Jeremy and Sylvie came to me as a fairly textbook young, middle class family. They were on their starter home, and had two young children. Both worked, both had cars.
Like many families in their late 30’s, they had gotten a bit ahead of themselves getting set up. Their 30 year mortgage, 5% down, property taxes, school taxes, infrastructure and everything that comes on top of it was already sucking up a great deal of their budget. As a result, they were slowly accruing debt on a line of credit as they stretched to meet their ‘start-up goals’ – furniture, cars, landscaping etc. Like most people, though, a myriad of unanticipated or underestimated costs began to impact their budget (lawnmower, garden tools, hose, sprinkler, snow shovel, epoxy for the garage floor, etc, etc, etc). And then, as young married people tend to do, Sylvie became pregnant with their first child. A whole slew of new expenses were added onto an already taxed budget. A few years later, child number two had arrived as well!
Basically, Jeremy and Sylvie spent the majority of their thirties so busy, working so hard both at home and professionally, that they had difficulty adapting to their own evolving lifestyle and finances. First time expenses and experiences, plus a constantly evolving budget landscape had them reeling, hardly able to tell up from down. Real life was so complex that financial minutiae were difficult to prioritize regularly compared to a crying child, the need to buy a crib, or fix failing brakes… so nothing substantial was done to manage their assets for several years. If we are being honest, Jeremy and Sylvie were in an almost entirely reactionary mindset when it came to spending money.
Build your confidence and save with tool starting with RRSPs
So, how do you recover and steady the course when spinning out of control? I would like to say that a simple sit down and look at the numbers with me is all it really takes, but the truth is that it isn’t that simple. Knowing the right answer doesn’t help a lot if the client isn’t psychologically ready to hear it or to use the tools to implement a solution. It took time for Jeremy and Sylvie to mentally snap out of ‘crisis response’ mode and learn that they could put some money to work for the future without it severely impacting their current standard of living. Everything was ‘emergency money’ to them - it needed to be accessible, and there was ALWAYS something to spend it on that was urgent.
The first step to getting them out of this mindset was to pay themselves first using RRSP contributions. This was a good way to start down the road to longer term thinking, because investing in RRSPs helped them with a return of 37.12% of their RRSP investment back to them in tax savings. The idea of putting a hundred dollars into an RRSP for retirement and getting ‘free’ dollars back was something their ‘crisis at all times’ mental state could absorb. On top of the return, the RRSP contributions reduce the family income on paper and so in turn, also increased their childcare benefit, reduced childcare expenses, and more. We were later able to expand and start various investment plans such as TFSA's and an education fund, RESP's, and take advantage of grants offered through the government. It was a simple, common sense move that hit the right notes for them to embrace making the investment.
Organize your debt to work for you instead of against you
Once they started to feel proud and comfortable of their positive step, talking seriously about their monthly and yearly budget became far more productive.
The second step to improving their finances was teaching them that if debt was inevitable, then being smart about where that debt is being absorbed is truly important. Up until then, they had their mortgage, a line of credit, and credit cards as their main financial tools, with the line of credit taking the brunt of the blows in terms of growing debt. The key thing to realize though, is that your finances are a balance of your assets vs your debts. Most people hear the word ‘debt’ and immediately reject it as a negative. But consider this:
If you have a debt source that is charging you 3% interest per month, but an investment source that is earning you 5%, where is it better to park your dollar?
In today’s low interest environment, many opportunities exist where absorbing debt in one area to fund an investment can actually be your smartest move. When you hear people on the news say ‘lower interest rates to stimulate the economy’, this is what they are talking about. This environment is tailored for you to invest, not to save. One sound investment strategy is to invest in portfolios that pay dividends which are invested in business you use every day such as banks, energy companies, and property management. It all starts with making sure you invest.
Protect your assets, and yourself
Finally, as a young couple still growing their professional income, there were of course, limits to the amount of investments that could be made in the short term. It is important to ensure that the existing assets and income were protected against unforeseen life events; to protect the family's lifestyle, we transfer the risk from the family, to an insurance company- by getting proper coverage through an insurance policy.
In simplest terms, you have to protect your house and cars as assets vulnerable to depreciation through physical damage- there needs to be upkeep there. And perhaps more importantly, you must protect yourself as an income earner. I feel strongly that insuring your biggest asset, yourself, is critical at any income level. No one thinks extreme events will happen to them, and for most, they don’t. But should you prove unlucky one day, not having adequate insurance can take a single bad event to a drawn-out catastrophe.
Once I broke down the benefits with Jeremy and Sylvie they saw the benefits of getting insurance personally, even though they had some degree of coverage from their work already. We worked together to find a cost that would accommodate their budget and give maximum coverage, and more importantly, a secure foundation for their future.