Financial Planning Efficiency

You cannot do everything, but you can do more if you apply your resources well.

We have looked at your what, when, who, and what with questions. The what if is there too. If they are developed, then the next question becomes obvious.

How do I make it work?

This is the point where you make a crucial decision. Who is the planner? There are several choices. Professional financial planner, life insurance or investment advisor, lawyer, accountant, parent, other.

None of those are right. There is only one planner. You! Everyone else is a helper. They provide advice, tactics, and technique. Technicians.

You hold the strategic vision and the best idea of how resources interact in time and with other people. You are the only one who will suffer if it fails. You are, and must remain, in charge of the planning process.

Never give up strategic control.

Advisors strategic help is limited

Their help can address the strategic layer but only with your involvement. They are most useful when they review your vision and strategic questions and offer advice in three areas:

  1. Identify conflicts.
  2. Improve completeness
  3. Develop priorities

An external examination of your strategic vision is important. Advisors have seen hundreds of situations, you are just formulating your first. Most complicated things don’t turn out well on the first try. Be open and learn to use other people’s experience to improve your plan.

Repeat. Never give up control of the plan. Rework yours until it is ready for action.

Helpers provide answers to only one question, “HOW?”

Advisors, all of them, are about tactics.

If you have a sound strategic vision and some detail supporting it, you will be able to understand the tactic in a non-technical way and assess if it meets your purpose and it fits within your limits and priorities. If you have a weak purpose or vision, you will be “sold” tools and techniques that may or may not help you.

Expect advisors to present their How solutions this way. “Given your purpose and resources and priorities, for this particular part, there are these choices. 1, 2, maybe 3. Here is how each would fit. I recommend …………………… because.”

The tools deal with moving money in time, and/or risk.

First there must be some money available.

If your living costs and debt payments consume your entire paycheck, you have will need to adjust your lifestyle. You cannot use all the money for lifestyle and debt payments. You know that won’t work for long. Once you learn how to have savings, you can decide how to use them to best advantage.

Moving money to pay for the past

Debt management should be your first order of business. Most debt requires interest and in many cases, the interest you pay is not tax deductible. If you invest and earn 8%, pay 3% in tax, and use the rest to pay debt charges, you would have no gain if the debt cost 5% or more.

Investing is a good habit, but think about whether reducing debt is a better financial option. Let’s look at its value to you:

  1. It provides an after tax rate of return equal to the interest rate on the debt.
  2. Paying down debt is riskless. The risk is in what you got for the money you borrowed. You owe it with certainty.
  3. It improves your credit rating which makes it easier to get money should you need it in future.

There are no special tools to do this. It is technique and there may be ways to use new loans to pay old ones. New loans could be cheaper or more flexible.

Many people do a little of both investing and paying off debt. Investing is a skill where experience is worth something to you. Even small investments trigger emotions you must learn to control.

As debt comes under control, look to the future.

Think about how to allocate assets. There are five general categories.

  1. Assets you use. You car, your home, your stamp collection, jewellry, and so on. They tend not to be liquid and they don’t produce income.
  2. Assets you hold for unforeseen expenses and short term saving for large purchases, like cars, house renovations, maybe vacations.
  3. Assets you hold for future income. Most often these are tax advantaged investments like registered retirement savings plans or pensions. These assets are often fixed income assets like bonds and term deposits, even dividend paying stocks. They produce either tax sheltered income or top rate taxed income if not sheltered.
  4. Assets you hold for growth. Usually stock market assets but they could include rental real estate or even vacant land to be developed. Almost anything will fit here.
  5. Assets you own now but expect to dispose of in the long run. Assets here include the family business, vacation properties, maybe an art collection

As with all planning balance is important.

  1. Reaching retirement with a $2 million house, $100,000 in jewellry and nothing else is not going to work. Organize assets you use carefully.
  2. Some people use lines of credit against assets they use to deal with the unforeseen expenses and short term purchase layer. That is acceptable but should go away eventually.
  3. Assets for future income should be more cautious than other investments. Pay attention to your pension plans and be sure they become more predictable as you grow older. Equity investments when you are 30 probably are not wrong, but they become wrong as you approach retirement. Never rely on “average” rates of return. The timing of market fluctuations can be a serious problem.
  4. Assets for growth are the ones that may grow, stay the same, or even lose, without affecting your lifestyle much. You can deal with variations in value by waiting. These assets will produce wealth that can expand lifestyle someday.
  5. Disposable assets are trickier to deal with because you don’t know what their value will be when it comes time to use the money to support your living. For things you use like a ski chalet, cottage, or condo in the warm part of the world, it helps to think of them as use-assets with the idea of selling at a specific time in the future. The idea is to sell into a good market somewhere close to your target date. Probably a plus/minus five year idea. Eventually the asset goes back into the income or growth pool.

Investment tools

You can create a portfolio in many ways. It should be balanced enough that it does not frighten you periodically. It should optimize returns so you can reach your goals sooner or with less capital input.

Think about investment containers.

A registered retirement savings plan is not an investment it is a container for investments. Same idea with a Tax Free Savings Account or a pension plan. Whatever won’t fit into those, and they all have limits supplied by the taxing authorities, ends up in an “open” account. Taxable.

You should manage your overall holding rather than build a particular portfolio for each part. Tax considerations will move you towards placing highly taxable income in tax shelters and more advatageous income like capital gains in the open account. Running tax preferred income through a tax shelter tends to delete the tax preference.

There are timing considerations too. Maybe paying more tax later is better. Later will be far in the future to make that work. You can calcualate the breakeven point.

Building a portfolio

You could do it yourself if you have the time to do research, accounting, and reinvestment management. Also notice the need for emotional strength to stay invested.

Alternatively, you could be a passive investor and just buy a low fee index fund. Probably more than one to give you some exposure to different assets whether in geography, or asset type. This works, or has worked in the past. We are not so clear about the future.

You could go to an active manager through some form of investment fund. They charge more and yu may not do better than apssive. Careful selection of managers could add value.

You could choose and ETF. (Exchange traded fund). These are a managed investment fund that you buy and sell like a single stock. They track everything from an index, to an industry sector, to a place, to commodities. They charge fees but usually not high fees compared to investment funds. The problem is there are thousands to choose from. More of these than there are stocks to buy.

You will still need to consider how to build a balanced portfolio. ETFs tend to be very specific. Be a little cautious with fees. In this kind of investment very low fee ETFs tend to underperform after expenses. A little research could sort that our for you.

Your best results always happen when you allocate your capital well. Think business instead of a particular stock. Think about your time frame. Think about costs to oeprate both in terms of money, time, skill, and new potential risks like emotional responses to adversity. Understand your tax situation in some detail and use tax advantaged structures when possible.

For most young people, low-fee passive will generate a useful return. Other tools may work better later in life. Then with a swing back to passive late on. It’s an individual thing.

Retain strategic control

No matter the tool you choose, how you get it, or who you get it from, always relate back to the purpose. How does it help you achieve your life vision?

Tomorrow will be about insurable risks.

I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates.

Please be in touch if I can help you. 705-927-4770

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