‘To give or not to give’ is the age-old question that parents of adult children often contemplate. When I am asked for advice on this topic my response is always the same: ‘neither a lender nor a borrower be’ especially when it comes to family and friends.  In my experience, the costs far exceed the monetary value given, as relationships tend to suffer irreparable damages.

Having said that, each situation is unique and so to give or not to give really depends upon the relationship between the parent and the adult child.  If you are contemplating such a request, consider the following factors before making a decision; your child’s financial history, the other siblings in the family, whether your gifting or lending the money and most importantly, if you can afford it.

Your adult child’s financial history

Before you hand out any money, you might want to ensure that you’re actually helping your adult child and not enabling them. Otherwise you’re just throwing good money, after bad. So ask what the money is for and what sacrifices or life changes they have already made themselves prior to asking for financial help? Get a clear picture of their current financial situation to see if they are living beyond their means. Is borrowing a chronic condition and your adult child needs help once again because they are not managing their money responsibly? Or is this a one-time situation in which they need temporary financial assistance?

Other siblings in the family

Giving money to one child and not another will often lead to resentment. So if you cannot afford to dish out equal amounts to all your children then either ensure to provide the financing by way of a loan so it is paid back, or make provisions in your Will to account for the money given.  If it is a large sum of money, you might start off as a loan and then evolve it into a gift as part of the child’s inheritance. Again, ensure to put this in writing to prevent family squabbles when you are long gone.

Gifting or lending

Be very clear, is it a gift or a loan? If it is a loan, set clear expectations. Specify whether there will there be interest charged, the terms of repayment, and put it in writing. Setting terms in writing allows everyone to know from the get-go where they stand and what their future responsibilities are.

Can you afford it?

Before dishing out the money, ask yourself earnestly ‘can I afford to’? Any money you give or lend should be beyond what you need to cover your day-to-day expenses without touching your emergency savings, credit cards/line of credit and your retirement savings. If giving your child money puts a financial strain on you today or in retirement the answer without question should be no.

Responsible money management is part of being an adult as is the consequences for poor management. You are better off helping your adult child improve their financial skills then by bailing them out. Saying no is never easy but it’s better to endure a little discomfort now then a major fallout later. Whatever you decide, just be sure that you think through the ramifications beforehand and seek out the advice of a financial advisor. Maybe the best way to help your adult child is with a little guidance, direction and some time with a financial planner.

What the heck is a recession?
Well we now know that we are officially in one, so what the heck is it? In simple terms, a recession is when the economy stops growing and for the most part, starts going in reverse. Technically it is described as two or more consecutive quarters of negative growth and job losses.

Why does a recession get worse?
As companies start making less money they cannot continue to hire people or employ some of their existing workforce and layoffs start to happen. You may buckle down and start to spend less because you are now either out of a job or worried that you soon will be. Guess what happens if we all stop spending? Businesses sell even less and profits go down even more and it all starts all over again with more layoffs.

So how does a recession end?
The short answer, when the reverse starts happening. For the most part, a recession will correct itself as interest rates drop to a level that encourages borrowing and spending again.

 Is this why interest rates keep dropping?
Yes. When the Bank of Canada drops the interest rates, it’s as if they are putting our money on sale. When things go on sale, people tend to buy.  Imagine that you borrow $100,000 at 7% to buy a home. Your monthly payment is about  $700. Today you can get a mortgage anywhere from 4 to 6%. So lets say you got a 4% mortgage today, then your monthly payment will be about $530.00. That’s almost $200 cheaper a month. This means that more people can now afford to get into the housing market.

So if it costs me less to borrow money, I more inclined to do so.
Exactly, when rates are low and money is cheap, people and businesses will borrow and start spending again. If we are all spending again, the economy will start expanding.

Isn’t credit and spending how we got into this mess to begin with?
It wasn’t that simple but more a deadly mix of easy money, predatory lending, an unsustainable housing boom, a lack of rules and regulations and the fabrication of complex and treacherous financial instruments that have basically caused this global recession

Last thoughts
Well we will come out of this, we always do but it takes time…………..

Rhonda Sherwood, CFP, FMA
Wealth Advisor
ScotiaMcLeod
rhondasherwood.com
itshermoney.com

Are you living the life today that you envisioned you would be living 5, 10 or even 20 years ago? Are you content with most, if not all, of the many components that make up your world: your family, friends, career, health, finances, spirituality and community? If yes congratulations, that is no small feat to accomplish and probably didn’t happen by chance. Most likely you achieved this through purposeful goal setting, hard work and perseverance.

 Although many of us probably have some idea of what we want our life to look like, few actually take the time to clearly define our goals, create an action plan and then follow through. Without setting goals, the direction of our life can change with every event or circumstance that comes our way. Wanting to be skinnier is very different than making a specific goal to lose 10 pounds in 3 months through diet and exercise. A sheer way to achieve success is to set goals and follow through.

