The Boomer Apocalypse

September 30, 2010

We know its coming, but what will it mean?  With the boomer population currently between the ages of 44 to 59 and representing about 1/3 of the population, we can’t ignore the impact we’ll have on the economy  over the next 20-30 years.

The following article spells out a few of the challenges us boomers may have to deal with in the coming decades.   I caution “expecting” all of the predictions described to occur as future predications are rarely perfect.  However, the final mantra of the author – “Freedom not stuff!”  strikes a nerve.

http://www.financialpost.com/news/Boomer+apocalypse/3544057/story.html

Living within our means

There are many stresses we deal with throughout our lives, but money worries don’t have to be one of them.

The last few decades was the age of consumption.  Many of us have more and do more than our parents ever did – and we’re also more stressed. 

Of life’s stressors, financial stress seems to be top of list.  Reducing financial stress can’t be based on having more money.

 It starts by living within your means.

Reality is, you probably don’t have unlimited funds so living on the income you have is the only option.  I’m also guessing, you don’t just want to survive but enjoy and thrive for as long as you have.  Spending your money where it really counts can make that difference.  In other words, making conscious spending decisions and using money for true priorities – on what you really need and on what you believe is important.  Matching up what you really want with what you can afford is the route to true happiness and less stress.

Here are my rules to living within your means. 

Debt management is the first thing to get your arms around.  There are two types of debt: 1 – consumption debt and 2 – investment debt. 

Consumption debt is from stuff that hasn’t really been paid for and probably isn’t worth what was paid.  You’ve been coerced, wooed, cajoled and sold by advertisers to buy stuff to make you feel good.  Okay, you’ve bought into that concept for awhile – but for the sake of your health, your relationships and your future financial security you need to stop thinking – “more stuff = happiness”.

Living within your means starts with internalizing the idea your parents or grandparents had – that consumption debt is bad debt and must be scorned once again.  Everything you buy depreciates.  Concert tickets, a plasma TV and a new car.  You may feel all these things provide you with great memories or freedom or relaxation and for those reasons may be worthwhile.  But you need to weigh the short term gratification of having these things against the long term stress of spending your limited resources on them.

You need to consolidate consumption debt onto the lowest cost credit card or line of credit available and pay it off before you buy anything other than what you need.  Then you have to decide you won’t ever have consumption debt again.  You save the old fashioned way and pay for your wants with the money you have saved.  That’s all I have to say about that!

Rule #1 – Buy only what you need and can pay for now – like your grandparents did.

Investment debt is often considered good debt – its money borrowed for investment.  A mortgage is investment debt and it helps purcashe a tax free investment – your home.  Real estate appreciates and when you sell it for more than you paid for it – you keep all the money! Its not taxed like other investment gains.  Real Estate has appreciated at about 6% over the last 20 years in Ontario. However, too much mortgage used to purchase too much home can be a stressor.  When interest rates increase (and they will!) you may find yourself paying a lot more to finance a big and expensive to maintain home.  I’m not so sure that “buying the biggest home you can afford” is the best long term strategy anymore – not if it means you’re strapped for cash for other immediate needs.  We may see a few decades where smaller, more affordable homes will continue to be in demand while demand for larger homes decline as baby boomers downsize.  A more prudent strategy may be to purchase a smaller home so you can spend the right amount on other priorities.  Regardless, when it comes to a mortgage, the best strategy is to plan paying off that mortgage by retirement or sooner.

Rule # 2 – Buy a home you can comfortably pay for to be able to do the other things you need and want to do.

Many of us see retirement so far off we can’t give it much attention.  Believe me, the years go by quickly so decide today you’ll “pay yourself first” and begin investing in your retirement.  Plan on not being a burden to your children or society.  Other than if you have the most lucrative pension, you’ll probably need to have savings to cover retirement expenses and large purchases – a car, vacation, potential healthcare bills etc.  Begin by creating an automatic withdrawal from your bank account to long term savings – be it an RSP or TFSA.  Speak to a financial advisor to figure out how to make this work.

Rule #3 – Invest in your retirement by making sure you’ll have one!

Since you probably don’t have unlimited income, you will need to decide where and how much to spend in all the areas that are important to you.  The sooner you decide, the sooner you’ll be living your life the way you really want.   For example, if family is important to you, you need to decide on the areas you want to spend your money on to fulfill your priorities.  Vacations and activities are important but so are education funds, life insurance and long term financial security. Decide consciously how much you want to spend in all the important areas of your life.

