I read an interesting article. Here are my thoughts on it.
Source/Issue: “The 20-minute financial expert” , (MoneySense , www.canadianbusiness.com )
Written by: By Ian McGugan and Duncan Hood
Key points from the Article:
1. This article attempts to give the reader a good basis on personal finance related topics such as how to save, smart ways to invest, tax tips, how to use leverage for benefit, insurance, will , how to find a financial adviser, and how to retire. One of the key points is paying yourself first. This is a very popular concept in personal finance and is recommended by a lot of financial advisers, bank employees, articles and books. The concept is to automatically withdraw a set amount from your paycheque . This is supposed to force someone to save and learn financial discipline.
2. Another key point from this article is about how to invest your money smartly. It covers two important concepts in investing, diversification and keeping transaction costs low. It recommends investing in diversified , low cost mutual funds as a investment strategy for people who wants to start investing, and doesn’t have the time or expertise to invest in other type of investments. This is also a very popular concept in personal finance , and is recommended my many financial journalists and advisers.
3. The article also covers how to handle taxes. Its main view is tax minimization is a waste of time, since the system is set up to discourage it. It provides steps on how to approach your tax. The steps are, save all your receipts, contribute as much as possible to your RRSP, take advantage of spousal RRSP contribution, and use tax software if you want to do your own tax.
4.Insurance is also covered by this article. The article’s spin on insurance is that a person only buys insurance for events that are unlikely occurrences, and if the consequences of that event(s) will be expensive. Also that term policies are the best approach for life insurance, life and universal policies cost too much, and that it is not a good idea to combine savings and insurance in universal policies. It also suggests a user increase their deductible to reduce their monthly cost, since most claims are big ones for house insurance or auto insurance. The article advocates shopping around for insurance, and buying it only if you need it.
5. The article covers retirement, and it takes an interesting approach to retirement. It goes against the norm, and indicates you don’t need to save too much for retirement. The argument for it is that by the time you reach age 65 you would have paid off your house , and your kids would have all grown up , and you don’t need to save any more money reducing your overall need for money. Also that government benefits kick in, and if you are not looking to change your life style drastically you would be ale to sustain your lifestyle.
1. As mentioned before this article attempts to give the reader a good basis on personal finance related topics such as how to save, smart ways to invest, tax tips, how to use leverage for benefit, insurance, will , how to find a financial adviser, and how to retire. The biggest critique I have about this article is, by attempting to explain many topics at once it reduces the seriousness of the topics, and gives the reader a false sense security that they have enough information to understand the concept. Each of these topics can be standalone articles or even series.
2. The author starts off the article by implying if you follow “pay yourself first”, and allocate some money to yourself first from your paycheque, you don’t need to have a budget. “You’re done. By saving first, and spending only what’s left over, you never again have to worry about sticking to a budget or falling victim to temptation.” This will work if someone has a cash budget, but even than they will miss out on things that they may only see if they had a complete budget , like the one we did in class, that helped create a balance sheet, and cash flow statement for an individual. The paying yourself first is a good idea to help someone save, however that idea itself doesn’t eliminate the need for a budget.
3. The articles talk about using leverage for many purposes, such as investing. From my experience most people don’t have the discipline to use leverage properly. I feel that it doesn’t highlight the risks involved in using leverage for purposes such as investing. The good thing is it highlights not using leverage for want spending such as a cruise. Another good aspect in terms of the discussion of leverage is , it highlights the fact when you borrow to invest as long as your returns are higher than the cost of your leverage you are making money. This is an important concept in using leverage for investing, that many people tend to forget due to emotional investing.
4. The article talks about how many financial planners recommend mutual funds based on the percentage of the funds they receive for recommending the fund. I believe this maybe true for some advisers, but the article spins it in a way that makes it seem like most financial advisers are such people. Also I don’t agree with the view in the article that “financial advisers are worthwhile for only people who has above $200 000 available for investment”. I think if someone was able to accumulate $200 000 in investable assets, they have some financial smarts. I think flat rate financial advisers should cater to people who would benefit most from the advice and guidance of such people. People who are trying to accumulate wealth, and need help creating a plan to achieve such a goal with their means.
5. The article also takes a very easy attitude towards retirement. It almost gives the reader the feeling that they don’t need to save for retirement in Canada, and they can still get by. It does this based on the assumption most people would have paid off their houses by this time, and would not have any debt. However studies have found a lot of people approaching their 60s still haven’t paid of their mortgages, or has a loan against their mortgages, and still have some debt left. The article doesn’t cover the pitfalls or the dangers of such actions; rather it takes an overall happier view of the situation.