1. Have a plan
Ask any Canadian the first step to securing one’s financial future, and most will say that it starts with a solid plan. Yet, 69% of us don’t have one, according to the Financial Planning Standards Council. Unfortunately, no plan often equals no financial future, says Ted Rechtshaffen, president and CEO of TriDelta Financial. “The plan drives a lot of key decisions, like when can I safely retire, how much investment risk do I need to take on and what’s my likely estate value going to be.” Creating afinancial plan is not as painstaking as one might think. Add up expenses and income, property values and pensions and then do some math to determine how you’ll get from where you are today, to where you want to be in the future. Think about your future income, where inflation might go and what kind of investment returns you’ll need to generate enough income to take you through your golden years, he says. No plan is perfect, but you can make some fairly reasonable assumptions.
1. People often wonder why they don’t have money left over at the end of the year. It’s because we underestimate our spending. Most of us spend more than we think.
2. We think we’re invincible, but we’re not. People get sick, they lose a job—always be prepared for unexpected events.
3. We’re too conservative when it comes to our returns expectations. Returns may be lower today than in the past, but it’s probably not as bad as you think.
1. Start when you’re young. Even though it’s harder to predict your future, you’ll be ahead of the game.
2. Review annually to make sure you’re on track, but only make changes when a big life event occurs.
3. A plan isn’t just about saving—it should help you buy the things you want, too.
2. Pay yourself first
Study after study has shown that Canadians have a problem with saving. According to Statistics Canada, our savings rate is at about 4.2%, which is down from about 6% in 2013. With so many demands for our dollars, it’s easy to see why people don’t save. But saving is not as hard to do as you might think. Most financial advisors tell clients to pay themselves first, meaning that they should put some cash into a savings account before doing anything else with it. That can easily be done by setting up a withdrawal program at a bank where once a month, or every two weeks, a set dollar amount is transferred from your bank account to an RRSP or TFSA. You won’t even notice that you’re saving money until you look at your retirement account’s balance, says Heath.
But there’s an even easier way to save. Those who work at a company with a pension or group RRSP can get their employer to put a part of their paycheque right into an account. In many cases, the business will match that contribution. If the combined savings is large enough, and helps you meet your financial goals, you may not have to set aside any savings of your own. Those who do pay themselves first tend to do better at sticking to a budget, says Heath, because they can, essentially, spend whatever’s left over. “I find that if you automatically pay yourself first, then spending will follow suit,” he says. “It’s easier to use whatever’s left over.”
3. Create a workable budget
The finance industry is hyper-focused on saving and investing, yet people need to spend, too. You need basic items to live, of course, but you also shouldn’t feel badly about taking a vacation or buying a gadget you’ve always wanted. “Don’t deny yourself the wealth or you’re not having fun along the way,” says Scott Plaskett, CEO of Ironshield Financial Planning. The key is to spend smartly. That means cutting back on frivolous expenditures, and buying something you really want. Or finding cheaper ways to spend, says Jason Heath, a CFP with Objective Financial Partners. Do you need to spend $5 a day on a latte when you can make one at home? Plaskett tells clients to put 10% of every paycheck into a spending account, then use 50% of that to spend on whatever they want. “I encourage my clients to spend it, because that’s what we’re doing this for in the first place,” he says.
1. Many people spend without knowing what they can afford. Budgeting is key.
2. If you’re using a credit card, pay off the purchase. Too many people buy stuff using high-interest plastic and then get hit with hefty interest charges.
3. People don’t think in after-tax dollars. You might figure you have plenty to spend, but, thanks to tax, it’s usually less than you think.
1. Prioritize your spending. Determine what deserves your dollars most.
2. Comparison shop. Is that item cheaper somewhere else?
4. Make more money
Want more money? Then make more of it. While that may be easier said than done, thinking about career, and the additional income that comes with a better job, is an important aspect to financial freedom, says Heath. In the same way you plan for your retirement, plan for your career—think about where you want to be in the future, what kind of income you’d like and figure out how you’ll get there. In some ways, it pays to think like a company, says Plaskett. Businesses do well by increasing their bottom line—you might want to do that, too. When people think about their career, he says, they think more about the employment they get from that job as opposed to earnings, but if you’re serious about money then you need to do what you can to increase your wage. “That’s a solid part of financial planning and it should be followed. But not everyone embraces that because they don’t want to rock the boat.” You may have to invest in education to improve your skills, but the return can be worth it. There are also other ways to make more money, says Heath. Many people have side businesses, they rent out space on Airbnb, they sell stuff on eBay and more. “It’s a lot easier to make money than we think these days,” he says. Investing in income-producing securities can give the bank account a boost, too.
5. Healthy debt
While it’s always better to be debt-free than to owe money, debt is not as evil as many would have you believe. In fact, there’s good debt and bad debt—the former usually involves going into debt to buy an asset that will eventually grow in value, such as a house. Bad debt is debt used to buy something that loses value. Credit card debt usually falls into the latter category, but credit cards aren’t inherently bad if you pay them off every month. And that’s the key—debt can be useful as long as you don’t overdo it. What’s the point of a big house if you can’t afford anything else? Still, it’s a good idea to be mindful of what’s considered good and bad debt.
One common thought around debt is that you have to pay it off as quickly as possible. Not so, says Plaskett. For instance, with rates so low today, it can make sense to carry a mortgage and invest any extra dollars in the market, where you can get a better return. If interest rates rise, and borrowing costs become more expensive, then put some of those gains toward your mortgage. In other words, debt is not always a black and white issue. Generally, you want to be debt-free in retirement, and high interest rate credit cards can be a killer, but it’s important to think carefully about debt and see how leverage fits into your overall financial plan.
