Golden Girl Finance | The Financial Voice for Women
Launched in 2008, Golden Girl Finance is Canada’s media leader in financial content for women. We create original and unbiased financial content to educate and inspire Canadian women about investing, personal finance, retirement, philanthropy, and the psychology of money. Follow this site and get content on how to manage finances and money.
If you’re like me, you like to travel. Last summer I took a road trip. Can I just say, “I love GPS!” I can’t imagine navigating a drive without it. It’s given me the confidence to just set the destination and enjoy the journey so much more. Even if I know which way I’m heading, it alerts me to traffic jams or delays. And the very best part? When I make a wrong turn, it effortlessly, and without judgment (as to my skill as a driver), recalculates the best new route. So. Much Less. Stress.
While we don’t think twice about getting help on the road, when it comes to our finances, Canadians often go it alone and this leads to high levels of anxiety. In a recent survey, money worry ranked at the top over health, work and relationships. The Financial Planning Standards Council revealed that 6 in 10 Canadians haven’t reached out to a professional financial planner to help them deal with it. That leaves many people too afraid to look at their finances to see the interest they’re paying on their credit card(s), how much they owe, and the fees they’re paying for financial advice – just to name a few key issues.
“We’re stressed about our money and going it alone”
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November is Financial Literacy Month and the week of 18th to 24th is financial planning week. What better time to reach out to get help and the answers you need when you’re debating whether to pay off your mortgage faster or invest in a RRSP or TFSA. Self-help is great—up to a point—but sometimes you need the services of a pro, someone with the Certified Financial Planner designation. After all, if you broke your leg, reading a book on surgery wouldn’t do the job.
“There’s a lot of “free” information on the internet, but it’s difficult for individuals to determine whether that information is applicable to their situation,” says Cynthia Kett, a fee-only Certified Financial Planner with Stewart & Kett Financial Advisors Inc. “A CFP can provide the objective, third-party expertise that individuals and couples often need to define, prioritize, and plan for the achievement of their life and financial goals. Also, couples often differ in how they manage or think about money. Each person brings knowledge, experience, cultural and/or personal biases into the mix, which can affect their ability to agree on a course of action. CFPs can facilitate communication about financial matters and add his/her own expertise and experience to the clients’ decision-making process.”
Study shows that having a plan gives you a financial boost.
85% of Canadians with a comprehensive financial plan felt a greater sense of financial well being, 62% reported increased emotional well-being and 42% said it contributed to their overall contentment.
78% of those with a CFP vs 54% of those with a non-certified planner feel their finances are on track.
73% of those with a CFP say they have a greater peace of mind and 70% say that they are closer to achieving some of their life’s goals as a result of planning (vs. 63% and 61% respectively of those with a non-certified planner).
Okay, so having a financial planner is a smart money move. But how do you find one? Except for Quebec, anyone in Canada can call herself a financial planner. There’s no regulation that restricts the use of this title, so it’s vital that you do your research.
Tips for finding a reputable financial planner
Visit the FPSC site and click on the “Find Your Planner Tool”. http://www.fpsc.ca
Ask some of your trusted friends or current advisors for referrals.
Research financial planners and financial planning websites on the internet.
Speak with them on the phone prior to setting up a meeting.
Interview one or more in-person to determine whether there is a good fit with your unique needs; this should be ideally be a long-term working relationship, so you’ll want to be comfortable with them from the beginning.
Yoga and mindfulness might seem like the opposite of the mental and emotional intensity that often comes with investing, yet these practices have parallels that may be useful to building wealth.
Meditation is a technique for resting the mind and attaining a state of consciousness different from the usual waking state. It allows the mind to focus on something other than events around us. Similarly, Hatha yoga is a practice aimed at caring for the body and mind, helping us to develop focus, patience and calmness.
“I think that mindfulness definitely informs how we feel about our investments,” says Kathryn Mandelcorn, B.C.-based certified money coach, financial management advisor and director of cash flow strategies at Spring Financial Planning. Practicing mindfulness helps us manage reactions to the things that life throws at us — which can apply to our financial situations as well. So, the next time you’re in yoga class, consider whether some of these popular asanas (postures) might help with your investment process.
