Archive for Financial Planning Posts

published in Achieving Your Dreams, Book Reviews, Dreams/Goals, Financial Planning, Inspiration, Money by Maryanne | February 23, 2016 | No Comment

Money Matters Part 2 – Saving Saavy for the Not-So-Young

money tree

“The best time to plant an oak tree was 20 years ago…the second best time is today.”

Chinese Proverb

In my recent blog, The Greatest Financial Gift to Give a Child Won’t Cost YOU a Cent, I wrote about the importance of encouraging young people to start putting aside money on a regular basis to build a significant-sized nest egg.

The numbers, of course, speak for themselves…when it comes to getting compound interest to work its magic, time is the key ingredient.

But what about all those people who don’t have 40 or 50 years left to save for retirement?

Well, according to financial expert, David Bach, it’s never too late to start. “Even if you’re starting late,” Bach writes in his book, Start Late; Finish Rich, “you can still amass quite a respectable amount of money.”

And you don’t have to be earning some sort of mega annual income either. In fact:

“How much you earn has almost no bearing on whether or not you can build wealth.”

David Bach, Start Late; Finish Rich

Rather, explains Bach, “It’s not how much we earn, it is how much we spend.” And some of that spending can easily be trimmed by looking at what Bach calls the “Latte factor.” If, for example, you are currently buying a fancy coffee every day for $5 – and you instead saved and invested that $5 per day, you could actually build a nice little sum of money.

Here are some numbers 🙂

If you save $5 a day ($150/month) and got an average 10% return on your money (compounded annually), then in 10 years, you would have $30,727. But in 30 years, you would have $339,073.

Now, if you double your savings and were able to save $10 a day ($300/month) and got an average of 10% return on your money (compounded annually), then in 10 years, you’d have $61,453. But in 30 years, you’d have $678,146. Now we’re talkin’ – especially if you put that $3600 a year into a TFSA as then that money can be withdrawn tax-free.

And let’s say you can afford to put aside $20 a day ($600/month) and got an average of 10% return (compounded annually), then in just 20 years, you would have $455,621. But in 30 years, you’d have $1,356,293.

Now of course, the stock market at the moment isn’t exactly reflecting a 10% rate of return. And you’d be lucky to find a GIC for 2% these days, let alone 10%. Fair enough. But building wealth by regular saving and prudent investing – regardless of our age – isn’t usually a quick rich scheme.

Rather, it is slow and steady wins the race, even if you’re just starting that race in your mid-forties. Because historically, the stock market has provided investors with a decent average return on their money. Between 1900 and 2012, the average total return/year of the Dow Jones Industrial Average was approximately 9.4% and that, of course, includes the crash of 1929.

Looking at the stock market returns over shorter chunks of time, the 1990’s, for example, were a phenomenal decade with the average return per year being 18.17%. The next decade (2000 to 2009) was not so great: 1.07%. But then in the following three years (2010 to 2013), the average return was 16.74%.

“What counts is your time in the market, not market timing.”

– Investment Funds Institute of Canada

Alas, David Chilton, in his book, The Wealthy Barber Returns, suspects the stock markets may have more rocky times ahead in the short term. “Going forward,” writes Chilton, “we might have to deal with “muddle-through” financial markets fighting the headwinds of excessive public and private debt and the resultant slow economic growth.”

I suspect he’s right (but then again, that also means that there are – and will likely continue to be – some tremendous buying opportunities in the markets).

According to Stats Canada, personal debt is on the rise: Canadians owed almost $1.64 for every dollar of disposable income they earned in the third quarter of 2015. In 1990, this figure was about 90 cents.

And on the subject of personal debt: if one is carrying any sort of a balance on their credit card and only paying the minimum monthly payments, accumulating any sort of wealth is going to be extremely difficult.

Here’s a powerful example from Start Late, Finish Rich:

If you owe $10,000 on a credit card and pay only the minimum payment (with an interest rate of 19.98%), it will take you more than 37 years to get out of debt – and before you do, you will have forked out nearly $19,000 in interest charges.

Yikes.

“Credit cards allow us to act wealthier than we are,” explains Chilton in The Wealthy Barber Returns, “and acting wealthy now makes it tough to be wealthy later.”

Yup.

So what to do? Well, I think this observation speaks volumes:

“When I sit down with people who have saved sufficiently throughout their lives, I see three common denominators: 1) They paid themselves first; 2) They started young, or if not, they compensated with increased savings rates; and 3) Their debt management followed the approach of “Owe No!”

David Chilton, The Wealthy Barber Returns

As for how much to pay yourself, experts suggest you set aside 10% to 15% of your gross income – especially if you’re starting late in the game to save.