Rule #4 – Make sure you spend the rest of your money on what’s really important

No business, family or person can manage their finances well without tracking money coming in and money going out.  I know this is tedious and not fun – but deep down, you know you have to do this.  I’ve reduced it to a simple one page spreadsheet you can use for the entire year.  The spreadsheet allows you to track your money with as much or little detail as you want.  The important thing is to track it so you know less money goes out than comes in.  Send me an e-mail and I’ll send you the excel spreadsheet.

Rule #5 – know what’s coming in and what’s going out.

After tracking the money going out, you may find a significant amount can’t be identified.  The money is spent, but you’re not sure where.  This is called the “latte factor” – money spent on day to day “stuff” that really isn’t a priority.  Spending is so much a part of us, we often spend small amounts throughout the day that add up to large amounts.  Although it may seem trivial, watching this spending can help you save big.

Rule #6 – Watch the latte factor.

 Living within your means may mean spending less in some areas but it can also mean spending more where it really counts.  You just need to decide and live with less stress.

Body, Mind, Soul & Money

Financial health for teens and twenty something’s.

Maybe you exercise regularly to keep your body in shape; you’re in school so your mind’s definitely getting a workout; you may even contemplate your spirituality and meditate from time to time. But what about your financial health? Are you doing what you need to do to grow your financial skills and money so they support the things you really want to do in life?

This article will give you the money basics you need to master to help you do what you want to do with your body, mind, soul and life!

What’s Money?

Money is a store of value. Money is earned through work or intelligent investment. It gives us options to live our life a certain way if we consciously spend it on the things we want to do and believe in. Money deserves our respect and the better we treat it, the more options it will give us in life. Consider how you respect your money. Do you handle your debit and credit cards always knowing where they are? How about your bills? Do you crumple the bills and shove them into different corners of your wallet or purse or do you fold them neatly in a safe place?

As with any exercise program – discipline and form are important and it’s no different with your financial program.

Discipline in your financial program is the courage and willingness to create and stick to a spending plan so your money lets you do both the important and fun stuff you want out of life. You know you need to exercise every week to maintain your physical health and you also need to manage your financial health every week. Once you have your program in place, maintaining your financial health shouldn’t take more than 30 minutes a week.

A spending plan describes where you will spend your money – broken down my month. Anything important is worth having a plan for – it just increases the odds of success. You create a spending plan on a spreadsheet you’ve customized with your unique financial commitments and goals. It’s a planning tool that helps you decide where you want your money to go and tells you where it went. It monitors your progress and helps you stay on track. For a sample of my daughters spending plan, (designed for students) email me (ryasinski@financiallysound.ca) and ask for a copy. It will include all sources of income from; work, parents, OSAP, gifts etc. It will list first where you have committed to spend your money; phone, school, rent, car, longer term savings etc. and will list where you would like to spend your money. These are discretionary expenses and putting limits on them can be the difference between financial success or failure.

The more money you need to spend in future, (a university education), the more important a spending plan becomes. Okay, you can call it a budget, but I call it a spending plan – because that’s what you do with money. You spend it on your education, your entertainment, stuff you want to have or do in the future that will enhance your life.

Form is structuring how your money comes in, is held and is spent. We all need both a chequing and savings account and on-line access. If you are in a joint living arrangement you also need a joint chequing account for joint expenses. Any income you earn typically goes into the chequing account first where you leave enough to cover your weekly or monthly expenses. The balance you move to a savings account.

Ideally, your savings account does not and should not be at the same bank where you keep your chequing account. Most bank savings account do not pay competitive interest rates. Using one of the on-line high interest savings accounts (i.e. ING or Ally) will give you a higher rate of interest and make your savings account a little less susceptible to impulse spending. Check them out by searching “Canadian High Interest Savings” and find out how they are linked to your chequing accounts. Your spending plan will tell you what should be in your accounts at the end of the month to pay for all the future things you said you wanted to do. This is where your bank account and spending plan come together – one just doesn’t work as well without the other.

Your best and “must do” monthly financial health activity

Updating your spending plan every month is to financial security as tracking your progress is to training. Updating your spending plan, if it becomes a habit, will do more for creating wealth than most other activities. It forces you to take a monthly look at what you’ve spent and what you need to and really want to spend your money on and helps you reduce impulse spending. You just may not buy that shirt if you know you have more important things planned for your money. Uncontrolled impulse spending is the disease of good financial health.

