Today lets take a look at your Personal Money Managers.
You know, the ones you see mentioned in the financial section of your local newspaper.
These are the folks who review your financial status and provide you with advice on how best to prepare for your retirement.
So like the newspaper, we'll take a look at a Case Study (entirely fictitious of course):
Let's look at Ralph and Betty and their 3 ding a lings - I mean children.
Ralph and Betty are in their late 30s and the ages of their children range from 4 to 12 years.
Mr. works for privately owned company and Mrs. is employed by a non-profit organization. Their combined annual income totals approximately $100K.
Within the past year, they moved from a townhouse into a single detached home where they are all very happy.
She drives a fairly modern Honda Civic, while his mode of transport consists of a rather ancient Van.
The other day, Betty casually mentioned to her husband that it will not be too much longer before they will have to give serious consideration to how they will fund a post secondary education for their eldest. Ralph agreed, and added that they should also start to give serious consideration to planning financially for their retirement.
The problem they both recognized, was that after paying their monthly expenses, there was little or nothing left over for such savings.
Not to worry, they agreed that they would contact a Personal Money Manager (PMM) for his or her sage advice.
It did not take the PMM long to hone in on the problem:
Gross Income - $100k
Expenses:
- Taxes of all kinds - except realty taxes - $40k
- Mortgage - Principal, Interest and Realty Taxes - $21.5k
- Food, Clothing etc - $15k
- Car Payment (Honda) / Car Repairs - $4.5k
- Heat & Hydro - $3.5k
- Repairs to Home - $3k
- Insurance of all kinds (house / car / life/ disability) - $3.5k
- Entertainment (including cable vision, internet) - $4K
- Miscel - $5 k
"Your annual income is entirely cancelled out by your annual expenses" proclaimed the PMM.
What to do?
'Ralph and Betty, you have to immediately start to save for your retirements and for the cost of post secondary education for your 3 children and I suggest you the following course of action:"
- Each of you need to open an RRSP Account - for Mr. that would mean an annual contribution of $10,800 (18% of his annual income) and for Mrs. a further $7,200.
- You also need to open an Education Account for each of your 3 children and be sure to contribute at least enough to realize the government's maximum co-contribution. (formula) For the 3 children this would mean an annual contribution from their parents $7,500 ($2,500 per child to receive the government per capital grant of $500).
- And, of course you each must open your own new Tax Free Saving Account which will add an additional $10,000 to your annual bill.
- Oh, one more thing. It is prudent to have at least 6 months worth of income in a saving's account in case of the unexpected (e.g. the loss of one or both of your jobs) - $50,000.
Mr. and Mrs. sit dumbstruck. PMM sits with a great big smile on his face basking in the sageness of his advice.
Finally, Ralph clears his throat and manages to get the following out - but that totals nearly $90,000. "We don't have anything left over now - where are we going to get that much additional money?"
"That's why you came to me".
First you need to sell your home. That will save you mortgage payments, realty taxes, heat & hydro, and of course there will be no need for repairs.
Second, you need to sell one of your cars.
"My van"?
"No, you are going to need the van - I am talking about the Honda. With its sale you will get out from under $3,500 in annual car payments".
"Whaaat else"?
Glad you asked...
Now with respect to Food & Clothing. Have you thought of the Food Bank? Plus there are more second hand clothing stores than you can shake a stick at.
"Where'd we live?" asked Mr.
"Ah, that's why you are keeping your Van"!!
As I see it...
"Galagher"
p.s. My next Blog will deal with financial advice from their elderly neighbour.
