Habits

Hi folks,

There are various different "levels" at which an advisor can assist the client. These can range all the way from the very basic "coaching" to help you develop habits, to the very involved process of estate planning.

In my experience thus far, most people who haven't before worked with an advisor are in the riskiest place of all, the "I don't have an emergency fund" place. Usually, when I encounter this circumstance, the first thing we'll do is get started on some type of a regular savings plan. Many advisors will, at this time, suggest that the client begin an RRSP and suggest using some specific mutual funds. This is where I differ.

The problem with the "I don't have an emergency fund" place is that the risk of needing to dip into that RRSP fund is huge. All it takes is a broken vehicle, a leaky roof, or a dead furnace to erase all that hard work. People will either dive deep into short term debt solutions such as credit cards or lines of credit, or redeem RRSP funds, often incurring sales fees and usually causing some serious tax inefficiency, not to mention the forever lost RRSP contribution room.

So, the risks are pretty high, as most people will at some point in their life encounter the broken vehicle or dead furnace problem.

As a risk management guy, I'm always looking at ways to reduce risk. The best solution I have seen for the beginning saver is to start by building good habits.

Good habits to build:

• save some of every single paycheque
• budget your cashflow and monitor your expenditures
• limit the amount of impulse purchases to a fixed dollar amount per week or month
• never ever touch saved money without due consideration as to the consequences of that action

That last point is essential, and here's why. I've worked with a number of younger families (30-45 years of age) who have made a HABIT of redeeming their RRSP funds or other long term savings to offset shortfalls in cashflow, to pay off credit cards, or to pay for trips or other big ticket items. The problem with this behaviour is that, psychologically, the individual has now crossed the "Do Not Touch This Money" line. That may sound like it's no big deal, but people tend to repeat the behaviour. This is what takes most people off track from reaching their financial goals, and what usually leaves them mired in the short term debt cycle.

So, learning good money habits is essential. In order to do this, the advisor must act as a coach, encouraging the client to save in low risk, low volatility, liquid vehicles such as high yield savings accounts or money market funds so as to build up an emergency reserve as a cushion. Then, only after the client has been able to develop saving as a habit, should we look at putting some of it away for longer term goals.

Have you ever redeemed money from your RRSP? When was the last time your credit card had a zero balance? Perhaps finding a good coach would be helpful.