Warrior 1 & 2: Aim for your goals
“If you’re really clear on why you’re investing and that these choices are in alignment with your values, then outside noise becomes less scary,” says Mandelcorn. With investing, as with yoga, it’s important to understand your values and purpose. If you’re only attending class or investing in something because your neighbour or colleague is doing so, you’re more likely to be pulled off track by day-to-day financial news. In yoga terms, you can think of your investment philosophy as your “financial dharma”.
Downward Dog: Know when to pivot
Start with a plan based on what your goals are and what’s important to you right now, but check-in from time-to-time so you can adapt that plan when your life or goals change in a significant way, says Mandelcorn.
“To me, mindfulness or yoga is meeting yourself where you’re at right now and not trying to put pressure on yourself to be at a certain place.” Ask yourself, ‘what do I need to do to adjust in this space right now?’
Tree: Think Long-Term
“With investing, as with yoga, we have milestones and goals that we’re trying to reach. We may get to retirement, but even in retirement we’re still investing. There’s never a final destination,” says Mandelcorn.
Headstand: Try a different perspective
If you’re uncomfortable and stressed about your investments, ask yourself whether you need to change the plan. And don’t be afraid to seek support when making those choices. “We’re in a silo with our thoughts. Checking in with a financial professional or whomever you need to will ensure you’re not making impulsive decisions based on fear,” says Mandelcorn.
“Everyone wants to lead a peaceful, happy life, but happiness and success aren’t measured by how much money you have, but by whether you have inner peace in your heart.” – Dalai Lama
Recent studies affirm the His Holiness’ the Dalai Lama’s observation. In a landmark report, the Origins of Happiness, researchers at the London School of Economics (LSE) attempted to quantify how factors such as income, employment, health and family life influence a person’s level of happiness. The authors concluded that mental health explains more of the variance of happiness than income.
“I see clients in their 40s, 50s and 60s with all their material needs being met—private schools for the kids, second homes, fancy cars, vacations—and these are some of the loneliest people,” says Sari Shaicovitch, a Toronto-based therapist and social worker. From her experience, there is a false belief that money will provide happiness. “Social support is the primary determinant of happiness, longevity and better health—mental and physical,” she says.
According to the LSE study, having a partner contributes to happiness and a “partner” does not only mean a husband or wife. “It’s having someone in your life who loves you unconditionally. For many this could be an intimate partner, but it can also be a sister, friend or cousin.”
Though it may seem counterintuitive, the LSE study showed that even as incomes and education levels have continued to rise in the West, aggregate happiness has not risen in tandem. There is some evidence that people who compare their incomes with others are less happy when they perceive themselves to have less.
“Sometimes when we see what others have, we want that life, but forget that money does not bring fulfilling relationships. From what I see in my practice, it all comes down to having a good emotional support network,” says Shaicovitch.
Age does seem to be an important factor in happiness. In the recent study, Do Humans Suffer a Psychological Low in Midlife?, the researchers examined the psychological well-being of 1.3 million people worldwide between the ages of 20 to 90. Their conclusion: happiness follows a U-shape over a lifetime. People are happiest in their late teens and early 20s, hit an all-time low around their early 50s and then rebound into their retirement years and beyond.
“Mid-life is a particularly stressful time. People are balancing work stress, aging parents, and teenagers.” There can also be a growing awareness of their own mortality and a need to evaluate their life purpose. Women, particularly, experiencing menopause, so there are strong physiological changes in addition to psychological changes.
As much as we need to take care of our financial well-being, these studies remind us to invest in our personal relationships with family, friends and/or partner. Emotional health and wellbeing are paramount to life satisfaction. Social comparisons are big contributors to misery. It is human nature to compare your income with that of others. Yet, while someone’s life may appear “perfect”, you never know how happy she really is. This is a lesson for all of us. We need to clarify the income level that will meet our needs and wants and, once we have the means to achieve that, to prioritize personal connections.
