What Would You Do?

Occasionally, I’m asked, “What would you do if you were me?” The probability that you have faced the same question is very likely.  It’s a tough spot in which to find yourself!  Undoubtedly, if you know the person’s circumstances and have had a similar experience, you’re comfortable giving advice.  If you feel some hesitation, though, you would probably reconsider the facts and weigh several options in order to decide on the best advice.

The unknown piece is you can’t predict the person’s response to your advice because you are not the person asking the question.  Everyone reacts differently to advice from others so I am cautious as to whether they are sincerely looking for advice from me or seeking validation for a plan they have already thought through.

Different situations require different considerations.  Simple situations can be satisfied with easy-to-give advice.  Extreme questions require extreme considerations and planning.  If my friend was asking for the best apple pie recipe, that’s easy.  However, if my friend was asking how much to save for his retirement, that requires more thought and planning. 

Here’s the dilemma when extreme questions are about money.  Extreme questions require you to expose yourself.  One client said, “I feel like I am standing here naked,” as she handed me their investment portfolio, credit card statements, bank statements, and tax returns.  No doubt it’s a daunting experience to reveal what you’ve done with your life’s earnings.  Definitely you saved as well as squandered a share of your income.  You may even feel like you could have done a better job if you’d tried harder.  A financial planner can be compared to a doctor.  We diagnose potential problems when you are willing to expose yourself.  We examine any symptoms and treat any ailments with plausible remedies to make the “boo-boo” go away.  Many people are reluctant to go for their annual health check-up.  They also experience the same reluctance to make an appointment with a financial planner.  Much like an x-ray reveals broken bones, a financial plan can help diagnose broken parts in need of repair and ensure you are on the right track. 

 

The decision you must make is whether to work with CERTIFIED FINANCIAL PLANNER® professional or fly solo.  Equipping yourself with financial information is the secret to a successful outcome.  Financial Literacy Month and Financial Planning Week were launched for the same reason I publish my blog posts, to create awareness concerning “your financial health”.  We can’t do everything perfectly right.  I can honestly say I squander my share of money on things that are not always beneficial.  However, I believe we can all be coaxed into striking a balance between our spending and saving habits.  Maintaining great financial health is an impressive habit to develop, something which was discussed in my last blog.

With masses of information available on the Internet, here are three specific websites to gain access to various topics, such as dealing with life’s challenges, starting your first job, and how to open a bank account.  Pick a topic of special interest to your particular circumstances and get smarter about money.

- Get Smarter About Money

- Financial Planning For Canadians

- Financial Consumer Agency of Canada

To end on a different note, I’d like to share this story that I use in my “Money Matters” presentation.

A magician was working on a cruise ship in the Caribbean.  The audience would be different each week, so the magician allowed himself to do the same tricks over and over again.

There was only one problem. The captain’s parrot saw the shows every week and began to understand what the magician did in every trick.  Once he understood, he started shouting in the middle of the show.

“Look, it’s not the same hat!”

“Look, he’s hiding the flowers under the table!”

“Hey, why are all the cards the Ace of Spades?”

The magician was furious but couldn’t do anything; it was the captain’s parrot after all.

One day the ship had an accident and sank.  The magician found himself on a piece of wood, in the middle of the ocean, and of course, the parrot was by his side.

They stared at each other with hate, but did not utter a word.  This went on for several days.

After a week the parrot finally said, “Okay, I give up.  What’d you do with the boat?”

    

Like the parrot who wondered what the magician did with the boat, we, too, may be wondering at the end of our working careers, “What did we do with the money?”

I’m asking, “What would you do”

…with an inheritance

…to prepare for retirement

…when you face a critical illness

…if you lost your job

…to ensure you are on the right track financially

…to save for your children’s education

Extreme questions may require you to “get naked”?  So, what will you do?

Severance Planning – When You Lose Your Job

 

“When one door closes, another opens but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.”  ~ Alexander Graham Bell.

Here’s a situation where these words of wisdom carry tremendous value.  You’ve been given the fatal news that your job is terminated.  Waves of emotions begin to take control when the news makes contact with your brain. Your mind churns the facts, asking the most logical question, “Now what?”

The questions following the shocking news are first centered around money issues.  But eventually, the money issues make way for others. You may feel a sense of grief, anger, or even euphoria. Every person will experience a range of different emotions on any given day.

