Published in Smart BIZ, March2018
Financial Planning for People with Better Things to Do is the sub-title for my Opus on THE END OF WORK. My purpose over the past two years plus has been to simplify the mystery of “Financial Planning” so that you can look after yourself and your loved ones without getting ripped off by salesmen paid on commission. I close off THE END OF WORK with an example of financial planning that takes a minimum of time and effort in preparing for your eventual END OF WORK while protecting yourself from a premature END OF WORK.
You are twenty-five, finished an education, developed a trade, travelled and have landed your first real job with a decent company doing something you like; you are ready to begin financial planning. Your $4000 gross nets out to $3000 take-home. After taxes, your deductions include CPP and a group plan with $50,000 life insurance, short and long term disability and health and dental. That’s a pretty good start. Let’s say your CPP, company pension and group plan are taking 10% of your gross so paying yourself first may only need $300 a month of your net pay.
“Hang on”, you say, what about paying off my student loans? Remember behavioural economics. It may be more rational to pay off all debt first but people including you (and me) are not rational. But we are creatures of habit. Get in the habit right from the start of putting that 10% of your net into providing your future income & independence. Invest as much as you can as early as you can.
Right now, your group insurance would be enough for your executors (likely your folks, get a Will done) in looking after your “final expenses”. But if you expect to have a family, your first insurance priority is to insure your “insurability”. Buy some term insurance while you are still healthy. Your odds of collecting are minimal (like the lottery) so it is cheap. $500,000 of ten year term for a non-smoking male is only $27.60/month.
That leaves almost $275 to start investing. Some planners will suggest you are young enough to have a longer term risk horizon so you should throw it all into an aggressive equity fund. In the interest of good long term habits, I prefer to start practicing balance and diversification from the start.
And don’t forget tax planning as well. Put $100 every month into a balanced growth fund in an RRSP. That actually only takes $70 of your $300 after tax budget, with the tax deferral benefit at a 30% Marginal Tax Rate and depositing your tax refund as well. Put another $100 of the after tax net into a fixed income fund within a TFSA, where the tax on interest income will be sheltered. That will also be your savings/emergency fund that you want to build up. You are left with $100 after tax for investing outside tax registered investments. This money you use for the more volatile third of your portfolio in an ETF equity fund where dividends and capital gains get preferred tax treatment. And remember the tax sheltering and risk management advantages of insured “seg” funds.
Allocating at least 10% of your net to saving/investing right away is not just psychological. Einstein called compound interest the eighth wonder of the world. An example: at 25, Ted starts putting $100/month into a balanced fund. Even with only 5% average return, he will have $152,602 at age 65. Bob pays off student loans first, and the wedding, and the kids, and the LOC taken for the house purchase to avoid the CMHC tax, and doesn’t start on his own investment plan till age 45. To catch up to Ted, he deposits $200 a month to age 65. Both will have invested the same $48,000 but Bob’s account will only be $82,206, only a bit better than half of Ted’s who only saved half as much monthly but started sooner. That Einstein, eh?!
That will do it for Part One of “THE END OF WORK”. Next month, we will do part two, financial planning into your 30’s and beyond.
Fredrick Petrie, B. Comm. (Hons.), author of “THE END OF WORK: financial planning for people with better things to do”, provides financial education at www.navigatingfinance.com, reach him at email@example.com or call (204) 298-2900. You can get started at http://www.amazon.ca/END-WORK-Financial-Planning-People-ebook/dp/B00XCY0AJ2/