6. Reduce your tax
Everyone must pay their fair share of taxes, but there’s no reason you should pay a penny more. In fact, ensuring you pay what’s required—and only what’s required—is a key part of financial planning. To plan properly, think of your taxes in short-, mid- and long-term buckets. The first is your annual taxes. Know your deductions, such as pension splitting and child care, and your credits such as medical expenses, then make sure you claim everything. The second bucket is your RRSP and TFSA—determine which tax-sheltered account is best for you—while the last part involves minimizing estate taxes.
People tend to focus more on the first two buckets but Cynthia Kett, a CFP at Stewart & Kett Financial Advisors, says estate planning should start as soon as your assets exceed your liabilities. Estate planning is about protecting your assets from the tax man if something were to happen to you, she says. “Estate planning assumes the worst will happen and that [it] could happen right now.”
1. People don’t deduct all they can. This is crucial to tax reduction—miss a credit or deduction and you’re paying more than you need to.
2. They don’t keep receipts. If you’re audited, you’ll need to provide receipts. Credit card statements don’t cut it.
3. They’re too late with their estate. Estate planning can be complicated and needs to be done well before retirement.
1. With so many hard-to-remember tax credits and deductions, keep a master list of what’s claimable.
2. Creating a will is always important, but it can also help get the estate conversation started.
3. Name beneficiaries on your RRSP and TFSA and your savings won’t be subject to estate taxes.
7. Don’t buy too much house
4 rules of real estate
It’s a lifestyle purchase
Buy a house to live in because you like it, not because you want to get rich off it. No one knows what the market will be when it comes time to sell. It’s shelter first and foremost.
But you can make money off real estate
Again, we’re not talking capital gains, but rather monthly income from renting out a basement or a room. Buying a property to rent out can be a wise investment, too, if it’s in a popular or up and coming area.
Determine rental yield
When it comes to rental properties, it’s important to calculate yield. Take annual rental income and divide it by purchase price. Add in expenses to get a more accurate picture. Every area generates a different yield, so do the math to understand what kind of income you can expect.
Be mortgage-free in retirement
A mortgage sucks up a lot of income and that can be detrimental to someone who’s not making money. At least be mortgage-free on your principal residence; it’s OK to owe money on an income property if those payments are covered.
8. Play the long game
The stock market may be a volatile place these days, but you still need to invest if you want to grow your nest egg. Overall, expect a 6% annual rate of return, says Rechtshaffen, but there are ways to squeeze out more gains. First, pay attention to fees. A $100,000 investment earning 4% a year for 20 years would reach almost $210,000 with an annual fee of 0.25% (easy to do with an index-tracking exchange-traded fund), but the total would be $30,000 less at a fee of 1% (most equity mutual funds would charge about twice that). Canadians also need to stop being homers: Most of our market is concentrated in energy, materials and financials—and such heavy weightings can lead to trouble. Rechtshaffen’s portfolios typically have 20% Canadian equities and 20% in alternative assets (mostly private debt, but could include infrastructure assets and real estate). These holdings are typically long-life assets that generate an income and aren’t as correlated to equity and bond markets.
1. Investors let emotions guide investing decisions, which can result in selling low andbuying high. Use logic instead, says Plaskett.
2. People don’t think about what a company should be worth. Experts compare stock valuations to figureout where the business should be trading at.
3. They get swayed by the noise. Don’t get caught up in what the TV pundits are saying. Do your own homework.
1. Long-term investing allows your money to compound year after year.
2. Short-term trading is different than investing for the future.
3. You can pay an advisor to help you invest, but make sure you’re getting value for those fees.
9. Your real retirement
These days, 65 is just a number, not a retirement age. In fact, many people are working well into their 60s and 70s, some because they need to, but many because they want to. Others are retiring early—Heath has clients who want to punch their last clock in their 40s. Retirement can happen at any time, if you plan for it.
Start thinking about when you want to retire as early as possible, says Heath. The plan doesn’t have to be set in stone, but at least it gives you something to work towards. His clients who want to retire early have been working as hard as they can and are living more frugally than they otherwise would. Many of his still-working older clients have enough money saved, and are now deciding what todo with all the extra cash. Another reason to start early: You’ll need time to figure out what to do in retirement. You might start a new business, drive for Uber, or travel the world. That takes planning, too.
1. People don’t realize that plans get derailed. An illness, a job loss or some other life event could force you to retire early or work longer than expected.
2. There’s too much focus on saving. You need money in retirement, but if you don’t live a little during your working years, you’ll be too nervous to spend later, says Heath.
3. They think they can flip a retirement switch. Most can’t quit cold turkey. Consider part-time work to ease you into retirement.
1. Save more than you think you’ll need—if you’re forced to stop working early, you’ll be covered.
2. Modelling is a must. Plug in various assumptions to see how you’ll meet your retirement goals.
10. Teach your kids
It’s never too early to start teaching your kids about money. While it might seem secondary to everything else they need to learn, the more they know now the better off they’ll be in the future, says Kett. Start by giving them an allowance. About $1 to $2 a week for a four or five-year-old—enough for them to buy a small treat—is appropriate and increase it a little bit every year from there. Soon enough, they’ll start prioritizing their wants and needs and will understand that if they want something they must save for it. “Just establishing that kind of thinking in a child can be helpful to them later in life,” she says. This is important for any child, but it’s crucial for children with wealthier parents. It’s difficult for the child who can get what they want whenever they want to start saving and spending wisely. The key, says Kett, is to teach children that money is a limited resource. “Once they know that then they realize that they need to earn money to get what they want,” she says.
Illustrations by Jason Ford
This article originally appeared in the January 2017 issue of MoneySense Magazine and was nominated for a 2018 National Magazine Award.
WATCH: How to start saving money