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Financial Planning

Five big money blunders, and their fixes Add to ...

Mistakes can be great teachers, but you should avoid experimenting too much when it comes to your finances.

Not having a good handle on your income, debt and savings through life's stages could land you in difficult circumstances, says Greg Pollock, Toronto-based president and chief executive officer of Advocis, a trade and educational organization for financial advisers.

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Money can provide security and peace of mind, so it is too important to fool around with, yet people tend to make the same mistakes over and over, says Mr. Pollock, who is a certified financial planner.

The effects of such mistakes can be amplified over the course of one's life. "I see things that make life more difficult in the retirement years that could have been fixed early on," says Jolene Laing, a ScotiaMcLeod wealth adviser in White Rock, B.C.

How effectively you recover from money miscues depends largely on how far away you are from retirement, adds Al Nagy, a financial planner with Investors Group Financial Services in Edmonton.

Here are five of the most common mistakes and ways to correct them.

The mistake: Not having a financial plan

Without one, it's difficult to determine whether you're overspending or channelling money where it ought to go. "You'd be surprised by how much you're spending on what others might consider throwaway items," says Mr. Pollock. Will you have enough for today and down the road?

The fix: It's never too late to establish a budget, although the earlier you start, the better your chance of reaching your goals, says Ms. Laing. Do-it-yourself tools such as software programs can help track spending and saving, and facilitate goal-setting. But a financial planner can provide insight and suggest strategies to deal with the unexpected. "What a planner will do is help you think long term," says Lee Anne Davies, the Toronto-based head of retirement strategies for the Royal Bank of Canada.

Adds Mr. Pollock: "When you don't have another pair of eyes looking at your plan and asking, 'Have you met your goals this past year, and if not, why? What do you need to modify things?' you can end up in difficulty."

The mistake: Underestimating insurance

Sufficient coverage can mean the difference between weathering an injury or death and losing everything in a lawsuit. But "a lot of people think, 'I'm young, I'm not going to get old, sick or die, I don't need insurance,'" says Mr. Pollock. Having the right type and enough insurance is part of good risk management, important in any financial plan, Ms. Laing and Mr. Nagy say.

The fix: Find out which types of insurance are needed now and over the long term. "If you buy insurance when you're younger and healthy, it's a lot less expensive than if you wait until you're into your 40s and 50s," notes Mr. Pollock. Among the most common policies are health, disability and life (even if you have them at work, they may not be sufficient if you have dependants). Also consider long-term care (people are living longer). Don't forget there can be different products in each category. For instance, life insurance can include term (temporary coverage), permanent (lifetime coverage with tax-deferred savings) and universal (lifetime coverage with tax-deferred savings).

The mistake: No emergency savings

It's vital to have a healthy rainy-day fund in case you lose your job or need money to cover a broken furnace or other unexpected cost. "You should have four months worth of cash funds available for emergencies, rather than having to cash in valuable assets that end up not being tax-advantaged the way you had planned," says Mr. Pollock.

The fix: Pay yourself first. Set aside money from every paycheque, no matter how small (such as through automatic withdrawals from your bank account or pay, or from your income tax refund) into easy-to-withdraw savings like money market funds, savings bonds or a tax free savings account (TFSA). Mr. Pollock recommends paying off any high-interest debt first, because the 2 per cent or 3 per cent interest you may earn in a savings account wouldn't be worth it if you're paying 22 per cent on a credit card. The experts recommend TFSAs, which bear interest that doesn't have to be claimed on income tax returns.

The mistake: Ignoring inflation

Inflation can slowly erode savings, says Ms. Davies. Inflation is even less on people's post-recession radar screens because we are in a low-inflation environment, she says. "But in the long run, especially if you're living on a fixed income, inflation can be devastating because buying power can be reduced."

The fix: Consider inflation in savings projections and goals. "Historically, three per cent is a reasonable inflationary factor to use," says Mr. Nagy. Ask your adviser for guidance, but there are online tools (the Bank of Canada's Investment Calculator, for one) to give you an idea of how inflation may affect your savings. Investors might also consider inflation-indexed (also called inflation-linked) bonds, including real return bonds (RRBs) issued by the Government of Canada. Such products should be part of an overall diversification plan, warns Mr. Nagy. "Equities are also a great hedge against inflation, which can be a healthy thing for the economy," he says.

The mistake: Focusing solely on accumulating capital

You need suitable savings and returns on investments, but "it's not just about the money - it needs to be about what's important in your life," says Ms. Davies, who has a background in gerontology. A report by RBC, part of a retirement research series developed with Ontario's University of Waterloo, notes that retirement has become a transition into a whole new phase in life that can last more than 25 years, Experts say too many people, for instance, don't take into account the health challenges that could come their way. "Everything can change in a moment," says Ms. Davies.

The fix: Take a holistic approach to planning, balancing and synchronizing both the physical and financial aspects of your life, stresses the RBC-University of Waterloo report. For instance, RBC advisers recommend choosing three areas of your life that matter most - such as improving health and reducing stress, strengthening connections with family, helping loved ones financially, or even buying a new home or a vacation property - before helping them customize their plans. Adds Mr. Nagy: "Financial planning is a process, and there are variables, such as cash, risk management, capital needs, estate planning." Ms. Davies advises sharing your plan with the entire family, especially if powers-of-attorney are involved.

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