Needs vs Wants and Goals – Where do you need and really want to spend your money?

The first step in creating a spending plan is to be real clear about what you need to spend your money vs what you want to spend your money on. Since most of us don’t have unlimited funds, keeping enough money for our needs and only the most important wants is the only way to good financial health. Your needs and wants can be listed as financial goals. Each goal can have a dollar amount and date associated with it. “Contribute $3,000 to my first year of university by Sept 1st, 2011” is a big longer term financial goal. “Buy concert tickets to White Stripes for $60 on Nov 1, 2010” is a smaller short term goal.
Achieving these goals will mean saving a certain amount of your income monthly – these goals become line items on your spending plan. Every month you add a little money towards your goals which is saved in your savings account.

Latté’s, I tunes songs, games, debit transaction costs, magazines and late night visits to your favourite restaurant are all ways we can “fritter” our money away. Setting aside a specific amount of funds for fun things allows us to enjoy them without compromising more important needs and wants. An amount for “entertainment” needs to be part of every spending plan.

How to use credit and not get creamed

The best practice with a credit card is never to carry a balance. Interest rates are high for credit cares and can add up quickly. The credit card companies have learned teens and twenty something’s are fresh targets they want to indoctrinate with a credit mentality – make no mistake, this is a conspiracy – don’t let them get you! Resistance is not futile! A credit card makes it all too easy to make impulse purchases and get off track from your spending plan. Resolve for the good of your financial health never to carry a balance on your credit card. This means planning each purchase and knowing how much you can spend that month – the spending plan is your saviour!

If you must have a credit card, find one with no fees or that pays dividends on the amount you spend and charges the lowest interest rate (for that unfortunate time you might carry a balance).

If you get into credit trouble …

– First – don’t ignore the problem – it’s like ignoring a mole on your skin that’s changing colour or growing – it’s not good but you have to face it or it might get worse. The analogy between cancer and not dealing with debt is intentional! Not paying your bills gets you a poor credit rating and that follows you around for a long time and impacts your future ability to borrow for a car, rent an apartment and buy a home.
– Next, try to move your balance to a lower costing credit card. If you can take advantage of low credit offers, go ahead but cut up your credit cards (or freeze them in ice) because using them just gets you deeper in the hole.
– Next, make sure you have looked at every penny you spend and cut out all “wants” and re-evaluate “needs” to direct funds to pay off the debt.
– Getting out of debt on your own is an accomplishment. Don’t consider bankruptcy unless you have gone to a credit counseling service first.

What’s income tax? For those earning more than $10,382 in 2010!

Income tax is the so called “temporary measure” the Federal government placed on all Canadians in 1917 as a means to fund the first World War. It remains with us, never to leave to pay for all government programs like healthcare, building of roads, school subsidies, politician salaries and much more. Understanding taxation is as important to your financial health as understanding nutrition is to your exercise program. Some of your good work could be drained away if you don’t understand how your income and investment returns are taxed. Our tax system is “progressive”, which means, the more you make, the greater percentage of your income is taxed. The rich really do pay. For 2010, you need to earn about $10,382/yr or more before you start paying tax on your income. If you attend school full time you could earn up to about $14,000/yr before paying any tax. To make things complicated income tax is applied differently by each province and the federal government but assuming you don’t go to school, the income you earn is taxed about as follows:
$0 to $10,381 = no tax payable
$10,382 and below $40,970 taxed at 22%.
$40,971 to $81,941 is taxed at about 32%.
$81,943 to $127,021 is taxed at about 40%
Contributing to RSP’s and using TFSA’s are two ways to lower the tax you pay.

Tip: If you are 18 or over make sure you file your tax return even if you earn under $10,382. In Ontario you qualify for a $100 tax credit!

Learn to do your own income tax – software makes it real easy and can help you save money.

What’s investing all about and what do you really need to know?

Once you have all the above financial health activities working well, only then do you really need to consider investing. If you are saving for an expensive item you plan on purchasing within the next 5 years, all you need to find is an investment savings account that pays the highest amount of interest. Search “Canadian high interest savings accounts” and you’ll find the best current rates.

One of the best long term investments most of us can make is purchasing a home. A home is forced savings, the value has historically appreciated over time and when we do sell our homes we are not taxed on any of the growth. When you’re finished school and starting your career, this should be something you consider. Your RSP can be used to save to purchase your first home.

