Thursday 22 May 2014

Biggest financial oversights of each decade of life



By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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In what stage of life are you?

This morning I read a short article on the worst money mistakes people make throughout life. I would like to summarize them here for you so that more people can avoid these financial killers. While the mistakes we make at younger ages can be overcome with sound financial decisions later in life, the longer we wait to learn about and utilize finances in wise ways the smaller the window of opportunity and larger amounts of money we must make in order to take care of ourselves and our families. Keep in mind these ideas are someone else's and that I would tweak them; I don't agree with some of what this writer believes are the biggest mistakes and I've added my own tips, at times, to help give an idea of what you can do to take control of your own finances.

20s: Spending more than you earn and not saving for retirement

In this decade the biggest mistake is spending a ton of money on vacations and vehicles as well as clothing and eating out. These are all unneeded expenses and make a huge difference in how you can live later on in life. I'm not saying you shouldn't travel or eat out or buy a decent vehicle. What I'm saying is that by changing just a few minor details you can really take care of yourself later on in life.

These are ideal years not because you earn a ridiculous amount, but because you can save so much. While your expenses for living are relatively low you can actually get way ahead of almost anyone in North America simply by knowing what to do with your hard earned money.

Tip:
Understand the basics of budgets. Many educators teach budgets in a way that restricts what you do with your money. The focus of a good budget shouldn't be on restricting yourself, but rather freeing money up for top priorities. If you commit to investing and saving a certain amount of each pay check you can then spend the rest of your money how you want in complete freedom knowing that you can both enjoy life and take care of your future. The amount you invest and save doesn't have to be earth shattering and you don't need to watch each penny you spend. Take some off the front end of your pay check and put it away and invest it... with the rest you can simply enjoy it as you wish. No restrictions!

30s: Combining finances and delaying insurance

Biggest mistakes in your 30s, according to the article, are combining finances in romantic relationships and choosing not to have insurance while it is most inexpensive. If one partner handles finances the other typically doesn't understand what to do if his/her partner passes away or there is a break down of the relationship. Also, if all debt or payments are made by one person there is potential that the other partner may not be building his/her credit in order to qualify for potential needs in the future. Don't necessarily agree fully with this mistake I see the point and believe both partners should always have a good handle on the finances. I'll add another mistake: not having a plan, especially for your children, if anything happens to you and your partner. Why would you give all of your net worth to lawyers for fighting among in-laws or others? Take the very little time it takes to choose guardians for your children and at least let your family know what the plans are if you pass away. I recommend going to a lawyer and spending the money, but you can also put together a simple will yourself with a little bit of help and research on the internet. Just make sure you are taking care of your kids!

This and the next two decades of your life provide the ideal earning vs. ability to save ratio in life. It is when you will have the highest earning potential. Utilize this period of time to have appreciating assets rather than liabilities. Life insurance can be very inexpensive at this time in life, but make sure you do your research and understand the products. I was a licensed life insurance broker for a short period of time and really don't believe whole life or universal life insurance provide value for the average person. Each product has a use and the more you understand the more you will have the ability to make the best decision for your family

Tip:
Make sure you understand credit and debt. Both how credit is built and maintained as well as the differences between good and dangerous debt. My quick definition is that good debt will maintain itself and pay you over and above what you will ever need to pay back monthly whereas dangerous debt is any debt that doesn't pay you on a monthly basis. I personally utilize term life insurance because it has very low costs if started at an early age (you don't really need it before having dependents) and when it runs out my family will have enough cash flowing investments to pay enough to my family if anything happened to me. This is a type of self-insuring which, if done properly, will pay out way more than life insurance if you live for any length of time.

40s: Funding college accounts over retirement accounts and not saving enough

Don't get me wrong... taking care of your children should be a very high priority for you. If education is important to you and your children there are many ways to take care of its funding. Do you really need the Ivy League school if you don't have the ability to pay for it? Make sure you are taking care of yourself and thus teaching your children how to handle their own finances.

Typically the only financial lesson any of us learned in school was the magic of compound interest. If you invest early on, you can invest less on a monthly basis to reach the same amount later on in life. If you start funding both your retirement plan and your children's education at an earlier date it won't take as much out of your pay check than later on.