Benefits of goal setting

•  Provide direction and purpose to your life
• Helps you to make decisions that will positively affect your future
• Allows you to focus your energies on what’s most important to you
• Will enhance the overall quality of your life, and will provide peace of mind           

Goal setting is also crucial to financial planning; as you will need the financial means to support the life you envision having. Without knowing what you want in life, you may be misdirecting or wasting away your resources. For this reason, the first step to undertake in the ‘savings room’ of your financial house is to determine what your short and long-term goals are. Your goals should be designed around your most important values.

 Take some time to think ahead. What do you want your life to look like in the coming years?  What is important to you? What would you like to have more of and less of? Without knowing the answer to these questions, goal setting will be a difficult challenge.  I often advise clients to follow the SMART system when devising their goals; goals should be Specific, Measurable, Attainable, Realistic and Timely.

• What are your short-term goals (under five years) and what are the financial resources you will need to achieve them (costs)?
  For example, New kitchen to be built by October 2009 at a maximum cost of $25,000
•  What are your longer-term goals (five plus years) and what are the financial resources you will need to achieve them (costs)?
  For example: Reduce work hours by half by age 55. Need extra $20,000 a year from investments to supplement part-time income.
               

People tend to have more goals than the money to support them, therefore, when doing financial planning often just two or three goals are taken into consideration. That is why it is very important when goal setting to prioritize, to be realistic and to set attainable goals.  You may want to retire when you are 50 but is this really within your financial capabilities? Maybe not, but perhaps with the proper planning, commitment and discipline retiring at 55 is within reach.

 However one thing is for sure, to achieve your goals you must start now. Only you can put your plan into action. Additionally, you must reevaluate your goals on a regular basis as they may change or evolve over time. So be prepared to make any necessary adjustments to your plan along the way.You have the power to create your own destiny, so take the time to invest in the future you want.

If a man knows not what harbor he seeks, any wind is the right wind.
-Seneca

Rhonda Sherwood, CFP, FMA
Wealth Advisor
http://www.rhondasherwood.com
http://www.itsHERmoney.com

In the last few issues of ‘itsHERmoney’ we discussed the importance of organizing the 5 rooms of one’s financial house; our personal debt room, our savings plan room, our retirement plan room, our estate plan room and our insurance needs room. Last month we tackled the topic of managing and understanding our ‘debt room’. In this issue we will deal with our ‘savings plans room’ or more specifically the importance of establishing an emergency savings fund.

Why are emergency savings so important?

As they say, “life happens when you’re busy making other plan” and life tends to cost money. Having enough money put aside for such unexpected events can be the difference between staying afloat or sinking financially. So one of the most important elements of your financial plan is to ensure an emergency fund is in place - and sooner rather than later.

Why an emergency fund?

An emergency fund is an easy to access pool of money to be used solely for the purpose of emergencies. Having an emergency fund in place gives you the “peace of mind” that you can handle most financial crises that come your way. This could be anything from an unexpected car repair bill to losing your job. Unfortunately, those who have not planned in advance for such unexpected events tend to borrow the money at the last minute and often at very high interest rates. In addition, those without emergency funds tend to collect more debt overtime.

So how much is enough?

This depends on many factors specific to each person’s situation such as, how employable you are, whether or not you carry substantial debt, if you have adequate insurance, if you are a dual income household and/or if you have children. The general rule of thumb is to have 3 to 6 months of your current living expenses set aside for emergency situations. However I recommend the following to my clients: 

• At the very minimum save a $1000 now in a separate high interest savings account. Set it up so it cannot be accessed by your ABM card. This will help protect against impulse buying. Remember an emergency isn’t, “I NEED those shoes’ but truly an unexpected bill or expense.
• When you have that $1000 saved and put aside you should aggressively start paying down those high rate loans and/or consolidate your loans into one lower rate manageable loan.
• Finally, when your debt is paid (excluding your mortgage) it is time to start saving 3 to 6 months worth of your current living expenses. If you find that you are spending what you earn then take 3 to 6 months of your current after tax income as the barometer of how much you need to put aside.
  I also recommend setting up a line of credit that would cover a few months of emergency expenses. I say this with caution to those who have trouble steering clear of debt. This is solely to be used for emergency means only.
   

 How to get started on your emergency savings plan 

1. Determine what you can ‘reasonably’ afford to put aside each month - $25, $50 or $100
2. Setup up an interest bearing savings account to save the initial $1,000. Again I advise that you open up an account that is not easy to access i.e. no chequing or ABM privileges. This $1,000 will help cushion any unexpected bills that may come your way.
3. Set up an automatic process to save – this can be an automatic monthly payment or an automatic transfer between accounts.
   When you are ready to start saving the larger emergency reserve- 3 to 6 months worth of your current living costs – open up another high earning savings account or a money market mutual fund (the latter is not as easy to access and takes a few days for the monies to settle once sold. It also tends to pay a bit more interest than a regular savings account). You want to ensure these funds are liquid and assessable when needed but are also growing with the cost of living (after tax and inflation).
4. Make sure that you keep your emergency funds separate from any accounts that you are using for other savings purposes, like reno’s, travel or a new car. 