Finally, if you are in your late 40s to mid-50s and feeling low, remember that mid-life dissatisfaction is normal— and that it will pass.
Many of us struggle when it comes to understanding financial matters. Figuring out how best to achieve goals and overcome challenges is difficult. Almost all Canadians will need some form of professional financial advice at some stage in their lives. Except that we’re confused about what type of advice we need, whom we can or should get it from and who is qualified to provide it.
Monique Madan, a Toronto-based certified financial planner and Head, Financial Life Strategies at Quintessence Wealth says, “when you’re starting off in your career and adult life, the benefit of planning doesn’t necessarily have to do with long term eventualities. Sometimes it’s just a matter of getting to understand what a reasonable budget is. If I can tell people, how to set up an appropriate budget, what proportion of their income to put against debt, and then get them on a course for success, it will more than make up for the fee.”
Vancouver-based certified financial planner and co-founder of Money Coaches Canada, Sheila Walkington states that “a financial plan can help clarify and prioritize your goals at any age. While we often associate financial planning with retirement planning, most of us have other short- and medium-term objectives, such as buying a home, maternity/paternity leave, career change, or saving for our children’s education. A good financial plan helps balance today’s goals with a secure financial future. The earlier you start developing and implementing a plan, the more time you will have to meet your goals, and the more secure you will hopefully feel along the way.”
Planning may be more comprehensive earlier in your working life, but in your 50s and onward questions are more targeted. Madan says that clients wonder, “can I afford to enter an assisted living situation that’s going cost me $6,000 a month?” There are also tax issues around inheritances to be considered.
A financial plan is an investment. Depending on the complexity of the plan, costs can be thousands of dollars. Some planners charge hourly rates if you require advice on a specific issue. Other advisors may provide “no-cost plans” if your investment size meets their minimum asset threshold. But keep in mind that you get what you pay for. Some companies also offer financial planning services as part of their employee benefits.
Life isn’t static, and your financial plan shouldn’t be either. Whenever your goals or circumstances change significantly, update your plan. “Your plan needs to evolve as you do. Working with a fee-for-service planner who can provide unbiased advice and tailor their services to your needs is a great option. Not everyone needs a full or completely re-written plan at every stage of her life. Having an ongoing relationship with your planner makes it easier to make updates over time,” says Walkington.
Ah, retirement! Finally, we can live exactly the way we want to. In my case, that’s learning to cook international cuisines, dancing with Javier Bardem on a beach in Bali, and relaxing in a Muskoka chair surrounded by our beautiful, multicultural grandchildren.
I encourage my clients to dream of their ideal retirement as well as planning for what is inevitably an unsettling experience— going from a steady pay-cheque to drawing upon savings to cover expenses. Few people have reliable and inflation-adjusted employer pensions any more. Fewer still, have sufficient investment portfolios to produce enough income to live on. The reality is we’re all concerned about outliving our money and this can— and often does—prevent us from fulfilling our retirement dreams.
One of the most important things I do for UPotential clients is prepare the “maximum sustainable budget”. The “maximum sustainable” budget determines the highest standard of living that you can enjoy to age 90 without tapping into your home equity. If your home equity is intact at age 90, to cover the costs of health-and long-term care or for your estate, you’re unlikely to exhaust your resources.
By comparing your maximum sustainable budget to your current and anticipated lifestyle, you’ll know how reasonable it is for you to enrol in “Le Cordon Blue”— or if there’s some more work to do.
You’d be surprised to learn that even having a large bank balance is no match for “bag lady syndrome” – the fear that we’ll outlive our savings and end up homeless. What a shame for this fear to keep us from fulfilling our personal goals. I recommend that clients create some mechanism of regular deposits into their bank account that resembles that steady, reassuring paycheque. Consider it a “DIY pension”.
Here’s how to implement your own“personal pension plan”:
A monthly “sweep” (or a systematic withdrawal plan).
