Mistakes? I’ve made a few!
When it comes to making blunders in your personal finances, age and experience is only likely to raise the tally. At age 62, I’ve been writing professionally about personal finance for a quarter of a century and still make my share of blunders.
In fact, even before tackling this particular series of blogs, I gave a speech this summer on the seven biggest financial mistakes I’ve personally made over the years.
Over the next five days, we’ll look at mistakes in saving, debt, selling a home, investing and finally retirement. I think it’s important to take a “life cycle” approach to these topics, along the lines of the “Ages & Stages” philosophy MoneySense has always taken in its coverage of personal finance.
Chronologically, I’d put paying down debt ahead of saving for millennials and young people just starting out on their financial journeys. After that, it’s natural to marry and buy a house to raise the resulting children, after which investing and ultimately retirement will become priorities as one reaches middle life and the later years.
So without further ado, here is the first in the series:
Avoid these saving blunders
The single biggest mistake of course is NOT saving at all, says Adrian Mastracci, president of Vancouver-based KCM Wealth Management Inc. Face it, life is expensive and younger generations face more spending temptations than their parents, who didn’t have to worry about paying monthly Internet bills, cell phone roaming charges or premium cable. The easiest thing in the world is to spend 100% of what you earn or even worse, fall into debt. It’s absolutely essential to live within your means, spend less than you earn, and save the difference. So at the root of the failing-to-save mistake is the failing-to-live-within-your-means error.
We’ll look at mistakes in debt paydown next time but from the get-go it’s worth focusing on both debt paydown AND saving because too often people put the saving cart before the debt paydown horse.
Vancouver financial advisor Chris Cottier, of Richardson GMP Ltd., often raises this issue with clients in the context of Tax-Free Savings Accounts (TFSAs.) He tells them it makes no sense to bend over backwards to make a $10,000 contribution (or soon, just $5,500) just in order to shelter interest income of 1 or 1.5% in a GIC, when outside the TFSA the same person is paying close to 20% in interest on credit-card debt. “The first savings sin is to own a TFSA while you’re in debt. The mathematics just does not add up to be able to suck and blow at the same time. You’re either very clever or very lucky to make it work.”
You may find Cottier’s next savings sin a surprise: saving too much for too long. “So many people with good long-term secure jobs often have large so-called ‘rainy day funds’ and it never rains,” he says, “This is often a bad strategy where the only winners are the bank offering the deposits and the income tax authorities who collect up to half the pittance earned by the emergency fund.”
RRSPs can double as emergency funds if necessary: they’re friendlier and more liquid than you may think: you can open one this week and collapse it the next if you really need the money. There may be tax consequences, but it’s doable, Cottier says.
Don’t get us wrong here. Over the long run, we are strongly in favor of saving money, and investing it properly to build your Financial Independence and ultimately Retirement. It makes little or no sense to carry debt into retirement: if your finances are that shaky, you have no business contemplating retirement.
But this goes double at the beginning of the financial life cycle. Advisors talk about the magic of compound interest over time, which is why I like to see young people get money into TFSAs as soon as they can. But NOT if they’re heavily indebted with non-tax-deductible high-interest credit-card debt.
Because once you’re mired down by this kind of debt, you’ll experience the power of compounding all right: NEGATIVE compounding, paying way more interest than you’ll ever receive as the owner of a bond or GIC. Older folk that get behind in their tax payments to the Canada Revenue Agency are in the same boat: their debt starts to compound due to the combination of penalties and interest.
Younger people are more likely to have problems with credit cards, either while they’re still students or early in their work lives. Depending how much they’re paying, I’d also recommend paying off all student loans.