4-Step Plan To Fix Your Finances
Photo: Thanasis Zovoilis
Worrying too much about money? Here, Gordon Pape’s quick tips to fix your finances.
Nothing in life seems to provoke so much second-guessing as managing your money. Should I pay down the mortgage or buy RRSPs?
Do I play my investments safe or take on more risk? Should I speak to an adviser or go it alone?
If you’re one of those who has a natural aptitude for walking this sometimes precarious tightrope, you can stop reading now and move on to some of the more interesting stories in this issue. But if you find yourself just barely hanging on, here are four basic financial rules that, if you follow scrupulously, I can almost guarantee your money worries will melt away.
1. Pay off debt
I am increasingly alarmed at the rising percentage of people who are going into retirement carrying a heavy debt load. I can understand why it’s happening—debt fuelled the good life of the baby boom generation, and people learned to live with it. But after you’re retired and are on a fixed income, debt becomes a time bomb just waiting to explode in your face.
Every recent study confirms the trend, although the numbers vary from one poll to another. The most reliable measure is a 2012 report from Statistics Canada that showed 70 per cent of people between ages 55 and 64 were still in debt. That was up from 61 per cent in 1999. The number of people over 65 with debt was 43 per cent.
An online poll sponsored by CIBC in mid-2015 found that the percentage of people over 65 that still owed money was up to 56 per cent.
Just as when they were working, these folks are using debt to finance their home, buy a car or enhance their lifestyle.
Financial experts have been warning about the dangers of this for years but, based on the survey results, many Canadians haven’t been paying attention. Why should they? Interest rates have been at historic lows for most of the past decade. Money is cheap, so why not use it?
Those days are coming to an end. The Federal Reserve Board raised its target rate by a quarter-point in December, and three more increases are predicted for 2017. Even if the Bank of Canada stands pat, the Fed hikes will influence commercial rates across North America. That process has already started with some of the major Canadian banks announcing mortgage rate hikes this past fall. Be prepared for more this year.
A one per cent increase in your rate means another $1,000 a year in interest on a $100,000 loan. But don’t expect it to stop there.
Historically, once central banks start to raise rates, the trend continues for a few years. As recently as 2007, the average five-year residential mortgage rate in Canada was 6.75 per cent. That’s more than two percentage points higher than now. Ask yourself how an increase of that magnitude would affect your finances.
Start paying off debt before you retire. Make it a priority to be debt-free when you stop work. If that is not possible, shop for the lowest interest rates at websites like ratehub.ca and continue to pay down any loans or mortgages.
2. Make safety a priority
The Great Recession of 2008 hit many of us hard. Some people were forced to delay their retirement after suffering stock market losses while others had to cut back on their lifestyles. But those memories are fading away. The past few years have been good for stocks. The Toronto Stock Exchange was one of the best performers in the world in 2016 with a gain of 17.5 per cent.
Not surprisingly, many of those investors who were burned in 2008 have returned to the market. Greed tends to trump fear when times are good. But the risks remain, and a correction from recent record highs is increasingly likely. Another collapse like 2008 would leave many people in financial trouble. I’m not predicting that will happen, but the possibility can’t be discounted. The older you are, the more conscious of the risk you should be.
Review your portfolio and determine what percentage of your assets is exposed to the market. That includes stocks, ETFs and equity mutual funds. If it is too high for your comfort level, make some adjustments. Sell some of your equity investments and move the money to short-term bonds or cash.
Next: Don’t invest in anything you don’t understand…
3. Don’t invest in anything you don’t understand
Financial engineers are constantly inventing new and enticing products. Most of these are extremely complex but are designed around one basic marketing theme: get rich at no risk. Of course, no security can deliver on that promise, but that doesn’t stop people from selling it.
The big banks are among the worst offenders when it comes to peddling these types of securities. Principal-protected notes and market-indexed GICs are examples.
You should always be suspicious if anyone tries to talk you into a risk-free investment. Usually, these securities are structured in such a way as to protect your principal, but you may end up tying up your money for years with no return. If you do end up with a gain, it may be limited by the fine print in the plan.
Ask for a two-minute explanation of any new security that’s suggested to you. If you don’t completely understand it at the end of that time, move on.
4. Ask for help
The financial world is incredibly complex. Unless you’re a professional, there’s no way you can navigate it on your own. It’s like trying to be your own doctor or lawyer. Without extensive training, you can’t possibly succeed.
If you need the services of an accountant you’d seek out a certified professional, right? So why not do the same when it comes to financial management? Some people think having a financial adviser is too expensive. I suggest a good one is cheap at the price.
But how do you find that good one? That requires some due diligence on your part. Don’t stop with a name and phone number – ask what the adviser specializes in and why he/she might be suitable for you. Interview at least two or three. Explain what you’re looking for and ask precisely what he/she would do for you. If your comfort level is not high, pass. Once you have found someone, review the results at least quarterly. If you’re not happy, say so.
In my experience, fee-based advisers are likely to give the best results. They charge a small percentage of your total assets annually (typically one to one and a half per cent) and so have a vested interest in your success. The greater the value of your account, the more they collect. Win-win scenarios work best for all concerned.
Gordon Pape publishes the Internet Wealth Builder and Income Investor newsletters, www.buildingwealth.ca.
A version of this article appeared in the May 2017 issue with the headline, “Worrying Too Much About Money?”, p. 32-33.