arm or leg, a $20,000 to $25,000 settlement is common. Whatever the amount, the insurance company pays it for you.”

Prepare yourself

In the rare cases where a settlement cannot be reached, you will have to tell your story in court. The night before your appearance, go over your notes and have a friend or family member quiz you on the event. Strive to be clear, logical and concise. Don’t exaggerate but be prepared to state your side of the story. A judge will decide who was at fault and what the final damages will be. “It’s the cases that involve brain injuries that usually end up in court,” says Yazdani. “And if the plaintiff is at risk of losing future employment earnings because he can no longer work, and you are deemed to be at fault, then the court settlements can be very high — close to $1 million.”

Shop around for insurance

If this is your first claim, then you will lose your claims-free discount, though your home insurance policy will be renewed as usual. But if this is your third insurance claim, your home insurance company may refuse to renew your policy. If this happens, contact an insurance broker and see what other insurance companies have on offer. “Your premium may double or triple, you’ll have a higher deductible and the new insurance company may restrict your coverage in certain areas, but you can usually get some type of coverage,” says Denny Edwards, an insurance agent with CarInsurance.ca in Toronto. “Have your agent shop around for you until you’re satisfied you’ve gotten the best policy available.”

Have an emergency? Email your question to letters@moneysense.rogers.com