When we do our own financial planning we’re often too close to our own situation to have an objective perspective. We may focus on the wrong problems… or take a narrow view of the potential solutions… or miss potential issues entirely.
One of the benefits of working with a financial planner is that they provide a second set of eyes for your financial plan. Most people are already on the right path, but there are common issues that may end up working against you. A financial planner can help find these common mistakes that may otherwise go unnoticed.
Financial planning isn’t rocket science, it’s something that can be done on your own. The math itself isn’t terribly difficult, and there are tools available online to help, but one of the major downfalls of the DIY approach is that we can be somewhat oblivious to our own personal biases.
Basically, we’re too close to our own financial situation to be entirely unbiased (This goes for financial planners too!) There are certain financial planning mistakes that we all tend to make if we’re not careful.
These mistakes can lead to potential issues over time. These issues can create more risk, or decrease investment return, or increase taxes, or create a higher risk of running out of money in retirement.
These mistakes are quite common and identifying these potential issues is the first step to creating a stronger financial plan.
What is your risk profile? This is a key question for every investor, yet I suspect it doesn’t get the attention it deserves.
Everyone sees risk differently. Some people don’t worry about risk at all, it doesn’t keep them up at night, it doesn’t cause them any stress. To them, not taking risks seems like a waste of time and resources. They’re risk seekers.
On the other hand, some people are deeply affected by risk. It causes them to worry, to always focus on the negatives, to think about all the things that could go wrong. For them, risk causes stress and sleepless nights. They’re risk averse.
Then there is everyone in-between. People who aren’t risk seekers, but who aren’t risk averse either. They see the benefit of risk, but it makes them a bit uneasy.
Choosing the right risk profile isn’t easy. There are a lot of factors to consider. Going too far one way or their other can cause issues over the long-term. But sometimes it takes some real-world experience before you can safely say what you’re risk profile truly is.
Asset location is the idea that certain assets are more tax efficient when held in certain types of accounts. Different assets classes, and more specifically different types of income, are taxed differently in Canada. Dividends are treated differently than capital gains which are treated differently than interest income. Even certain investments inside “tax free” accounts like the TFSA and RRSP can sometimes lose money to taxes but many people may not realize this.
When you’re just starting out you might hold bonds/fixed income, Canadian equities, US equities, and global equities all in one account (probably the TFSA if you’re just starting out). When you’re just using one account, asset location is less of a concern, but once you start to use a second account (maybe an RRSP), then you may want to ensure you have the right asset in the right place to minimize the drag of taxes.
This becomes especially important after you’ve maximized your TFSA and RRSP and have started to use a non-registered account. Non-registered investments are fully taxable at your marginal tax rate so it’s a good idea to put the most tax efficient investments inside your non-registered account.
Taking advantage of an asset location strategy requires a bit of work. Rather than having the same asset allocation in each account (which is super easy to manage), it means having different assets in each account and managing asset allocation across the entire portfolio.
How much money do you need to have in non-registered assets before asset location adds value? $50,000? $100,000? $500,000? $1,000,000? Let’s take a look…
For many investors adjusted cost based is something they may never need to worry about (but should still be aware of!) For most investors who are only using tax-sheltered accounts like the TFSA or RRSP, they never need to worry about adjusted cost base (or ACB for short).
This is because ACB is only required to calculate capital gains tax, and because most investors are investing inside a tax-sheltered account like a TFSA or RRSP, this is a non-issue.
But for anyone with investments outside of a tax-sheltered account, adjusted cost base is extremely important! And your ACB is something that you need to stay on top of.
Adjusted cost based is something every individual investor needs to track on their own. Yes, some mutual funds or robo-advisors or even brokerage accounts track adjusted cost based, but in the fine print they typically tell investors to track it themselves too. Why? Because they don’t want to be held accountable for a tax issue in the future.
Here’s why we need to worry about ACB and some tips on how to track it…
Managing money is an important life skill. Whether you’re a few years into your first job, or a few years away from retirement, do it well and your financial stress will disappear. Do it poorly and you’ll probably find yourself in a difficult situation more often than not.
The problem is we were never taught how to do this! We were never told how to manage our money. We were never told how to budget, how to pay bills, how to invest, or how to save.
We were never taught about best practices like emergency funds or automated investment plans.
Some of us may have been lucky enough to have a parent or older sibling who was good with money. We were able to learn by watching them manage their money. But because money is so secretive, its often hard to see what they were actually doing on a day-to-day basis.
This post will cover a few of the best practices, the best money management tips, and the best ways to manage your money.
If you’re reading this post my guess is that you’re probably already doing some of these things, or maybe all of them! But you might find something new to add to your financial routine. Something to make it stronger and easier to manage in the future.
In the last blog post we looked at the financial considerations when deciding to take CPP early or late. But personal finance is never just about the money. Half of personal finance is personal. The “best” path varies from person to person even when the numbers are exactly the same. When it comes to taking CPP early or late these personal considerations can make a big difference.
There are many “soft benefits” to taking CPP early or late. These benefits can make taking CPP early look more favorable… or it can make taking CPP later look more favorable… it just depends on how much YOU value each benefit.
Before deciding to take CPP early or late it’s important to understand what your goals are for retirement. Not just financial goals but personal goals. What do you want to do in retirement? What does your retirement look like? This may inform some of your decisions around these “soft benefits”
It can also help to have a financial plan and see how taking CPP early or late helps you achieve your financial goals. Everyone is different, and the decision to take CPP wont be the same for everyone.