And if you have significant credit card debt, David Bach suggests your first step is to call your credit card company and ask for a lower interest rate. And if they won’t give you a lower rate, then find a credit company that will – and transfer your balance.

Interestingly, however, Bach does NOT suggest you pay down debt first and THEN start saving. Rather, he strongly suggests you do both!

But I reckon if a person is concerned about their financial future, perhaps the worst thing they can do is…nothing at all. For it is better to plant a small seed that will grow into a little oak tree than plant no seed whatsoever 🙂

Related blogs by Maryanne:

The Greatest Financial Gift to Give a Child Won’t Cost YOU a Cent

The Magic of Compound Interest – Why Geometric Progression Matters

Tales, Tears & Triumphs – Transforming Your Relationship to Money

A Great Gift Gone Bad – A Cautionary Tale about Investing Properly for a Child’s Education

Maryanne Pope is the author of A Widow’s Awakening, the playwright of Saviour and the screenwriter of God’s Country. Maryanne is the CEO of Pink Gazelle Productions and the Chair of the John Petropoulos Memorial Fund. If you would like to receive Maryanne’s weekly blog, please sign up here.

 

published in Financial Planning, Habits, Inspiration, Money by Maryanne | February 16, 2016 | 3 Comments

Money Matters – The Greatest Financial Gift to Give a Child Won’t Cost YOU a Cent

piggy bank

“It is crucial to understand that wealth flows from savings, not from income.”

David Chilton, The Wealthy Barber Returns

What if the greatest financial gift you ever gave a child didn’t cost you a cent…but meant that they ended up with a nest egg of a million – or two – dollars?

If you’re the frugal sort, that should put a smile on your face 🙂

So what IS this great financial gift?

Why, advice, of course. Which is: if one starts to save regularly as a young person, then the amount of money that can be accumulated over a significant period of time is staggering.

For it’s not the amount of money a person earns that determines whether or not they will be wealthy; it is the amount of money the person sets aside that really matters. And the sooner they get started, the better.

A few weeks ago, I read an excellent article in the Globe & Mail about the importance of teaching kids about how – and why – to start saving when they are young.

“Financial freedom occurs when a person’s investment income is greater than their monthly expenses. Many people who appear wealthy simply have high incomes but little or no net worth; they may also be in huge debt and not even close to financially free.”

Nancy Phillips, author of The Teen Steps to Success Guide, as quoted in the Globe & Mail article, “Parents of millennials, teach your children well,” by Gail Johnson, Jan 16, 2016

“Financial experts agree that teaching children about money early is vital, as early as 5 or 6, or at least well before they start using credit cards and apps,” said Johnson.

“Research has shown our belief system around money is set by age 7,” explained Phillips, “mostly from modeling the behaviour of those who raise us.”

Wow.

To illustrate the importance of starting young to save, here is an example by Nancy Phillips in her book, Steps to Success Teen Guide, 25 Financial and Life Success Lessons to Help You Achieve Your Dreams:

“Say you start investing $2000 a year at 19, then stop at 29 (so a total of 10 years) for a total investment of $22,000, while your brother starts putting aside $2000 a year at age 38 until he’s 60 (so 22 years for a total investment of $46,000). Assuming an annual return of 6.5%, you’ll have more than $231,000 in your portfolio by age 60, while your brother will have about $107,000.”

In other words, time is what is needed for compound interest to work its magic.

And money, of course. But surprisingly – and this is the beautiful part – not necessarily a lot of it. In fact, what is far more important than the amount of money saved is developing the habit of regularly setting aside money i.e. paying yourself first.

I’ve yet to read a financial book (and Lord knows, I’ve read an awful lot of them) that doesn’t drive this crucial point home to the reader.

Pay yourself first – and you will become wealthy.

As for how much to pay yourself?

“Wealth beyond your wildest dreams is possible if you learn the gold secret: invest 10% of all you make for long-term growth.”

David Chilton, The Wealthy Barber

Here are some further figures to ponder (from The Wealthy Barber):

“If you invest $2400 a year, say $200 a month, for the next 30 years and averaged a 15% return a year, how much money do you think you’d end up with?”

$1.4 million.

Wow!

But, for all the young ’uns out there, get this: “If you put $30 a month away at age 18 and you continue until you are 65 (so 47 years), averaging 15% annual return, how much would you end up with?”

$2 million.

WOW!

But wait…there’s even better news!

TFSA Contributions in Canada

Now, if you live in Canada, the annual TFSA contribution limit is $5500.

So if a 20-year-old invested $5500 in a TFSA that earns an average of 7% interest per year (compounded quarterly) and contributed the max of $5500 each year (and don’t draw any money out) for 40 years, by the time the person is 60, how much money would they have accumulated?

$1.3 million! AND NO TAX WILL BE PAID ON THAT MONEY!!

