Finding yourself in a healthy and happy financial life means practicing better money habits. And, putting you and your family in the best position possible. Raising your income, having income that not employment related, mitigating taxes and positioning your assets in a way to provide maximum benefit for your family are all a part of having “good” money habits. Following these eight very controllable tips will have a positive impact on your families outlook.
Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones. ~ Benjamin Franklin
By Kevin T. Taylor AIF® and Peter Locke CFP®
Define your wealth stage
The stage of life you are in should greatly impact your financial picture now and in the future. Knowing which phase of wealth you are in will help make decisions regarding your other “Better Money Habits.” Having a near term understanding of your wealth stage will govern parts of the financial and investment decisions you make. In general, there are four main wealth stages that individuals move through and between over the course of life:
- Starting – Here some of the characteristics are establishing a career, buying a home, getting married or starting a family. Some of the hurdles are getting into a rhythm, setting goals and budgets, and defining your expectations. The main objectives: Earning, saving and growing assets.
- Stabilize – You have a stable career and are in or approaching your peak earning years, are a homeowner, starting to think about retirement and estate planning. Some of the hurdles here are major life expenses, vacations, college, and the generally hectic lifestyle and constant pulls of family life. The main objectives: Creating a balanced portfolio of preservation and growth, staying focused on long term goals, and making the time to manage the business of your household
- Success – Retired or working by choice, using accumulated wealth to generate income as a salary replacement, keen on protecting assets, estate and wealth transfer planning is a priority. Some hurdles here are investment shortfalls from the stabilization years, a lack of planning for tax and spending, investments not meeting current needs, mounting tax liabilities, and rising healthcare costs. The main objectives: steady cash flow, defined spending habits and risk mitigation.
- Significance – Everyone wants to know that if they have led a fiscal life and executed on their financial plan that there will be a lasting ripple in the lives of their family and the causes they care about. Hurdles are a lack of planning beyond yourself and no legal direction for your lasting wealth. The main objectives: direction for your assets, a written commitment to the causes you would like to see flourish, and the supporting documents to see that intention carried out.
The stage of life you are in should help you benchmark your plan, find common ground with those in a similar stage and find strategies and nuances that help you support the current need to keep all things in balance.
Caution: Don’t forget to monitor!
Wealth plans and projections should be treated as living, breathing documents. To make sure they continue to work for your personal situation, they need to be reviewed on a regular basis with a person or team who have earned your confidence and whose opinions and expertise drive value into your life. One of the better money habits is to revisit these plans annually and upon major live events. One of the best ways to ensure you revisit it regularly is to simply schedule the time in advance on your calendar.
Make investment with your better money habits and your style
Matching your financial vision with the right investments is an important part of finding a plan that will work for you when circumstances are not what is planned. Investing in perfect conditions is easy, but not lasting. While there is a wide variety of investment options available, the two primary types of accounts in which they are held — Qualified and Non-Qualified — can have implications for investors.
Qualified: Accounts allow you to grow your wealth without the immediate handicap of taxation. These platforms will allow you to focus on the total return without adjusting for annual losses due to taxation, they also will help you compound those returns over time, and make adjustments to the strategy without being concerned about tax. They offer the most flexibility in your earning years, and are part of the whole picture when determining the taxes you want to pay later.
Non-qualified: Accounts allow you to build cash flow ecosystems that support your current cash flow needs and allow more flexibility for the uses of cash generated by your investments. They’re however, subject to taxation and the consequences therein.
In addition to using the right types of accounts, you should also use the right types of investments that will keep you focused on the big picture. Using a gains and losses framed approach causes inexperienced investors to sell and buy at the wrong time. Finding the right balance of risk and volatility is an effort to future proof against yourself when conditions become questionable. Having a written Investment Policy Statement will help you stay focused on you better money habits when your emotional side steps in.
Know some concepts
You should always work with someone you are comfortable telling that you may not be familiar with an idea, and you should never invest in anything you don’t understand. How an investment makes money and returns that money to you is key to being a successful investor. If you don’t understand an investment at its root, move on, there are always other opportunities.
What’s the difference between an asset class and an investment vehicle? An asset class is a broad category of investments (e.g. cash, bonds or stocks) that have a distinct risk/return relationship. They are viewed as a group and have a predictable range of returns. An investment vehicle is the financial product that enables investors to buy and sell the underlying asset class (e.g. a mutual fund or an ETF).
What is the relationship between risk and return? In the investing world, there is a strong relationship (we use the word correlation) between the risk of an investment and the predictable range of returns. In its most rudimentary terms, the higher the potential return, the more risk an investor should be willing to accept. Risk for professional investors however, is not strictly a gain or loss, it is also falling short or exceeding expectations. If a risk has a range of possibilities from inception and the return is less than anticipated, this too is a risk. Keep in mind, for most types of investments, returns are not guaranteed.
Why have I heard about diversity and “Don’t put all your eggs in one basket”? When investing, it’s important to invest for varying circumstances. For example, when interest rates are high, it’s typically good for lenders, and bad for borrowers. Having a range of investments that will perform under changing circumstances helps to stabilize investment returns and make the outcome more predictable. The trick here is finding the right balance of investments or what we call non-correlated assets, in order to reduce overall risk and volatility.
Prepare your estate plan with your better money habits in mind
Protect yourself, your family and all of your assets. Your estate is all of the property that you own — from your car, home, business, rental properties, commercial estate, to your bank and investment accounts, insurance policies, and personal possessions. It also incorporates what you want to happen to those assets when something happens to you.
So what is “estate planning?”: While creating a Will is a critical component in the estate planning process, estate planning is the broader process of creating a detailed plan, in advance, that any fiduciary can carry out. This will include the tasks and decisions for the management and disposal/transfer of your assets after death. It will serve to help assure that your wishes and intentions are carried out. Your legacy has already begun with your actions in life, but it will continue with the execution and conveyance provided by your estate plan.
Your Will: This is a guiding legal document in the administration of an estate where you outline your decisions for how property and possessions are to be distributed at death. If an individual passes away without a valid Will, they are said to have died “intestate” and, simply put, this means the provincial laws (probate process) determine how the estate will be administered. The courts will elect a representative to distribute your estate based on what they think you would want. In other words, individuals lose all choice as to who receives what, and it may also create extra fees, taxes, and delays in administering the estate.
Power of Attorney (POA): This is a written document that legally authorizes another party to act on an individual’s behalf during their lifetime. It may help to provide personal and financial comfort should you become incapable of making these decisions (due to an accident, significant illness, cognitive condition, etc.). Be sure you review with a legal professional what type of Power of Attorney you need and when their powers are active so you have the proper representation when you need it.
Personal Inventory: A beneficial first step in estate planning is building an inventory of what you own and what you owe, as well as other important financial information (e.g. location of your Will, POA/Mandate, insurance policies, digital passwords, etc.).
Write Down and Answer these questions:
- Who will act as executor and administrator of my estate after my death?
- Who are my beneficiaries?
- How do I want to see them supported?
- What charities do I want to see thrive?
- Am I transferring assets in a tax-efficient way?
- Which assets will make up my estate?
- Who will act as my power of attorney for property, financial matters, guardians, health care or personal care should I become incapacitated?
Having adopted these eight behaviors would be now well on your way to putting your mind at ease and your assets in the right hands both while you are enjoying them and beyond. Keep in mind nothing in life is set in stone, and you should be flexible in your discovery and development of your goal.