Commentary - Hans H. Mathisen
How's your debt? -
LIFE LETTER for July reminds us
that we should only incur debt to purchase an asset that has the
potential to increase in value. This sounds like good advice.
Avoid these financial planning mistakes - Most of us have made at least one of these seven financial planning mistakes at one time or another. My brother was once given a silver plaque that had this engraved: "Plan Your Work and Work Your Plan". The same goes for financial planning. Make a plan and follow the plan.
LIFE LETTER MATURE - It makes as much sense to do your own will as it does to fix your own teeth. Pay a lawyer to do your will, just the way you pay your dentist for professional services. And your legal advisor, accountant and financial planner are your three partners who should work with you to make your estate plan. "Plan your Estate and the Plan will Work for You".
THE STOCK MARKETS - Indications are that the market correction which started in late April appears to be over. As of July 31, 2006, the year-to-date return of the TSX Composite Index is 4.96%; the Dow Jones is up 4.37%; S & P 500 is at +2.27%;and NASDAQ stands at - 5.16%. The European indexes are up 5.06% in Germany; 6.24% in France; and 5.51% in Britain. Japan's NIKXEI is at - 4.06%; and Hong Kong's Hang Seng grew 14.08% the first 7 months of 2006.
Analysts agree that Canada is still a very good country in which to invest our money. As all my clients are invested in Canadian Blue Chip mutual funds, not a single dollar of clients' money was moved during the recent correction. We are all invested in value funds, so it makes sense to stay where the value is, especially during a correction. Now, we hope that the summer rally continues.
How's Your Debt?
Bob and Sally, like many Canadians, had succumbed to the seductive allure of easy credit. Zero percent car loans, big screen TVs with payments over many months, trips and cruises to exotic locations on credit cards, recreational vehicles, and furniture events where you do not pay 'til you die, just to name a few. They knew they had a problem when they were seriously considering a second mortgage to consolidate their debt.
Statistics Canada says that total consumer debt held by Canadians, which excludes mortgages, is a staggering $450 billion. This works out to over $14,000 per man, woman and child in Canada. CBC Marketplace tells us that Canadians paid some $22 billion in interest alone on consumer debt in 2004.
The best approach to retirement is to enter it debt free. According to a recent Ipsos-Reid survey, 85% of working Canadians polled believe they should pay their debts before retiring. However, about one third of retired Canadians carry a debt load that averages $35,000. One in seven have debt that exceeds $100,000. About 35% of retirees with debt find themselves working in retirement.
On top of this debt load, the Canadian savings rate has been declining steadily since 1990. According to the Institute of Chartered Accountants of British Columbia, the national average savings rate is only 1.4%. It is impossible to accumulate wealth at this savings rate. In fact, in British Columbia, the savings rate is negative. This means that the average BC resident spends more than they earn every year.
The banks appear to be doing everything they can to help consumers get into debt. Recent advertising has been focusing on a "new" 35-year mortgage. That means that a 35-year old getting such a mortgage today will not pay it off until they are 70 years old. Glenn and Gayle heard the advertising that states they won't have to give up their "lattes or beer" to own a home. Maybe they should give up something.
A $200,000 mortgage amortized over 25-years at 5% will earn the bank about $148,963 in interest. The same mortgage amortized over 35-years will cost the homeowner about $221,193 in interest. The difference in monthly payments is only about $160 per month. Glenn and Gayle would be much better off by cutting a few lifestyle expenses and choosing a shorter payment period for their mortgage.
Not all debt is bad debt. Those that achieve personal wealth in their lifetime tend to follow a basic set of financial rules. Typically, they will only incur debt to purchase an asset that has the potential to increase in value. These assets include real estate, business interests and equity investments. In the book The Millionaire Next Door, we leam that the typical millionaire lives in a modest home, drives an economical domestic car, avoids flashy and expensive clothes, and is not impressed by expensive restaurant meals. They also save regularly.
All too often we spend money we don't really have on things we don't really need to impress people we don't really like. Remember, good debt supports an asset and bad debt pays for gratification.
Want help with your wealth accumulation plans?
Hans Mathisen today at (306)242-7042.
Copyright © 2006 Life Letter. All rights reserved
Avoid these financial planning mistakes?
Number One - Buying too much on credit. No matter what income level, more people get into financial trouble because of too much debt than any other reason. "Too much" means different things to different people. Very few people go through life without making a purchase on credit. However, trying to "keep up with the Joneses" pushes too many of us into lifestyles we simply can't afford. Buy some things you need on credit, like a home or a car, but save up the cash to buy the things you want.
Number Two - Not paying yourself first. If you were at a movie with your family and a fire broke out, who would you save first? The car dealer, the tailor, the, stereo store manager, or your family? Silly question, but too many people do just that with their money by spending first and saving what's left. All too often " they find too much month left at the end of their paycheque. Get into the habit of an automatic savings withdrawal plan on a monthly or weekly basis.
Number Three - Taking too long to pay off debt. It is extremely expensive to carry credit card balances. Don't forget, if your credit card balance isn't paid off when it's due, all new purchases start attracting a high rate of interest (usually between 18% and 20%) from the date of purchase. You should pay off your mortgage as quickly as possible, too. A $100,000 mortgage at 6% paid off over 20 years instead of 25 years will save you about $21,017 in interest.
Number Four - Not following a budget. A budget doesn't have to be a formal, detailed exercise. Simply comparing planned expenses with your income over a period of time, say a year, will help you decide what you can truly afford. Don't forget to plan for annual expenses, like vacations, insurance and property taxes, so you won't be forced to use credit.
Number Five - Failing to comparison shop. This doesn't mean driving across town to save a dollar. When buying big-ticket items, like vehicles, furniture and appliances, it pays to compare prices and quality. Remember that really cheap pair of shoes that only lasted a few months? When purchasing something you expect to use for a long time, a quality item will often cost you less, over time, than a cheap one.
Number Six - Trying to make a quick buck. Who hasn't heard a hot investment tip lately? The allure of doubling your money in a short period of time can be very seductive. However, one basic rule will always apply - if it's too good to be true, it usually is. Remember, if you have two investment choices and the rate of return is higher on one than the other, so is the risk of losing some or all of your money. It is wise to invest the bulk of your money conservatively and only take greater risks with a small portion.
Number Seven - Believing the future will take care of itself. Never has, never will. You have to plan for long-term goals like retirement, children's education, and opportunities. They simply will not happen by themselves. It is wise to also plan for emergencies, like the death of a breadwinner, illness or injury, or temporary unemployment. Life insurance, accident and sickness insurance, and a rainy day account should form the foundation of your financial plans.
Want hlep with your financial plans?
Call Hans Mathisen today at (306)242-7042.
Copyright © 2006 Life Letter. All rights reserved
Mutual confidence is the power that binds together all harmonious human relationships.