Lastly, if investing for financial goals five or more years out, consider investing in stocks and bonds or mutual funds. Historically they have provided the highest returns but at times you can lose money. Investing in stocks or mutual funds should be done with a trusted advisor.

What’s the difference between interest, dividends and equity or capital growth

Interest is the “rent” a bank will pay you for the use of your money – what you keep in your savings account. The shorter the time you allow them to use it, the less interest they will pay. Interest is taxed like your income – in the year you earn it.

Dividends are excess profits you receive if you own a portion of a business. You could own this business privately or (if the business is a public company) by purchasing a share of that business in the stock “market”. You would need a special type of investment account to purchase the share (also called “stock”). Not all stocks offered by a company guarantee that dividends will be paid although banks and certain other stocks have a history of paying dividends. The value of dividends paid out annually is typically higher than what you would receive for the same amount of money if invested in an interest earning account. The risk of owning dividend paying stocks is: 1 – the dividend may not be paid and, 2 – the stock fluctuates in value from day to day. We pay less tax on the dividends we earn than on an equal amount of interest (if investing outside an RSP or TFSA)

Equity or Capital Growth is the growth of the value of a share (or stock) of an incorporated business. Stocks allow us to divide up the value of a business so more people can invest in the business which allows greater growth. Both dividend paying shares and “common” shares can realize growth in the value of their shares over time. Common shares, rather than pay dividends, re-invest profits into the business hoping to make their business more profitable and therefore increasing the value of their shares at a faster rate than dividend paying shares. There is no guarantee the share will grow in value. Since buying shares means you also take on the risk that the business does not grow, you can achieve the highest rate of return of all – along with the risk of a loss of some or all of your money. Investing in shares should only be considered after much research and with a trusted advisor. We pay the least amount of tax on the equity growth we earn than dividends or interest (if investing outside an RSP or TFSA)

What’s a Mutual Fund?

A Mutual Fund is professional management of your money. Most of us don’t have the knowledge or time to invest directly in stocks and bonds so the investment industry offers different types of “mutual funds” which are managed by professional and accredited managers who make the buy and sell decisions on individual stocks and bonds. Anyone can purchase a number of “units” of these mutual funds and have these managers use their money to invest.

What’s a Stock?

See Equity or Capital Growth in this article.

What’s a Bond?

A Bond is a promise of repayment of the original investment plus interest. You can purchase bonds from different levels of government, agencies and companies. All have different guarantees and interest payments. The higher the interest payment the greater the risk that you won’t get paid.

To make an investment you first have to open an account with an investment company. You will have to decide whether to open a Tax Free Savings Account, (TFSA), a Retirement Savings Account (RSP) or a non-registered investment account.

Unless you earn more than $10,382 in 2010, you won’t pay any tax so investing using a Tax Free Savings Account won’t help you. If you are in University, you get more tax breaks so you could earn up to about $14,000 and not pay any tax. A TFSA is simply an account within which you could purchase a number of different types of investments such as interest earning investments, mutual funds and stocks etc. and not have to include the interest or growth in your income and therefore not have it subject to tax. A TFSA is not designed for short term savings. You will be penalized if you contribute over your limit in any one year. The current limit for each individual 18 or over is $10,000. This will rise to $15,000 in 2011.

An RSP (or RRSP for Registered RSP) is another type of account which can also hold all types of investments. The major difference with an RSP is you receive a refund of the income tax you would have paid on your contribution and if you have to withdraw you repay the full amount of tax. RSP’s are, however, a great vehicle for saving for a home (search “Home Buyers Program) RSP’s are recommended for long term investment.

The Bottom Line

1 – Create and follow a spending plan – it helps you spend your money on what’s really important to you and gives you options.

2 – Set up your bank chequing and savings accounts on-line and use them properly. Do a monthly check on how you are doing against your spending plan. This takes a little time up front but is real easy once you get rolling.

3 – Make sure your savings are getting the highest interest you can earn. Search “Canadian High Interest Savings” to find out where to save.

4 – If you earn more than $10,382 ($14,000 if in university) understand the basics of income tax and how to lower the tax you pay. (RSP’s and TFSA’s) Do your own income tax.

5 – Only think about long term investing in stocks or mutual funds once you have finished school and paid your bills.
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