Many financial institutions can “sweep” interest and dividends that accrue in your investment account and deposit these into your regular chequing account. When combined with Canada Pension Plan (CPP), Old Age Security (OAS) and Registered Retirement Income Fund (RRIF) deposits, this “sweep” can provide you with an additional source of regular income. Payments may not be the same every month because different investments pay out income on different schedules, but it’s still a reliable deposit. If you’re accumulating too much in your chequing account, you can pause the “sweep”.
Monthly withdrawals from a cash account.
Another way of simulating a regular pension payment is to have accessible cash in your investment account to supply a pre-set monthly transfer to your bank account. Cash can be in the form of money market funds, or a series of GICs that mature in 6-month increments to fund your cash flow needs for the foreseeable future. You could also redeem a pre-set amount from a mutual fund. It’s better not to fund your monthly needs by selling stock or bond positions since these incur commissions. However, if your portfolio is largely comprised of stocks or bonds, you can trim positions periodically and reinvest the proceeds in money market funds from which the transfers can be withdrawn.
Purchase an annuity.
An annuity is a contract. In exchange for making a lump sum deposit, you receive regular payments for life. The amount you get depends on various factors such as the size of the deposit; whether the funds came from a taxable or non-taxable account; health condition; need for inflation-protection; continuing payments to a surviving spouse; and current interest rates. Our generation-long, low-interest rate environment has made annuities unpopular, but they still serve a purpose which is to provide reliable, predictable payments for life.
Despite the fact that we work and save and dream about this transition to retirement, the actual change can be unsettling. Working with a financial planner can help you to understand the upper limits of your affordable lifestyle and how to mechanize your savings to make those retirement dreams come true. Javier, here I come!
The boasting on social media about “extreme finance” is getting out of hand. Extreme measures include paying down a $200,000 mortgage in 5 years or retiring at age 35. Among the headline-grabbing stories, this one takes the prize: “Modern-day caveman lives on zero dollars a day.” Let’s agree that living off the grid and foraging for food are not viable options for most of us. Here are three main reasons why taking draconian steps with our finances is a bad idea:
Extreme measures are not sustainable
A diet of only ramen noodles may work for students but it’s certainly not going to work for a family with growing children. Similarly, eliminating clothing budgets and moving into a tiny house are unlikely to be long-term solutions. Generally, the more drastic the change, the more difficult it will be to sustain. It’s the same as following a diet: gradual change, such eating fruit between meals instead of sugary snacks, is easier to adopt and sustain than a diet that eliminates all carbohydrates.
If you live alone and have few social contacts, you are relatively free to take extreme measures that alter your lifestyle. For the majority of us with close family and friends, we can expect some fairly strong pushback if we propose to sell off the family car, restrict entertainment budgets and eliminate vacations.
Extreme measures reduce quality of life
Let’s take the example of a couple who wishes to retire at a very early age, say 45. By scrimping and saving for 10 years, perhaps they can achieve their goal of a frugal retirement. But let’s remember that life is not only short, but unpredictable. Enjoying life as you go is as valuable a goal as saving up for enjoyment down the road. Focusing exclusively on the future may cause extreme regrets if health problems or unforeseen circumstances interfere with future plans. Remember that one of the top regrets late in life is not travelling more at a younger age.
Extreme measures permit us to procrastinate
If we are lulled into thinking that a drastic change can be undertaken at a moment’s notice, we may put off making many reasonable and relatively easy adjustments that could improve our financial position. Instead of starting to save for retirement at slow and steady pace at age 35, we might procrastinate and tell ourselves we will take more drastic measures down the road. These measures are likely to prove much more difficult than we anticipated.
Can we learn anything from extreme finance?
Yes. All these extreme measures have one thing in common: reduced spending. To make money go further, cutting back is more effective than trying to boost either income or investment returns. There’s no shortage of good advice about how to restrict spending without sacrificing enjoyment of life. Setting a lower travel budget might mean more camping in national parks rather than winter beach vacations. A smaller clothing budget might spark an interest in thrift-store finds. Eating more meals at home is not only cheaper but is also likely to be healthier.
