Thursday, November 27, 2014

Investing in the Rise and Fall of the Markets

Up until now, I have been leading you to see the big picture.  Believe me, there’s more to come.  In the last month we have talked about savings versus investing, investing can be easy and paying yourself first. Now that you have a good understanding of “why” these topics matter, let’s talk about how to put investing into action to fuel your dreams.  

Have you ever walked into a fast food restaurant and only kind of had an idea what you wanted to eat?  Weren’t you grateful that places like Dairy Queen, McDonald’s, or A&W made your selection easy?  When you looked at the menu board, the choices were simplified.  You knew in advance you wanted the basics: a burger, fries, and a beverage.  You then only had to decide whether to choose chicken, beef or fish.    The reason you went there in the first place may have been to pick up something quick and simple so you could get on with your life. 

Oddly, people often ask questions like “What can I do” or “How can I do it?”   Needless to say, we neglect to add, “the simple way.” 

“What can I do the simple way?”

                                 “How can I do it the simple way?”

If things become too complicated or if we believe things are too complicated, we avoid doing anything. This happens way too often when it comes to investing. Is there a simple way to invest? The answer is yes unless you prefer the complicated route.

You may have heard the term, “mutual funds,” but you weren’t sure what they were or whether they were suited for you.  The word “mutual” by itself means common.  Having something in common generally means we are interested in the same thing, the same goals, or achieving the same results.  With mutual funds, we are simply combining our money together in one pool to be invested in different securities, such as specific stocks, bonds, and cash investments.  The best news is that professional managers, who oversee the funds, do the work of researching investments with potential earning power for you.  Not only do they select quality investments, they understand when to take advantage of buying and selling opportunities in the markets.  All the decision-making about the individual investments is left in their hands.  Imagine all these diversified investments bundled into one package suitable for you! Whether you are interested in Canada, U.S., international, or global funds; bond, stock or index funds; balanced or specialty funds, the suitable combination can be found. You have choices that are simplified to meet your investment needs.  

 Can Investing Really Be Easy is written to help you understand what type of investor you are based on your time horizon and risk tolerance. This is important because next you will be choosing the specific investments.  The way you walk into a fast food restaurant and make your selection of food choices, can be virtually the same experience with your investments. The biggest difference is having a competent investment advisor help with your selection.  You are not walking this journey alone unless you prefer to go with on-line trading.

Now you are ready. You have made the commitment to pay yourself; you know which investment is suitable; and now it’s time to find the best way to accomplish this.  Your money can simply be placed first into a savings account and later invested into the market but there’s a better way with the “Dollar Cost Averaging” approach. To minimize your risk, the recommendation is to make regular consistent investments over a long period of time versus a one-time lump sum investment.

The Dollar Cost Average Advantage
Investment Amount
Unit Price
Units Purchased
Total Units
$ 10.00
$   8.00
$  5.00
$  6.00
$  7.00
Total      $600.00

When money is invested into a mutual fund, you purchase “units”.  Since we understand that markets are like roller coasters, you can expect the unit prices will rise and fall based on the value of the securities. Because we never know how markets will react at any given time, on-going consistent investments allow us to capture both the high and low prices.  When markets fall, this presents an opportunity to acquire more units.

Imagine going to the grocery store and seeing the items you need on sale.  Don’t you love a good sale? Why? Simply because you are able to buy more with the money you intended to spend in the first place. Whether it’s cans of Campbell’s Soup, Bush’s Best Baked Beans, or GoldSeal Sockeye Salmon, you can have more items for $10 when they are on sale compared to when they’re not.  The same strategy applies when buying units in any mutual fund.  When markets drop, you capture more units. Waiting for markets to reverse directions (and they eventually will) will help you realize that more units at a higher value results in more money for your dreams.  At the same time you are reducing your risk and reaping the rewards from the rise and fall of the markets with Dollar Cost Averaging.
Fear is useless when investing in the markets.  Even though investing sounds and looks complex, having an open mind to who you are as an investor and the willingness to learn some of the basic investment fundamentals will work in your favor.  Fully understanding your options is one way to overcome fears so you can put investing into action.   

Thursday, November 20, 2014

If You Don't Pay Yourself, Who Will?

