Build your financial knowledge

Zoomer | January 1st, 2006

Many Canadians feel less prepared when it comes to their finances than for any other area of their lives. Yet this is a far-reaching aspect of our existence: The decisions we’re called on to make daily — as consumers, investors, savers, borrowers, voters or entrepreneurs — affect our ability to achieve lifetime self-sufficiency.

For the average investor, the task of managing assets may seem overwhelming at times, but a few basic guidelines can help make you a better consumer — no matter what your goals or investment personality.

Build your knowledge and awareness

It’s hard work but also the best investment you can make in your future. The more knowledge you have, the better you’ll be able to plan and manage your financial resources to improve your personal circumstances and meet your lifetime needs for financial independence.

In the world of investing, the “knowledge gap” between those who know and those who don’t usually operates to the disadvantage of financial consumers, the result being that we receive too little value at too high a cost. For example, are you aware of the fees you pay on your investments or of the impact of these charges oyour investments? One extra per cent age point in fees and charges can mean a 20 per cent difference in what you end up with 20 years down the road.

Here are some suggestions for bridging the knowledge gap:

Read the financial and business sections of newspapers and magazines. If you’re not used to doing this, you’ll probably find it heavy-going at first. Start by familiarizing yourself with certain sections — it won’t be long before you find articles of interest to you.

Explore Internet sites such as those of the Investor Learning Centre, the Canadian Bankers Association, GlobeFunds and Canoe. (You’ll find the addresses for these and other resources listed elsewhere in this guide.) There’s a wealth of information about investing and investment-related issues on these sites.

Contact mutual fund management companies and ask for a list of their publications on investing and retirement planning.

Consider taking a course on investing and retirement planning but beware of “investment seminars” that appear to be educational but are really aimed at selling products or advice that may benefit the seller more than your needs.

Take a course to improve investing, as well as more general, skills. A course offering assistance in upgrading your math abilities can help immensely in understanding basic concepts if you haven’t used these skills for a while. Similarly, a course helping you understand and apply basic investment concepts — such as the time value of money, the effect of compounding, the difference between total return and a return of capital, and how to assess opportunity cost — can be invaluable.

Develop a sound personal financial plan

Having a plan is crucial to achieving financial self-sufficiency. Determine what’s important to you and your loved ones — what your goals are, and how you’re going to achieve them.

Planning involves knowing how you spend your money and what you have in the way of assets, income, bank accounts, loans, mortgages, investments and insurance. Try to attach time-frames and dollar amounts.

If you’re like most people, you’ll have to make some trade-offs and set some priorities. Remember that the choice between spending $100 today and saving $100 for the future is not a one-for-one trade-off. Time can significantly enhance the value of the $100 saved and can, on reflection, make a frivolous consumer decision look particularly costly down the road. The following steps will help forward planning.

Learn how to budget by keeping good records. This is key to achieving your goals. Don’t become overwhelmed by the process — all you’re doing is figuring out what you have, what you need and how you’re going to arrange your affairs to meet your needs.

Base your budget on what you can control. For example, you can’t control investment returns and tax tactics, but you can choose how you live and your approach to wealth management and wealth creation. In case you haven’t already realized it, these choices apply to everyone, not just the super-rich. You can — and must — take charge of and manage this process.

Review your plan regularly. Remember that a plan is not static and you must identify continuously how you’re going to deal with the gaps between what you have and what you need. Changes in circumstances — such as divorce, a job loss or a death — should prompt a review of your goals, strategies, priorities and portfolios.

Get your affairs in order

Getting organized means being street-wise when it comes to getting financial advice, as well as paying attention to the little details that can derail your plan. Here are some considerations:

Pay off debt as quickly as possible. Get it under control. Discard your credit card if you’re not paying off the balance owing every month. If you are overwhelmed by debt, seek help from a credit-counselling bureau, or from your bank, trust company or credit union.
Build up an emergency fund. The usual rule of thumb is to set aside enough to cover four months’ living expenses. Keep this money invested in a liquid investment such as an interest-bearing bank account, a GIC or a low-cost, no-load, money market fund.

Make a will — it’s too costly to die without one. If you have children under 19, be sure to name a guardian and a backup. Also assign a power of attorney for both your personal care and property in the event you become incapable of managing your affairs.

Choose your advisers carefully and be prepared to pay for good professional advice. Don’t get confused by terms such as “financial planner”, “financial adviser”, “financial consultant”, “investment adviser” or other words describing some special expertise. As well, just because someone has lots of letters after their name doesn’t guarantee they have any special ability to give you sound advice. Be aware that some people providing advice really only want to sell you a product such as a mutual fund, a segregated fund, an insurance policy or whatever. There are probably hidden costs to this kind of advice. Sometimes, a flat fee offers the best value. Never automatically agree to pay a continuing fee. Instead, consider all your fee options.

Pay attention to what’s happening in all your financial institutions accounts. Promptly read and understand your confirmation statements and account statements. Ask questions immediately if there’s anything you don’t understand.

Keep notes of your conversations and meetings with your advisers. Understand how a certain recommendation to buy or sell fits into your plan and, before committing, make sure you’re comfortable with this assessment.

Ask for prospectuses and information statements before making a purchase. If it doesn’t sound like the perfect fit, ask questions before you buy.

Look for lower-cost alternatives offering comparable performance, diversification and stability. Lower costs mean you can set aside less than you would otherwise for long-term savings, so you’ll have extra for other needs. You could also end up with more capital available to fund your retirement needs.

Think twice about giving your adviser a power of attorney. It’s generally not a good idea, but if you do so, be sure it’s very limited and specific. Similarly, make sure your investments are registered in your name. Don’t let your adviser register your investments in his or her name or in the firm name, either alone or jointly with you. There are some exceptions to this, such as for investments held in a registered plan where they must, by law, be registered in the name of the trustee of the plan.

Don’t sign any blank documents and never sign anything without first reading and understanding it.

Be cautious about withdrawal plans, particularly if you’re using them to repay investment or other loans. Get different sensitivity scenarios from your financial adviser so that you understand fully the implications of any decline in the rate of return on your investments.

Glorianne Stromberg is a noted investment industry critic and the author of several reports on regulation of the investment funds industry.