So why don’t more people – young or not-so-young – save on a regular basis?

“One of the biggest reasons that it’s so difficult to save is that no one out there really wants you to. It’s true. Almost everyone want you to spend as much as possible.”

David Chilton, The Wealthy Barber Returns

Sadly, it IS true. But I wonder if it is also the WAY we try to communicate the savings message to young people that could use some improvement? I mean, when I was 16, I pretty much tuned out whenever I heard the words, “saving,” “retirement,” “compound interest” and “tax.”

Blah, blah, blah…bo-ring.

So the other day, I just happened to be with a friend’s daughter on her 16th birthday and the subject of personal finance happened to come up 🙂

Now, as perhaps you may have noticed, teens DO tend to like the words “money,” “cash,” and “rich,” so I tried to make sure those words made an appearance…at least in the first part of the conversation.

And before I knew it, I was googling a compound interest calculator on my phone and punching in numbers – at the birthday girl’s request!

“So let’s say I put aside $100 a month, starting now,” she said. “How much would that be worth in 50 years, when I’m 66?”

I began punching in the numbers. “I’m going to put in an average annual return of 7%, compounded monthly…”

She shrugged and resumed looking at her phone.

“The amount,” I said, a moment later, “would be $551,263.17.”

She nodded, somewhat impressed.

“But,” I continued, “if we raise that rate of return to 9%, compounded monthly, which is achievable over a 50-year span, let’s see what you get…”

A minute later, I had the answer: “$1,184,513.84.”

The birthday girl looked significantly more impressed. She even looked up from her phone!

Then her eyes narrowed a little and she said, “Since I will be making a LOT of money someday, I’ll be able to save more than $100 a month. So what if I increase the monthly amount?”

Unable to contain my excitement (that a teenager was actually interested in a personal finance discussion…on her birthday yet!), I made a quick change in the criteria on the compound interest calculator.

“Let’s say you increase your monthly payments by just 5% each year,” I said. “So this year, you contribute $100 per month. Then next year, you contribute $105 per month. Then the year after that, you contribute $110.25 per month, and so on, so very do-able…”

I saw the new total, smiled, and looked up from my phone.

“What?” she said.

I read her the amount: “$2,225,421.89.”

The birthday girl and her sisters – a 14-year old and a 7-year old – also in the room, all looked at me…rather impressed.

Fair enough, you say. So the 16-year olds are gonna get rich. But what about all of those, er, not-so-young people out there? Is it ever too late to start building a healthy nest egg? Nope. But you can read more about that in this blog: Money Matters Part 2 – Saving Saavy for the Not-So-Young.

In the meantime, if you have any teens in your life, please do pass this blog on to them. You just never know where the seed of an idea will take root…and grow into a multi-million dollar tree 🙂

Related blogs by Maryanne:

The Magic of Compound Interest – Why Geometric Progression Matters

Tales, Tears & Triumphs – Transforming Your Relationship to Money

A Great Gift Gone Bad – A Cautionary Tale about Investing Properly for a Child’s Education

Maryanne Pope is the author of A Widow’s Awakening, the playwright of Saviour and the screenwriter of God’s Country. Maryanne is the CEO of Pink Gazelle Productions and the Chair of the John Petropoulos Memorial Fund. If you would like to receive Maryanne’s weekly blog, please sign up here.

 

 

published in Assumptions, Change, Financial Planning, Gratitude, Habits, Inspiration, Money, Travel by Maryanne | November 3, 2015 | No Comment

 

Tears, Tales & Triumphs – Transforming Our Relationship to Money

 

Hatley Castle at Royal Roads

Hatley Castle, Royal Roads University, Victoria, BC

“It’s easy to look back on the past and beat ourselves up for all the wrong turns, incorrect assumptions, and false hopes that have led us to our current financial disappointments. We label them “mistakes” and write them down in our book of life as failures, then wonder why we feel overwhelmed, oppressed, and too scared to try again.”

– Sarah Ban Breathnach, Peace and Plenty; Finding Your Path to Financial Serenity

Ah, money…when it comes to taboo discussion topics, personal finance is often right up there with sex. And that’s a shame. Literally. Talking about money is usually avoided because of shame. Unfortunately, this avoidance simply tends to lead to more of the same mistakes being made.

Fiscally questionable patterns arise when assumptions and habits are left…unquestioned.

In mid-October, a friend and I took a one-day course at Royal Roads University entitled, Transforming Your Relationship to Money. The workshop was taught by Inga Michaelsen, who is a business coach.

The day was a real eye-opener – and heart opener. I was actually pretty surprised at how emotional many of the participants became. Tears fell as tales were told.

