The article “Five Stupid Things We Do With Our Money” was originally published by Geoffrey Vendeville on August 30, 2016 on Toronto Star Touch.
Most of us want to be smarter with our cash, so here are a few common financial mistakes to avoid.
A recent poll for Interac by the firm Ipsos said two-thirds of Canadians wanted to their financial habits to improve. But how do you start? The Star asked Chris Snyder, a personal financial advisor, chair of the ECC group and author of; Brenda Hiscock, a CFP at Objective Financial Planners; and the FrugalTrader, the blogger behind MillionDollarJourney, about our most common financial mistakes and how to correct them.
We don’t save
About 43 per cent of Canadians don’t save as much as they would like to, according to the Ipsos poll from last fall.
There is no magic formula to determine how much one should save, but Snyder says 10 per cent of your income is a good rule. Those who want to retire early should aim for 20 to 40 per cent, according to FrugalTrader. (He goes by a moniker to reveal his personal financials online.)
Recent graduates who can resist blowing the paycheques from their first “real” jobs and maintain a Spartan student lifestyle will be well ahead of the game, he added.
It’s a good idea to begin saving even before leaving home, when expenses are lower, says Hiscock.
We rack up debts
Many Canadians overuse credit and amass loads of debt for purchases they could have made in cash, the experts say. Paying down debt quickly is a form of savings, Snyder notes. “Always pay your credit-card bill in total if you possibly can,” he says.
People with student loans should make more than the minimum payment to avoid paying a fortune in interest, says Hiscock. As for those over 40, they should plan to retire debt-free, she says.
We make risky investments
One of the most common mistakes rookie investors make is picking penny stocks, says the FrugalTrader. They “want to hit that home run right away, and what happens is they lose all their capital, become de-motivated and stop investing altogether,” he says.
It’s usually wiser, he said, to play it safe by investing in index funds, which follow a market or market segment. “Most mutual fund managers don’t beat the index. So what’s the probability of a regular Joe beating the index?” he says.
People often don’t plan their investments properly, so they need a good adviser, says Snyder. “Underline ‘good’ because there are all kinds of people out there willing to sell you things,” he warns. A competent adviser will have certain professional credentials (CFP, RFP or CIM) and be focused on their clients’ best interests, including how to balance their goals, income and lifestyle, he says.
We don’t budget
Almost half of Canadians have a budget, and those who do almost always stick to it, according to the 2014 Canadian Financial Capability Survey. But the report also says it is “troubling” that the number of Canadians who use a budget has decreased since 2009.
“People just don’t do it,” says Snyder. “It’s almost as if they’re afraid to find out what they really spend.”
Financial planning provides an opportunity to reflect on your goals and helps limit unnecessary expenses.
The FrugalTrader uses the site Mint.com for his own budget, but he says a simple Excel spreadsheet will do.
Hiscock says people often forget to set aside money for emergencies such as home repairs. She suggests keeping three to six months’ income in the bank for a rainy day.
We fear the tax man
Who hasn’t left a letter from the Canada Revenue Agency unopened, hoping it will just go away?
“They look at the tax department in fear,” Snyder says. “When you talk to the tax department — I’d say five or 10 years ago, someone gave them a great course in public relations — they’re usually very accommodating, nice to deal with.”
A young person with income from an employer and who doesn’t own property should do their taxes themselves to learn how the system works, the experts say.
If you run a business or think you are eligible for write-offs, it’s best to seek advice, Hiscock says. “A professional should be involved, especially in the early days,” she says.