Affiliated with Sentinel Life &
Sentinel Financial Management Corp.
- Hans H. Mathisen
Buy Now, Pay Big time
Later - LIFE LETTER for May focuses on a problem
many of us have: The high cost of servicing debt. And many of us don't
have to worry about interest expenses dragging us down. Many clients
of Mathisen Financial, inc. had the cash required to invest when the
markets hit their lows not long ago. And these clients are already reaping
the rewards.This is not Market Timing. It's simply Good Timing.
Where to Get the cash
to Save a Business - This is the subject of LIFE LETTER
for June. We have seen this happen several times: One of the owners
or shareholders of a privately owned company dies. The deceased shareholder's
widow demands that the family income continues, even though she is not
contributing to the business. Suppliers and customers become uneasy
and uncertain. Employees get restless. Creditors demand that company
loans and lines of credit be paid. Would a large injection of cash help
in this situation? You bet it would!
THE STOCK MARKETS - While
stock markets have been flat lately, here are some good news:
Since 1944: in bear markets, world
stocks have declined on average by 28%. In the following bull market,
stocks have risen on average by 146%. Over a period of 57 years!
Annual Index Returns
- this table goes back 20 years, and it shows that the average annual
return in a globally idexed portfolio would have yielded 14.24%
per annum over the past 5 years and 11.87% over the past
10 years. The 20-year average annual return: 12.18%.
The conclusion is: Don't worry because
the markets are down. The markets are already on the way up again. And
if you have any money available, now is the time to invest. Please call
me with questions you may have.
Now, Pay Big Time Later
Brent and Darlene really enjoy their
toys, and their lifestyle. In thc last few years, they bought themselves
a big screen TV, a stereo system, two expensive new vehicles, a ski
boat and took a tropical vacation, mostly on credit. They also used
their credit cards to pay for numerous restaurant meals, theatre tickets,
hockey games and other expensive outside entertainment. It wasn't long
before they were carrying a balance from month to month. The credit
charges and payments quickly became a burden.
They received their quarterly RRSP statements
and were pleased to see that, thanks to their regular monthly contributions,
they had accumulated a tidy sum. But because they felt crushed by their
credit card debt they considered cashing in their RRSPs to pay it off.
To see if this made sense, they made the following calculations:
$642 monthly for five years is needed
just to pay off their present $25,000 of credit card debt, assuming
no new purchases. The interest rate on it is 18.5%, so $13,520 of
their total payments goes entirely to interest. And any further purchases
on their card accumulate interest charges as soon as they are added
to the bill. So they don't intend to run up their credit card bills
Moving their debt to a low-interest
credit card can cut their rate to about 10.5% and then their payment
for five years would be $537 per month. The total interest over the
five years would then be $7,220, but this card has a $29 annual fee,
which brings the five-year total cost to $7,365.
Consolidating their debts with an
8.75% bank loan requires only $512 monthly for five years. This reduces
their total interest cost to just $5,720 and keeps their tax-sheltered
RRSP funds intact.
The RRSP alternative is the most
expensive, because to net $25,000 after taxes from it, they have to
withdraw about $45,000. They would then lose out on the tax-sheltered
growth of their money. Assuming 8% compounded annually, their present
$45,000 grows to about $308,181 in 25 years. That could then provide
income of $28,870 a year for the next 25 years. And this assumes no
Excessive debt is the biggest stumbling block
between most people and their financial success. It is difficult to
avoid spending excessively when billions of dollars are spent annually
on clever advertising designed to persuade us to blow our hard earned
money on things we don't really need.
Brent and Darlene had their eyes opened to
the enormous cost of their spending and debt habits. They have cut
up their credit cards and save more money regularly to pay future
major purchases with cash, And they have also reduced their restaurant
meals and outside entertainment. Their plan is to go from living beyond
their means to living below their means so they can accumulate more
money for their future.
© 1999 Bowen Financial Inc. and Donald F. Pooley, Inc.
All rights reserved
Want to see how your savings can grow?
Call Hans Mathisen today at (306)242-7042.
or email - firstname.lastname@example.org
to Get the Cash to Save a Business
Ben and Jerry's business grew over the years
because of the different skills each brought to the company. When a
competitor's co-owner died, most of its customers came to them. The
competitor struggled to remain in business and eventually closed. This
caused Ben and Jerry to consider what would happen to their business,
and hard-earned success, if something happened to either one of them.
Without a doubt, they would want the
business to continue. Their respective spouses and families will need
income to continue living the lifestyles they are accustomed to. Employees
will need to be assured that their livelihoods will continue. And the
bank will need to know that loans will be repaid.
They soon realized that most of the
problems caused by the death of a partner could be solved with cash.
But where would it come from? How much would be needed? They explored
Borrow from the bank. 'I'hey already
owe the bank money and find it unlikely that the bank would lend more
right after the death of a partner. Because a loan has to be paid
back with after-tax dollars, plus interest, extra pressure will be
placed on the survivor to increase revenue in a potentially limited
market. A $500,000 loan over 20 years at 9% would cost the survivor
$4386 per month, totaling $1,052,272.
Pay the widow and family over time.
With the death of a partner also comes the need to find a replacement
of the deceased's management skills. If the survivor also needs to
continue an income to the widow and her family, there is the pressure
to again increase revenues to meet these demands. The widow may also
want a say in any business decisions that are made, especially if
she is still a shareholder.
Bring a deceased's family member
into the business. This may not be viable. A widow may not have the
necessary skills or interest to do the job. A child may be too young,
not interested or not skilled, either. Other family members may be
reluctant to make a career change just to help a relative.
Find an outside buyer for the deceased's
share of the business. Buying or selling a business takes time and
potential buyers would be reluctant to pay full price if a shareholder
has recently died. A competitor might be a potential buyer. But would
they really like to see this business continue or have the best interest
of the survivor in mind?
Use life insurance to meet the cash needs. Life insurance provides
cash at the exact time it will be needed most and costs just pennies
on the dollar. Proceeds can be used to buy out the widow, pay off
the bank, cover the cost of a new manager and keep the company going
while it adjusts to the loss of an owner.
© 1999 Bowen Financial Inc. and Donald F. Pooley, Inc.
All rights reserved
Want to make sure your business can
continue ? Call today:
Mathisen Financial, Inc. (306)242-7042 or email Hans at email@example.com.
The rates of return indicated above are historical
annual rates of return, obtained from what we believe to be reliable
sources. These rates of return are not a guarantee of future performance.
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confidence is the power that binds together all harmonious human relationships.
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Saskatoon, Saskatchewan S7K 4W5
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