This is where your finance takes place

First, I would like to follow up on yesterday’s post on “Where is Prosper.ca”. I’ve been in contact with David Andreatta from the Globe and Mail and he wrote an article in today’s edition. You can read more about it on the Globe and Mail. I was glad to hear that a lending community will be established in Canada. Many thanks to David for mentioning my blog in the Globe!

Now, back to today’s post :

This is definitely on of the major source of financial discordance between the baby boomers and the generation X (or is it Y? maybe Z? anyway, I’m 25 so you can figure it out!). Several baby boomers think that their property is their retirement plan. If it’s completely paid off, they think they have enough money sitting there to live long and prosper. If they don’t have other source of income other than the government’s pension they are probably wrong.

Your main residence is not necessarily an asset. As we previously discussed on this blog, an asset must create income or positive cash flow. This definition is even more important when you retire and you depends on your assets to meet your financial needs. As most retired individuals are not renting their basement or are not operating a company within the house, their property is not an asset. Every month, they have to pay their utility bills, their taxes and cost of maintenance. With $800 a month, you might find the road to be a little longer than expected.

I just have to sell my house and I’ll make 400K, they will answer back quickly. That part is true, but do they really want to leave their house? All their memories and souvenirs are within those walls. In addition to that, they still need a place to live. The other thing is that they might not be able to find something that suits them for a lower cost. House market is pretty high right now and downsizing often means going back to that small 1960’s bungalow with several reparation to be made.

Cost of retirement home are sky rocketing and you are not getting much service for the price you pay. It will easily be $1,000 a month if you need services such as nurse inside the building. Besides that, you can always rent a nice apartment or downsizing you house. In both cases, you just increase your monthly payment. Therefore, you will need more money to live on and your profit from the sell will slowly disappear.

Your property surely worth something and the day you will sell it, you will get a big chunk of money. I’m not questioning that at all. However, it will never create income as is. Unless you sell it, you won’t benefit from the equity in your property. Reverse mortgage is another option but I will write about it another day.

There is still a way to make you property an asset and still live at the same address. By doing a Smith Manoeuvre, your new mortgage will become tax deductible and you will earn monthly income from your investment. This could be a good way to benefit from the equity lying (I prefer the expression dying) in your house.

This is definitely a highly debated topic. I recently heard about a US study on the added value of a financial consultant managing your personal finance. They were explaining that in most cases, the investment portfolios were not showing a better performance with the help of a financial consultant. There are several good and bad points to financial consultants but one thing is for sure, you don’t necessarily need one to become wealthy.

In fact, several individuals are doing just fine without them. They created assets generating sufficient income to meet their needs and they are fine with that. Some others don’t believe in the stock market and invest in real estate properties or other assets. I can’t really blame them after the techno bubble and other market’s fluctuations.

You can also learn everything by your own and be a pro of personal finance. There are enough resources on the internet (such as this blog and many others!) that you can make your own decision and create wealth from your own knowledge.

If you are not passionate about personal finance or you simply feel unsecured to manage tax laws or leveraging strategies, I strongly suggest you get a financial consultant to help you out. The main point of this post is to reposition the role of a financial consultant. He should draw up the main guidelines and provide you with technical advices. However, you need to remain in control of your finance and be able to dig up if you don’t understand completely his explanation.

In the end, financial consultants are definitely a good support for personal finance. However, you don’t need them to be rich and there is no consultant that will make you a millionaire if you can’t get it done by your own. They are there to help you out with what you have. Unfortunately, they are not magicians.

I’m writing another post on financial clichés. There are so many of them, it is not even funny!

When you pass away, you don’t need money anymore. All you need to leave behind is enough to pay for funeral, flowers and maybe a few debts. Too many times I’ve heard this kind of reflection. I always smile back and ask: “What about your wife and children?” Life most goes own, but they will surely need a way to compensate for your income.

Paying for the day you leave is not enough. A 100K is not enough. In order to do some good estate planning, you would need much more than this. In fact, you need enough money to cover for the number of years your children need before majority. For most cases, I would strongly suggest to consider the option of a 20 years term life contract.

In order to calculate the right amount, you need to establish the portion of your income that is not related to your own expense. In other words, you need to calculate what you earn less what you cost as a person in term of food, car, clothes and other expenses. If you only take 30% of your income for yourself, it means that your family rely on 70% of your pay check. If you leave them without insurance, they might end up with difficulties such as selling the house or cut in children’s education.

Most insurance broker will be able to calculate the right amount required in order for your family to live on with the same lifestyle. When he will lift up his eyes from his computer, make sure to read the amount on his lips as he is speaking. This might be the only thing you remember when you will wake up after fainting. The amount will be substantial, probably more than 400K. It sucks to talk about death, but it sucks even more if you leave your family with nothing but flowers. Those possibilities must be discussed and protection must be purchased. Don’t jump if your insurance broker suggest an half of million dollar policy. For an individual making 80K a year, it could easily go up to a million dollar. As I always tell my wife, I worth more dead and alive!

As you can see, a 100K insurance policy is very far from the truth. It might be true for somebody who is living on his own and has no dependent. But for anyone who has a family, you definitely need more coverage.

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