Extremely easy advice
Moderate and sustainable changes to our spending habits are the key. The age-old wisdom of paying ourselves first – setting aside the money for savings/investments and limiting our spending to what is left over – will always be a great strategy. Extreme personal finance measures challenge our thinking: Do we really need to spend that much?
The best advice is almost 100 years old, from Desiderata: “If you compare yourself with others, you will become vain and bitter, for always there will be greater and lesser persons than yourself.”
Keeping up with the Joneses in extreme finance is extremely overrated.
After a long period of low interest rates and rising asset prices (housing and equities), you may feel that having a financial plan is not that important. After all, everything is going great! But recent market turbulence reminds us that markets are volatile and having a solid financial plan that works for you in the up— as well as down— markets is key.
According to Jason Heath, a Markham-based certified financial planner with Objective Financial Partners, “when things are good, people get complacent. Stocks and real estate have risen quite a bit in the past 10 years. For young people who haven’t been through a stock or real estate market downturn, it may seem like these assets just go up. We also haven’t had a recession in Canada since 2009 – almost 10 years ago. Frankly, we’ve had a good decade for the stock market, real estate prices, and economic growth.”
But just because the markets have generally been increasing, that doesn’t mean you’ll want to get caught projecting unrealistic numbers when creating your financial plan. Doing so can set you up for far less than you’d hoped in the long-term.
Monique Madan, a Toronto-based certified financial planner and Head, Financial Life Strategies at Quintessence Wealth uses the guidelines set forth by the Financial Planning Standards Council (FPSC) when projecting rates of return for her clients. “The guidelines are incredibly conservative, deeply conservative in comparison to bull markets. So, if anything, we have been planning all along for a “soft” market. I don’t use prevailing rates. For equities and for my financial plans, the highest rate of return that I’d use— and that’s for a 100% equity portfolio— would be about 5.15, after fees.”
Heath, warns that, “there’s a behavioural economic theory called the “wealth effect” that suggests when people feel wealthy – for example, if their stocks or real estate have risen in value – they “act” wealthier by spending more than they should. And, when stocks or real estate fall, or some other economic shock occurs, these people may get off track. This may be most pertinent in hot real estate markets, like Vancouver and Toronto, where buyers are willing to assume more debt. If real estate prices fall, interest rates rise, or a recession or job loss occur, they may regret succumbing to the wealth effect.”
If you’re managing your own finances, be cautious with your projections. “Whether you’re using financial planning software or the services of an investment advisor, ensure that you adhere to the FPFC guideline,” says Madan.
Heath cautions against trying to time the market because doing so means you “need to be right twice: you need to pick the right time to sell and the right time to buy. Financial planning requires a long-run approach, and as humans, we’re fallible. We make mistakes. But we should try to be realistic and conservative in our expectations, whether on our own or with a professional.”
CEOs are unlikely to admit their successes are due to luck. But that is exactly what Harold G. Hamm, CEO of Continental Resources, did. He used the ‘Jed Clampett’ divorce defense to argue that only 10-percent of his enormous wealth ($18B) was due to his skill and effort.
Hamm and his wife were in the midst of a divorce battle and he hoped to use the Clampett defense, (named after Jed Clampett, a poor farmer who found oil on his land and became an instant multi-millionaire in the 1970s TV series The Beverly Hillbillies), to shield his wealth by saying that the majority of it was due to passive appreciation, e.g. high oil prices beyond his control, and should not be part of divisible assets. This, of course, runs contrary to the idea that CEOs deserve the outsize salaries, options, expense accounts, and other sundries they receive in exchange for services rendered. Basically, Hamm was admitting that 90-percent of his wealth was due to simple, dumb luck.