The concept of “paying yourself first” is heard but often misunderstood by many. The rationale is “this is all my money” so how do I pay myself?  This is true! The money belongs to you.  What is also true is everyone wants your money.  Just as quickly as you receive your hard-earned cash, you are dishing it out to pay bills, make loan payments, and buy the daily necessities.  Hence the concept of paying yourself was born. Before you hand over all your cash, pay yourself at least the first 10% of your pay cheque and pay living expenses with the remaining 90%.  Pay yourself first is “what you save”. It’s for future use. 

When money is out-of-sight, it’s also out-of-mind. What you can’t have, you can’t spend. This is why pension plans are effective. People who have pension plans put into practice “paying yourself first”.  When they are eligible to contribute to their organization’s pension, a percentage is automatically deducted from their pay cheque.  Small amounts of income trickled into savings plans over a long period of time will eventually pool into a large sum of cash.  Since fewer pension plans exist today, savings is becoming a necessity for everyone.      

The practice of saving can work for anyone. Discipline is the only requirement.  Saving is a good habit to develop.  If it’s not possible to save the full 10% now, start with a lower amount and continue working toward the goal of the full 10%.  Once you pay off a loan or receive an increase in salary, immediately increase your contributions.

Putting yourself on “automatic” is the best way. In David Bach’s book, The Automatic Millionaire, “automatic” is used to mean setting up payments that are automatically transferred to a saving plan. How many ways can I say it? Right-on-the-spot, same-day-deduction, the-minute-your-money-hits-your-bank-account is the best, and for some the only, way to save. Get Smarter About Money also provides some methods to make it easier to save.   

If you don’t pay yourself first, who will? Don’t cheat.  Don’t rob your piggy bank of its savings. You do not know what the future holds but one thing is for certain, you will not be able to work forever.  Secondly, you may not want to work forever.  Saving small amounts of money as you earn it is not as difficult as trying to save larger amounts in a shorter time period. When you reach the end of your working career, you will be grateful you mastered the concept of “paying yourself first” because you will have a pool of cash to enjoy and support your dream lifestyle.

Thursday, November 13, 2014

Colour Your World With Real Wants

Do you ever tell yourself or others, there’s never enough money? Is that really true? For some, it may be.  Do you know the difference between “needs” and “wants” or do you simply throw up your hands, believing your spending is all the same?   

By definition, needs are described as your basic expenses, things you must have to live.  Examples are food, gas, rent, power and heating bills.  Wants are the things we really like. These “things” would be nice to have but you can live without them.  They are Tim Horton’s coffee, books, new clothes and tools. The confusion begins when we see our wants as needs. Every item we purchase is viewed as a need without any distinction. All expenditures become “must-haves.”

Let’s introduce a new idea. If we look at sorting our expenses the same way we sort our laundry, then we get a clear view of how our spending can be divided into piles of needs and wants. When sorting laundry, generally you have three piles: whites, darks and colours. 


Whites are “needs,” the things you must have to live.   

Darks are “wants,” the things you like which are often mistaken for needs.

Colours are “real wants,” the things which colour your world. They are the kitchen renovation, the trip to Vegas to escape from Saskatchewan’s cold winters, or the new sofa and loveseat.  Maybe it is the money for your child’s university tuition or building your emergency savings.  Whatever colours you want in your world will be unique to you.

How can you focus on colouring your world? The first thing you must do is track your spending for a week (or a month), and then sort through your list of expenses. Think of going through your list as sorting laundry into your three piles:  needs, wants and real wants.

My best guess is that, at this moment, most of your expenses fall into only two piles: whites (needs) and darks (wants).  The goal is to reduce the spending on the things you want to start savings for the things you really want, or moving expenses from the darks to the colours.   

You may not realize the “things” on which you overspend. When you try to stretch money to last the month, it is not possible.  The problem begins when you rely on credit to pay for your wants.  The wants are what get us into financial trouble. Have tough conversations with yourself.   I understand you can always make an argument defending why you “need” to buy something that really is a “want”.  Who are you kidding, though?  

Recognize, Realize, and React are my three “R’s” if you are sincere about colouring your world with real wants. Recognize your spending habits. Realize you are in control. React by developing new spending techniques.

