Ages and Stages

Our modern every-day term “economics” derives from the Latinized Greek “oeconomica”, which meant household management. Today’s version of “home economics” is studied by only a few at university but it impacts all of us.

The reality is that money is the ultimate scarce resource for most of us. Family economics ultimately starts at the wallet: every expendable dollar in our pocket has a multitude of potential claimants. Some of these choices are trapped in the Today/Tomorrow trade-off. When you sit down with yourself to make these decisions, actively (and metaphorically) place another person at the conversation table – YOU in the year 2030! It is too easy to give this “person” – the retired YOU—no voice or standing in today’s discussions. Here are some tidbits of advice which can be applied at various stages of life:

Family budgeting is a classic way to keep control of family finances.

This requires some attention to detail, both in collecting the list of family outgoes, and aggregating and analyzing the results. This works well for some but not for most others. For the latter, discipline can nonetheless be attained by some “reverse financial engineering”. The incoming monthly cash flow needs to be skimmed off the top to those higher purposes (debt reduction, retirement saving, a sinking fund for a new car, etc) before entitlement consumption empties the cash bucket. Credit card mismanagement needs to be short-circuited by a) limiting the number of cards one has and b) keeping a credit card limit to a reasonable level (and undoing any unilateral limit increases “graciously” bestowed by the credit card companies). The undisciplined should run the other direction quickly from the line of credit financing now so widely available from financial institutions because it permits a Never-Never Land of debt reduction.

Put someone in charge as the Family Financial Officer

If you are single, you are it! For couples, I hypothesize that two-thirds find that one of them in the relationship is inclined to financial management. This is good! Put that party in charge and leave them there! Where both are so inclined, this isn’t necessarily good! Turf wars may break out, depending upon how the couple function together. At the other end of the spectrum, neither party is so inclined, and this is trouble! These family finance functions cannot be jobbed out in entirety. So, either the tasks are ignored, at peril, or one of the parties needs to come to the plate and join that two-thirds majority.

Treat your family finances like a garden

If you really like gardening, do all the work maintaining it yourself, and be sure to read garden magazines to know what to do. If you don’t enjoy it, farm it all out and spend your time on other things. If you like gardening but are time constrained, figure out which tasks to job out and which to do yourself. Do you keep the easy tasks, like lawn cutting, or the harder tasks like bed maintenance, etc? So it is with family finance. Do you have the time, interest and skills to stay abreast of tax law and stock markets? If not, sub these out to professionals. If you sub these tasks out, choose your advisors carefully. Find ones who are ethical, disciplined and don’t drive Porsches. Trust them, but stay in their backyard, so you know what they are doing for you. Empower them with a philosophy statement of how you wish to pursue your financial goals (eg risk profile) and monitor that they are doing so.

Raising a family?

Use RESPs! You can’t beat the automatic 20% rate of return that results from government matching. Even if you metaphorically put the funds in a sock after that, you are still way ahead. Don’t procrastinate too long- there are only so many years to contribute, and there is a legal limit to how much catching up can happen as your child gets older.

Social scientists say that attitudes towards money are formulated before children hit grade school! We typically don’t get a lot of formal education in managing our own finances. More likely, we get “on-the-job” training, starting with the role-modeling within our family home as we grow up. Some parents deliberately include money education in their parenting: others don’t. For the teach-by-example group, sometimes the role-modeling lessons are good and sometimes they are bad. Outside the micro level of the family home, there are also macro level impacts being exerted on the child at the societal level. These are more often bad than good. The evolution of a rise in the living standards in the developed world has produced the most broad-based middle-class in the history of this planet. With this comes succeeding generations who have acquired ever higher base levels of “entitlement”, all of which costs money. High base-line expectations tend to raise significantly the baseline of financial outgoes, which leaves less for Tomorrow.

You can’t ignore probability statistics…

… like mortality tables. Address having adequate life, critical illness and disability insurance while your life stage requires it. Those monthly premiums are another part of “top” dollars!

Empty-nesting?

Make sure you have a plan to use/retire all of your RRSP contribution room once the kids are out on their own and before your retirement. This may require some massive contributions in later life, but find a way to do it. Use TFSAs as a second-level of savings once your RRSP room is caught up. Get a proper financial plan by the time you hit age 50.

Dealing with “Lottery” winnings

You receive a surprise bequest from a maiden aunt or your parents. The School of Behavioural Finance suggests that you will treat this money differently from the salary you bring home each month. Apparently, we create “pots” for different sources of incoming money, and apply different templates of financial management to them. The truly disciplined will apply all of this found money to some higher, long term purpose while the undisciplined will “blow it” on some toy or treat. I think middle ground works – apportion the found money to some “Todays” and some “Tomorrows”, and be reasonable with the proportions.

Many issues await those near retirement

Family conversations and decisions are critical and, surprisingly, often lacking. If you didn’t get a financial plan done in your early fifties, you need one now! The biggest question in life becomes: will there be enough? The Today/Tomorrow trade-offs still exist, albeit with a smaller timeline than before. In the absence of professional third-party analysis to provide guidance on this, couples may disagree on a subjective assessment of this question, and that incongruity will hamper and haunt them until it is sorted out. The range of questions are classic– how long to remain at work? How rich will the discretionary part of retirement be? How much is left for the next generation?

The social connections from work evaporate on retirement and replacement of connectedness is important. Hermits aside, people generally need to be connected with fellow human beings.

Those who have just entered retirement…

…need to pursue their retirement dreams without delay. The unknowns of health hazards come out of nowhere, and quickly redirect the retirement agenda. As we age, dream travel can become overly wearisome – try two weeks of 6 am starts to join a bus tour through Europe!

For seniors

One of the most difficult issues is vacating the “old homestead”. The unfortunately right answer is that seniors need to move before they need to move. Those who “get that”, come out on top. Those that don’t often find themselves in a sticky situation, where they cannot, or will not, be able to transition to their next, and perhaps last, home.

And then there was one!

Couples seldom pass away simultaneously. If the Family Financial Officer is first-to-go, the survivor should not be burdened with acquiring the skill-set at age 80! Ideally, the couple should address this and plan for the knowledge transfer. If the non-financial spouse is resistant to this burden, have him/her talk with peers who do carry this skillset.

And then there are none!

Last-to-die must play out the inevitable financial drama of whether enough money was accumulated during life to make it to the end, which may include expensive personal care. If an estate value does remain, then identify who you love, and include those people in your estate plans. If you have difficulty deciding who is on that list, do not use this as an excuse to procrastinate! Think about leaving some legacy upon this Earth. I have written before about the N+1 Strategy, where your list of residual beneficiaries is increased by one to include some charitable good. The tax break on this gesture will mitigate significantly what you are taking away from loved ones.

Article published: Dec 2010