Personal Finance

Winnipeg Free Press - PRINT EDITION

FINANCIAL DECATHLON

10 events in financial success

By: Ted Rechtshaffen

Posted: 08/9/2012 1:00 AM | Comments: 0

One of the glamour events of the Olympic Games is the decathlon. Many say the gold medallist in decathlon is the greatest athlete in the world. This herculean event is really 10 separate events that range from the 100-metre sprint to a 1,500-metre race, and from the high jump to the javelin toss.

In my view, building wealth and managing wealth is similar to the decathlon in the sense that it takes many disciplines to make it all work together.

Too many people focus on just one discipline (investment management) while the other nine don't get the attention needed.

Here is my recipe for the 10 events of your personal financial decathlon:

-- Income: Your employment income is obviously a key driver of wealth. Ways to boost income would include more education, working harder, negotiating a raise, ability to anticipate the needs of the boss and the market, and political astuteness. Sometimes there is just luck involved.

-- Expenses: We see clients who spend $25,000 a year and clients who spend $800,000 a year. The key to expenses is having a decent sense of what you actually spend, and to have the spending aligned in some way with after-tax income. That could mean you spend $500,000 a year, but are still a saver in relation to your after-tax income. Not surprisingly, some bad habits around gambling, drugs, alcohol, etc., can push your expenses far beyond a healthy level.

-- Taxes/government benefits: The government gives and the government takes away. Being tax-smart in terms of taking advantage of RRSP, TFSA, RESP, RDSP, Old Age Security, CPP benefits, etc., can really add up over the years. On the other side, being smart about ways to reduce taxes paid can make a big difference over time. This goes from the basics of writing off all you can to using other strategies around insurance, trusts and corporations.

-- Investments: This is one of the more difficult ones. The power of better investment performance is clear. If you put $10,000 into an account for 40 years and earn six per cent a year, you have $1.65-million. If you do the same and earn seven per cent a year, you have $2.15-million.

Like many athletes, you want to have a clear discipline that you repeat over time to have the best chance at investment success. Keeping away from the junk food of stock tips and high flyers, and focusing long term on dividend payers with increasing cash flows will play an important part in performing well.

-- Insurance: Everyone gets injured at some point. You need to make sure you or your family don't get permanently hurt financially. From personal experience, I know making sure a young family is properly covered against the death or critical illness of a parent can make a big difference to a couple of generations.

-- Inheritance: This is one you don't have a great deal of control over (although you really do need to discuss it in some detail with elderly parents). Just as some countries can afford to provide better coaching and training facilities, some people get meaningful inheritances.

-- Family status: From a financial perspective, the best scenario is a marriage for life. It provides stability for planning, full opportunities for tax planning and income splitting, and ideally for sharing responsibilities that can enhance each others' goals and careers. One or two divorces can cause significant financial damage. Being single also minimizes some of the tax and pension advantages couples benefit from.

-- Pensions: This event is evolving quickly from the relative stability and certainty of a defined-benefit pension plan to the potential but risk of a defined-contribution plan (group RSP). Taking advantage of company matching and contributions, and the benefits of any government guarantees to pension values, can play a big part in your overall wealth.

-- Debt management: Contrary to some people, I think there is nothing wrong with having debt. The key is for the debt to be smart debt. That would include low interest rates, using the funds for a house or education, writing off interest if possible. When high-interest debt is incurred and the funds are spent on disappearing or depreciating assets, this is a big wealth destroyer.

-- Constructive risk: Starting a company, taking a bit of a risk with a real-estate purchase, taking a job out of town. These all have an upside and downside, but most wealthy people have leaned toward taking these risks over their life, and they are sometimes a necessary part of the financial decathlon.

Much like the Olympic decathletes, you don't need to be great in all 10 events, but to win your personal financial decathlon, you need to do pretty well in most of the 10 events to achieve your own gold medal.

Ted Rechtshaffen is president and chief executive of TriDelta Financial Partners.

-- Financial Post

Republished from the Winnipeg Free Press print edition August 9, 2012 B8

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