 

Darryl Robinson, a Certified Financial Planner, delivered a presentation on Severance Planning: The Good, The Bad, and The Ugly at the Canadian Institute of Financial Planners 14^th Annual National Conference.  Darryl, who once worked as a registered social worker, now specializes in offering financial, severance and retirement planning services.  He willingly shared his expertise on this important topic.  

One enormous take-away from Darryl’s presentation was that when people are seeking help with the usual requests,  “What should I do with my severance package and pension?” or “Help me pay less or no tax”, their underlying need is to know “Am I going to be okay?”  Darryl’s advice to the group was before you discussed any money issues, the first conversation should center on the client’s well-being.  Reach out and ask, “That’s rough.  How are you dealing with this?”  

Sharing your emotions is as important as dealing with the money issues.  You may be coping with a drastic change in your life as well as your lifestyle. Airing your feelings and concerns openly with a professional can help you deal with your frustrations.  

Available Resources and Provisions 

Retiring Allowance Provision

If you receive a retirement allowance, you may find some temporary tax refuge with the Retiring Allowance. Canada Revenue Agency described a retiring allowance (also called a severance pay) as an amount paid to officers or employees when or after they retire from an office or employment, in recognition of long service or for the loss of office or employment.  This link to the Canada Revenue Agency’s site discloses which specific payments qualify as a retiring allowance.

The lump sum payment (or allowance) is a taxable benefit and will be added to your annual taxable income.  Depending on your current year-to-date employment income, this added bonus may push your taxable income into a higher tax bracket unless you are able to take advantage of the Retiring Allowance.

The maximum limits determine the eligible amount based on the timing and duration of your years of service with the same employer. Consideration should be given to even temporary summer employment to increase the total years. 

 

·       $2,000 for each year or partial year of service before 1996

PLUS

·       An additional $1,500 for each year or partial year of service prior to 1989 in which you didn’t earn any vested pension or DPSP (Deferred Profit Sharing Plan) benefits  

 

The most significant aspect of the Retiring Allowance is its ability to rollover your taxable allowance directly to an RRSP (Registered Retirement Savings Plan) without any immediate tax consequences, giving the flexibility and control to withdraw the funds when needed.  This extra “room”, per se, is in addition to your existing RRSP contribution room shown on your Notice of Assessment.  Utilizing both, the Retiring Allowance and RRSP contribution room, will maximize your tax savings if your annual taxable income is exceedingly high.  

This advantageous provision is often overlooked and doesn’t receive the necessary attention. Because the Retiring Allowance is available for years of services prior to 1996, some advisors and Human Resources employees are unaware of it.   Many dedicated and loyal Baby Boomers today, who have been committed to one employer, certainly may benefit from this if they are offered a payment.

A sample calculation is provided Jim Yeh, a blogger for Retire Happy, in his blog post, Dealing with Your Severance Allowance.

FCAC’s Checklist: Things to do if you lose your job

A valuable checklist is available from the Financial Consumer Agency of Canada (FCAC).  By clicking here you will see a number of actions if you lose your job. The list is fairly detailed and may appear overwhelming.  One important item on the list may help alleviate feelings of being overwhelmed: “Consult an independent financial professional, such as a financial advisor or financial planner, to find out how to best handle your severance package, if you receive one.”

Employment Insurance

Another consideration is to apply for Employment Insurance. Most would not consider this option if their positions have been terminated and they received a severance package. Employment Insurance is available to those who lose their job through no fault of their own.  Applying for benefits while you transition to the next phrase of employment will provide the necessary financial help.  Specific details on How to Apply for Employment Insurance benefits are available here.

What’s Next

The better question may not only be “Now what?” but “What’s next?” 

When you received the news, you may have been on the verge of retirement.  You are not greatly affected. But if you weren’t ready for retirement, you have been presented with a new employment opportunity. I believe the important part is to hunt for the opened door.  I know first-hand the feelings of being delivered the fatal blow that your job is being terminated.  Grief certainly is part of the transition process to the “What’s Next” stage.  Recognize your feelings and acknowledge that they will pass when you develop new passions and desires.  Success will come to those who look for it.  Please share any challenges and experiences you encountered which may benefit others. 