When it comes to money, people are often not just ashamed of the choices they’ve made (and the impacts these choices have had on their lives and loved ones), they often also struggle to understand why they made them in the first place – never mind forgiving themselves for doing so.

But of course, before one can understand why a certain financial decision was made, one needs to first be aware that one actually was made. Oddly enough, this isn’t as obvious as it sounds. Apparently, many of our financial “decisions” are, in fact, made more or less unconsciously.

To help us better understand this, Inga started the day off with a group discussion around three common cultural myths beneath many of our beliefs, based on the teachings of Lynne Twist, author of The Soul of Money:

1. There isn’t enough to go around

2. More is better

3. That’s just the way it is

When it comes to money, time or love, it would seem that a real scarcity mindset exists.

Twist explains the danger of this: “When your attention is on what’s lacking and scarce – in your life, in your work, in your family, in your town – then that becomes what you’re about.”

In other words, what we focus on/pay attention to expands, so we would be wise to focus on all that we do have versus what we do not.

“What you appreciate appreciates.”

– Lynne Twist

However, in my experience and observation, we tend to dwell on what we don’t have – or don’t have enough of…particularly when it comes to money.

But what is enough?

To help us get to the heart of this rather loaded question, right before lunch Inga had us do a simple but effective exercise on gratitude. In our small groups, we each shared all that we have – or have had – in our lives to be grateful for.

After listening to myself tell the others in my group my rather extensive list of all that I am grateful for, I laughed out loud at my bounty of blessings.

I already have enough…of everything. All I have is all I need.

Another interesting concept discussed during the day was that how we spend, save and/or invest our money is connected to our story about money. And apparently we all have one.

To help us get to the root of what our story about money might be, Inga gave us homework to do over lunch. We had to think back on our life, in 5-year intervals, and recall an incident or event in each interval that had to do with money – and then see if any sort of pattern emerged.

Oh yeah.

In the afternoon we discussed spending habits and how money flows in our lives.

Intentional spending refers to spending your money on what you are committed to rather than on what others want you to want.

In other words, do we spend our money on things we really care about? Or things we think we’re supposed to care about i.e. what advertisers tell us we should care about?

Inga suggested that spending our money is one way for us to express our life’s purpose in this lifetime – so to try and think of our purchases in terms of whether or not they are in line with our life values.

Is the way we spend and/or save and/or invest our money a reflection of our values?

This is an interesting question because when we discussed it further as a group, it became clear that we often struggle with conflicting interests; how we spend our money may have negative impacts on others.

For example, one woman in the class raised the issue of fast fashion and how the dyes used in the garment industry pollute rivers plus millions of tonnes of clothes end up in the landfill after scarcely being worn. She also mentioned the harsh realities of child labour and the horrific working conditions for many people working in the garment factories in developing countries.

Then I brought up my personal concern about my love of travel and how I struggle to reconcile my passion for exploring new places with the reality of the significant impacts that travel has on the planet, such as greenhouse gas emissions.

All in all, I would say the day was a resounding success. The course certainly got me thinking differently about money, which is a step in the right direction towards transforming my relationship to it.

Ten Tips That Can Help Transform Our Relationship to Money:

1. Ask yourself: what is your relationship to money? Love, hate or indifference?

2. Focus on all that you already have – people, pets, purpose, possessions, health, etc

3. What you appreciate appreciates

4. Do not dwell on what you don’t yet have i.e. what you lack

5. What you focus on expands

6. Pay attention to how money flows through your life

7. Think of all the good you currently do – and have done – in the world with your money

8. Forgive yourself for past financial decisions

9. Be mindful of how you spend your money: do your purchases reflect your values?

10. Are you aware of your “story” about money? Is it serving you or holding you back?

Is our definition of success dependent on our financial earnings?

Interestingly, after I finished writing this blog, I watched an excellent interview with Elizabeth Gilbert, author of Eat, Pray, Love. My friend Sherry had sent me the link to the interview months ago but I hadn’t got around to watching it. Timing is everything 🙂

In the interview by Marie Forleo, Elizabeth discusses her recent book, Big Magic; Creative Living Beyond Fear, and speaks candidly about how people working on creative projects, such as writers, often expect or demand that their efforts make money – and if they don’t, then it is not really a “success.”

In other words, deep down, do we equate success with the financial rewards our efforts bring us?

That is a question that’s certainly making me squirm, so for the next leg of my transformational journey, I shall be picking up both Big Magic and Lynne Twist’s The Soul of Money. If I can get them at a used bookstore, even better!

Maryanne Pope is the author of A Widow’s Awakening, the playwright of Saviour and the screenwriter of God’s Country. Maryanne is the CEO of Pink Gazelle Productions and the Chair of the John Petropoulos Memorial Fund. If you would like to receive Maryanne’s weekly blog, please sign up here.