Tip:
This may be the time to start budgeting for your kids' education, but it IS the ideal time to teach your children about their own finances. I'll write another blog shortly on how my wife and I are teaching our young children so they will be able to take care of themselves. Instead of simply lamenting that I didn't get any extensive financial education I can simply teach my children.

50s: Co-signing on a loan and getting too defensive with savings

Newer CMHC regulations are changing whether or not you can co-sign for one of your child's mortgages, but co-signing can put quite a bit of your future financial security in jeopardy. As individuals start thinking more seriously about retirement there is a tendency toward taking zero risk in any investment which, for the average individual who has been burned in a few investments, can seem safe. It isn't if you do not have enough for your retirement.

The average 50 years old has a lot of life left and, it may just be me, the majority of even 60 years old can still feel very comfortable working rather than beginning retirement. This means that the 50 somethings are individuals who can still save quite a bit. Not only can you still work, but often you are also an empty nester at this time of life which means expenses can usually drop substantially.

Tip:
Rather than not investing or throwing your money away in a GIC (you make less than inflation takes away from your nest egg) why not take the extra time you have without children to begin re-educating yourself on investments? If you have some extra time this allows you to know and then properly manage the risk for any investment. Gone are the days when you trusted others with your money. You need to understand the risk and then take appropriate action. If you fear losing money... make sure you have a controlling interest in your investments so that you can decide what happens instead of leaving it up to chance or others' mistakes.

At this stage you need to understand how much you need to retire and replace your income. The numbers can be astronomical if investing traditionally in GICs or bank controlled assets. If you are paid 6% on your investment and need a modest $60,000 (this will assume you've paid off your mortgage) to live on each year, you will need a hunk of cash of at least $1,000,000. This doesn't even take into account how much more you will need each year due to inflation. Ask yourself right now: do you have $1,000,000? Now, if you invest in your own education and turn your nest egg into cash flowing investments they will already cover inflation (unless you invest in stocks). Also, if you have educated your children before this point it will really pay off because they won't be asking you for money.

60s and beyond: Underestimating the cost of future medical expenses and overlooking your income

When you do choose to retire, don't forget to continue to invest wisely and cover you risk. Don't get too passive or you may not have enough... some people are living into their 90s. Don't be the person who suffers through lack of planning! Medical expenses, even in Canada, can get expensive if you want good care and the cost of living can actually go up quite substantially!

These years should be where you are able to enjoy your grandkids and spend quality time with them no matter where they live on the planet. My parents take regular trips to Japan to visit my brother and his family of 5 and this is how it should be. This is where all your planning pays off. Congratulations!

Tip:
Cash flowing investments are so much better a plan than a big pot of cash in the bank because they cover every scenario. I have covered this in depth in other places in this blog, but keep in mind that cash flowing assets should grow with or outpace inflation or they won't meet your needs at this stage. Don't leave decisions up to your children as you age. Make sure you have a living will that will take care of you AND your loved ones. It is expensive to live in a retirement complex that has full time nursing staff.

One last tip: do some research right now into how much the maximum payment from both CPP and OAS is! I promise you will be suprised at how little you will receive if you don't already have a good idea of these numbers (hint: the maximum total, annually, is less than $20,000 as of this writing). CPP and OAS don't provide a lifestyle, they simply keep people from starving (and you may still starve if you attempt to live in a Toronto, Vancouver, or Alberta) even if you own your home with a clear title.

Summary

I won't be wordy here. The main point is that you need a plan in place. I recently read an article that stated the average Canadian will retire with less than $60,000 in savings! That will take care of you for one year of retirement and I don't want anyone in this country to have to work as a wallmart greeter for the rest of their lives due to a simple lack of planning. I have nothing against Wallmart greeters, I simply want people to take this job because they want to rather than to keep from eating cat food.

Here is a link to the article that precipitated my interest in writing this post:
https://ca.finance.yahoo.com/news/worst-money-mistakes-age-000000873.html

Here's to your future of risk-averse investing!


If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html