Understanding the True Cost of Payday Loans and Cash Advances

Anyone strolling down Robson Street in downtown Vancouver may disregard this type of sale advertisement unless you happen to be a financial planner or desperate for a cash advance.   As a financial planner, I took note of this particular signage because my plans were to address this in a blog post.   But I also remembered the first time I applied for credit. I made an application for a Sears credit card and was declined.   I felt devastated and ashamed yet I trusted that the company’s reasoning must have been valid. The reason for the decline could have been missing or inadequate information and even lack of credit history.  I didn’t understand and I didn’t ask. Now I will never know.

When people are refused credit, they become desperate in times of distress.  Payday Loans and Cash Advance stores are frequently being used by people who find themselves in these types of situations. They may not fully understand the fees and true cost of borrowing from these venues.  At first glance these may sound like great deals but really aren’t.     

Calculating the Cost of Borrowing

The Financial Consumer Agency of Canada (FCAC) provides a clear illustration of the cost involved with payday loan compared to other ways of borrowing.  Undoubtedly, you can see the price difference you pay when you borrow $300 for 14 days.  This information should convince anyone from using cash stores. It’s all in the math. 



Financial Consumer Agency of Canada


The costs shown in this example are for illustration purposes only. Calculations of costs are based on the following assumptions:

• a payday loan costs $21 per $100
• a line of credit includes a $5 administration fee plus 7% annual interest on the borrowed amount
• overdraft protection includes a $5 fee plus 19% annual interest on the borrowed amount
• a cash advance on a credit card includes a $5 fee plus 21% annual interest on the borrowed amount.

 

The Good, the Bad and the Ugly

One cannot dispute the “good” about the payday loans.  They are convenient, providing quick access to money within the hour. The advertisements proclaim “no credit check”. These are probably the only visible “good” things about payday loans.

Behind the good is also the “bad”. Some people find themselves growing dependent on regular advances every payday.  When a part of a paycheque is used to pay off your debt, a person will find themselves short of money for other expenses.  Once again, they will be forced to apply for another advance. The endless cycle begins and develops into larger advances.  The associated cost takes more from their paycheque than just repaying the borrowed principal.

The “ugly” is the fees deemed to be reasonable by the Canadian Payday Loan Association (CPLA).  The cash stores make no mention of an annual interest rate since they only charge a fee for their service.  When these fees are translated into an annual interest rate, they’re ugly.   The law requires the cost of credit to be disclosed by defining the APR (Annual Percentage Rate), the rate of interest charged on a loan each year.  At the Money Mart® website, the fine print states for Saskatchewan residents, the APR on a $300.00 loan for 14 days is 599.64% on a rate of $23.00 per $100.00 borrowed.  This calculated annual interest rate of 599.64% is not a typing error.  That’s enough to blow anyone’s mind.  The cautionary message can’t be any clearer than this “Payday Loans are High Cost Loans.”   

Breaking the Cycle 

People depend on these types of loans because they may have been misled into believing their credit is poor.  Although their credit is below the standard requirement, they may not have any direction how to fix their credit score.  Any effort to improve a credit score in order to apply for a Line of Credit or Overdraft Protection at a bank or credit union will save money when borrowing is necessary.

People have also felt intimidated by financial institutions because of what others have told them or even from their past experiences. Their fears may be unwarranted.  Finding the courage to develop a relationship with someone at a bank or credit union where they feel comfortable will diminish their fears. 

In his book, The Success Principles, Jack Canfield emphasizes taking 100% responsibility for your life.

Don’t be afraid to ask. Most people are afraid to ask for feedback about how they are doing because they are afraid of what they are going to hear.  There is nothing to be afraid of.  The truth is the truth.  You are better off knowing the truth than not knowing it.  And once you know, you can do something about it.

Fixing the Problem

The only way to wean oneself from using payday loans may be to find some way to earn extra cash.  The purpose is to simply get ahead.  If that means working an extra job for a short period of time, then do it.  If it means borrowing money from friends and family with full intentions of paying them back, then do it.  Doing nothing other than paying more money in fees than you borrowed does not make financial sense. Two other solutions also come to mind. First, learn how to prepare for an emergency. Second, apply the teaching by Bob Proctor who instills the message, You Were Born Rich.  The answer might not be so simple but you must do something so that cash stores will not be the solution to put food on the table.