Words Confuse

Words have their dictionary meaning and they also have their emotional meaning.

Some words are warm and fuzzy.  Puppy, bonus, guaranteed, better, free, healthy, and rich.  We like these.  Other words are not so fun.  Late, bankrupt, overdraft, sick, fired, homeless.

Words are both rational and emotional.  People must be cautious using them.

It is especially true for professionals who have narrower ideas about some words and who see many examples in use.  They lose the emotional part.  Sometimes it is hard to get it back.

A common problem is that professionals think about words in term of what they do while clients think about them in terms of what they are.  Consider the tax preferred offering in Canada.  The Registered Retirement Savings Plan.  Registered is good.  Retirement is a long way off but nice.  Savings are good.  Plan sounds useful.  It is, therefore, a good thing.  I get a tax write-off and it grows somehow or other.  It is an abstract thing that sounds good.

It is easy to sell product to this kind of client. They have no way to assess value.

Professionals look at an RRSP in terms of what it does.  It maximizes capital by allowing the investment of pretax income.  For many people, two thirds more.  It allows income to be earned without current taxation.  A higher rate of compounding.  Growth with no tax is very helpful, but it has some downsides.  There are stringent limits on how much you can put in and on what you can invest in.  There are rules about when and how much you must take back out and make it taxable.  It can be very tax expensive at death.  On balance it is a useful tool to accumulate money for spending after retirement.

The key word is tool.

An RRSP is not an abstract thing that creates a tax refund.  It is a device to enhance the financial power of the user.  It is like any of the many financial tools.  Insurance of all kinds.  Corporations, trusts, investment funds, pension plans, lines of credit and mortgages.  They do something in particular.  Efficiently.

Tools are easy to understand.  You judge them on their effect.  The what, not the how.  People do not care if they own an electric drill.  No one really wants one.  The only reason they own one is that sometimes they want holes.  The holes are the what; the drill is the how.  Factors like precision and amount of use would drive the choice of one drill over another.

What is strategic. How is tactical.  Good planning demands that you focus on the what.  You cannot judge the how unless you know the “what”,  the “what with” and “when” limits.

Know the “W” questions before the how.

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

Contact: don@moneyfyi.com 

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