Here are a few clues to help you follow the 3 “R’s”.    
1. Learn to say “No, Thank you!” to yourself and others.  It’s easy to say $5.00 spent on coffee and muffin, $15 on lunch with a friend, and $30 on a new sweater, are insignificant yet the point is all purchases add up. Saying “No” may require some practice.    
2. Don’t let convenience steal your money.  The line-ups at the drive through at meals times are endless.  With a little planning, you may not need to spend money on take-out. Packing lunch for the office or finding ways to be creative with meal planning at home can save money for your real wants.
3. Identify your weakness. I believe we all know our own weaknesses. Finding ways to steer clear of temptations could go a long way to building your savings.  
4. Make wise decisions about specific purchases.  Extra money does not necessarily have to be spent on the best things when other good quality items will work just fine.
5. Check your credit card statement for the amount of interest spend on “wants”.  This may deter you from continuing to purchase so many “wants”.  The interest incurred could be directed to your “real wants” rather than an added unnecessary expense. 
6. “Reduce” doesn’t necessarily mean “eliminate”.  Reducing the number of times you go to a restaurant each week for coffee with friends doesn’t mean stopping entirely.  The question is how you can find different ways to socialize that don’t cost money.
7. Rather than making purchases on a whim, create an impulsive buying list as you shop. That means recording the things you would like to buy as you see them. Then let some time pass to determine whether these purchases are important. Are they “needs” or “wants”?  Impulsive buying can steal your joy from saving for and purchasing your “real wants.”   

Examining your spending and identifying your needs, wants, and real wants is a effective way to stretch your money.  The harm you do to yourself happens when you spend money on things you only half want.  These things accumulate into stuff you don’t need. So be like Santa.  Take a look at your list, check it twice, and determine where you can make changes in your future spending habits. If you want to get more out of life, developing good money management will colour your world.  

Thursday, November 6, 2014

To Whom Do You Listen

When seeking financial advice, many people have admitted asking their friends, family, or colleagues what they have done.   It’s not uncommon to scout for information from the people with whom you feel most comfortable. However, is this really the best way to get financial advice? 

Advice about specific topics is best sought from professionals who have experience and education in these areas.  I am not saying all advice from people who don’t work in the financial industry is necessarily wrong advice; but consider that what their advisor told them may not work for you. If people receive only a tiny snippet of your story, you may receive inappropriate advice.  

One size doesn’t fit all.  Because some financial strategies may work well for some, doesn’t necessarily mean they’re right for you.  An analogy to help understand this concept can be made to clothing sizes. We do not all wear the same size.   What might be an ideal shoe size for you, size 6, doesn’t mean it will fit your friend’s size 9 ½ foot.

Think about these three scenarios:

If you opt to follow your colleague’s advice, some decisions may be irreversible.  For example, when selecting your pension options with specific guarantee periods and survivor benefits, these decisions, once made, are final.

If you take your friend’s advice, perhaps it doesn’t match your goals, dreams, and aspirations.  The advice you receive is more apt to suit theirs.

If you heed your family’s advice, who will monitor your progress to ensure you are on the right track?  Will you continue to check with them for follow-up guidance?

So if you shouldn’t get financial advice solely from family and friends, who can you look to to be your teacher? CERTIFIED FINANCIAL PLANNER® professionals have taken the appropriate courses and gained meaningful job experiences to qualify them to provide sound advice.  The comforting news for you is knowing that Certified Financial Planners follow a code of ethics ensuring your interests always come first.  

Information on the various topics related to personal tax planning, insurance, investment, retirement and estate planning is so vast.  Your “go-to-person” should have a strong understanding of these topics to help you make important life-planning decisions.     Who better than the people with financial knowledge to help you make decisions about:

  • taking Canada Pension benefits at age 60 or 65;
  • using Registered Retirement Savings or Tax Free Savings;
  • starting withdrawals from Registered Retirement Income Fund (RRIF) earlier than age 71;
  • paying down the mortgage or making contributions to Registered Retirement Savings Plan (RRSP);
  • choosing the best options for pension benefits?
Financial Planning Standard Council (FPSC) is a not-for-profit standards-setting and certification body that develops, promotes, and enforces professional standards in the financial planning field through Certified Financial Planner®certification.  FPSC compiled a list of questions to help you determine whether your financial planner is competent and qualified to provide appropriate advice.  Click here for a list of ten questions to ask.  You are in the position to hire someone based on their credentials to do the best job for you.  You certainly want to be assured they are qualified to do that.