Like many people, I, too, automatically believed that those with mighty titles were not like the rest of us toiling in the background. However, since having moved up the corporate ladder myself and had numerous opportunities to watch some of these folks up-close-and-personal, I’ve come to realize that, while some of them are indeed exceptionally talented, many are of average skill with above-average luck. The list of “failing up” CEOs is long: Jeff Immelt at General Electric, Steve Ballmer at Microsoft, John Sculley at Apple, etc.
Blame this misperception of a CEO’s true abilities on confirmation bias, a trick of the mind that leads us astray when we seek out examples or information that confirms what we already believe. So, for example, if we believe that a CEO has above-average skills, we look for signs of confirmation that might include massive salaries and benefits, trappings of success like corporate jets, golden parachute severance packages, oversize offices etc.
During the last big software boom in the 1990s, I worked for a high-tech company in Toronto. After a hugely successful IPO—and weren’t they all bonanzas then—the founders became multi-millionaires. Not long after the public offering during a general staff meeting, I glanced over at one of the co-founders, who also happened to be a senior vice-president. She sat on the floor, her eyes unfocused, while absent-mindedly picking at her bare feet. After the initial shock, I concluded that she must be some kind of genius because who else would do that? Her eccentric behavior abetted by the big job title and sudden wealth seemed to confirm that she must have some kind of super-extraordinary abilities.
Years later, after the mea culpa cheques had been sent off to the SEC, the now-disgraced founders went their separate ways. The smart ones admitted that luck, in this case in the form of vigorous cheerleading from the San Francisco-based software industry sell-side market analysts that promoted the stock and the rapidly forming speculative bubble in high-tech stocks, had graced them. And, more importantly, that that kind of windfall may only happen once in a lifetime, if at all, like the oil that gushed out of Jed Clampett’s yard in The Beverly Hillbillies.
This particular VP, instead of launching a new high-tech business, took her remaining chips off the table and moved with her husband to the Tuscan countryside. So, come to think of it, maybe she was a genius after all?
Popular TV shows like Schitt’s Creek and Arrested Development feature children who cannot function without the financial support of their affluent families. Caricatures of these spoiled children are played for laughs. I find that many clients with investable wealth of anywhere between $1 – $5 million confide how difficult it is to raise well-rounded and ambitious children. They say that their children expect or demand things that would have been unthinkable to children a generation ago.
How can we incentivize our children?
Here are some examples:
Bill and Melinda Gates have pledged to distribute a “miniscule portion” of their wealth to their three children in order to force them to “find their own way.”
Warren Buffett has provided his grandchildren with a college education and related expenses but no other entitlements. “A very rich person,” he is quoted as saying, “should leave his kids enough to do anything, but not enough to do nothing.”
Kevin O’Leary has said that he intends to make sure his children are educated and then kick them out of the nest. “If you don’t start out your life with the fear of not being able to feed yourself and your family, then what motivates you to get a job?”
Here are some of my own strategies to help parents encourage their children to become financially and socially responsible:
There is nothing wrong with child labour. Paying your children for chores teaches them that the world rewards effort. It also helps children to learn to manage small amounts of money and introduces them to budgeting.
Let them pay rent! Many young adults are having trouble gaining employment sufficient enough to allow them to pay market rates for accommodation, so they’re returning home. I encourage parents to charge their adult children rent to teach them that not all of their income is discretionary. Even if you do not need their rent money to cover your expenses, save it on their behalf and return it as a gift when they purchase their first home.
A weak job market doesn’t have to mean that your children have to stay on your payroll. Try putting them on a stipend equivalent to a retiree’s pension. For example, Old Age Security currently pays $587 per month. This should incentivize them to, not only get a job and improve their standard of living but teach them that their future retirement pensions are unlikely to be sufficient.
Cover the costs of a first degree only. Some parents assume they must cover the costs of multiple degrees, including room and board, and beyond until their kids’ “launch”. With escalating education costs, especially for professional programs, consider having your kids take out student loans, as well as apply for grants to pay for their advanced degrees. Depending on the degree and how quickly their salary ramps up, they should be able to repay their loans in short order. In the meantime, your own money is growing and providing lifestyle benefits.