How to find money to save

• Basically, spend less than you earn
• Save all your loose change
• Have a garage sale.
• Review your current expenses/bills to see where you can make some sensible changes - do you really need the movie channel?
• Cut back on indulgences (Bring lunch to work, have one less cappuccino a week, eat out less, and/or rent a movie versus going to the theater).
• Consolidate your debt into one low interest loan.
• Pay cash for all your purchases. People tend to curb their impulse buying when they actually have to fork over cash to make a purchase. Using cash also helps prevent out of control credit card debt and saves on the interest charges you incur when you borrow money.
• Cut down on bank machine withdrawals – those service charges do add up.
• Find creative ways to make extra money. Do you have a skill set that can be put to work?

Financial emergencies can come at any time and at any cost. All you can really do to help protect you and your family from such financial crisis’s is to ensure you are adequately insured and that you have enough savings put aside to help ride out whatever uncertainty comes your way. Start small if need be but start soon.

Rhonda Sherwood, CFP, FMA
Wealth Advisor
www.rhondasherwood.com
www.itsHERmoney.com

1. Preparation: first we must understand what makes up our ‘financial house; it’s our personal debt, our savings plans, retirement plans, estate plans and insurance needs. Our financial papers should be sorted and filed in these 5 groups.
2. Declutter: once we have sorted all of our papers into the 5 groups, it is time to go through them and start shredding. The rule of thumb is to keep your last two statements plus your original documents and shred the rest. If you haven’t gone paperless yet, it’s definitely time to do so. Most banks and financial companies offer on-line services.
3.  Develop a ongoing process to manage your financial papers
    

If you’re like most, you probably don’t have the time to assess your future retirement needs. However, with increasing life expectancies and concerns over the stability of our health care system and government/private pension plans, early retirement planning is a must.

To help you get started, here are some questions to think about:

1. How much money will I need to last throughout my retirement years? Some experts say you’ll need up to 70% of your pre-retirement income. 
2. What will be my sources of retirement income? Relying just on government benefits is a mistake. CPP and OAS on average make up only a third of your total retirement income needs. 
3. How long will I live? How long did my parents/grandparents live? How is my overall health? A legitimate concern many people have is, “will I outlive my money?”
4. What if my spouse dies first? Am I prepared financially? On average, women outlive men by 5 years.
5. How will I handle the unexpected? Do I have enough emergency funds? You should have money put aside or a line of credit set up for financial emergencies.
6. What activities and hobbies will I take up in my retirement years? What might these activities cost? What is the cost of what you enjoy doing today? Add 3% (inflation) to that cost for each year you have until retirement.
7. What if I need assistance in my retirement? Have I planned for home care and medical costs? With such a large portion of the population retiring within the next 10 to 15 years, home care cost are likely to dramatically increase. 
8. How will I manage my retirement money? Will I invest it myself or use the services of a financial planner/ broker? Do you want to be concerning yourself with investment decisions in your 60s, 70s or 80s? Think about consolidating your portfolio and working with just one advisor. 
9. Have I thought about estate planning? Do I have a Will, Power of Attorney and a Living Will in place? If you don’t plan for the inevitable, the government will step in to take care of things for you and most likely not how you would have preferred it to be done.    

    

If you haven’t yet given much thought to what your retirement days might look like, it’s time to step back and reflect on how you would like to spend this phase of your life. Taking a realistic look ahead and planning carefully will help ensure that these ‘golden years’ will meet your expectations.

 
Rhonda Sherwood, CFP. FMA
Wealth Advisor
www.rhondasherwood.com
www.itsHERmoney.com

The long and the short of it - NO

Now is not the time to panic and bail. If you were investing money for the long-term (3 years or more) then you must close your statements and continue on. If anything, see this as an opportunity to buy quality companies relatively cheap. If your monies are needed within a 3 year time frame they never should have been in the market to begin with. So stay calm and stay put.

So what happened? 

Basically the cost of borrowing money became cheap and Wall Street found a way for everyone to benefit from it. They came in and packaged up all the risky mortgages and sold them to investors all over the world. It can be summed up as simply as this; greedy aggressive lenders took advantage of uninformed borrowers. And as history has shown, the market eventually punishes greed.

So let’s go back a bit. 

Over the past few years too many Americans were buying homes that they really could not afford. Interest rates were at an all time low and the housing market was booming. Basically money was cheap to borrow and readily available. As a result, demand for borrowed money grew. Mortgage companies took advantage of this need and started lending to everyone, even to people who couldn’t afford to pay it back. They basically gave uninformed Americans high interest rip off mortgages. When interest rates were low the payments were somewhat manageable but as interest rates slowly crept upward, the cost of borrowing this money became too expensive. Many are now facing the reality that they cannot afford their higher rate mortgage payments and will lose their homes.

This is what is being referred to as the sub-prime mortgage debacle. In a nutshell, mortgage companies were approving mortgages to financially unstable borrowers who did not qualify for conventional prime rate mortgages. And the losses do not end here. These mortgage companies didn’t want to bare all the risk associated with the sub-prime mortgages and so they bundled them together and sold them off as big ticket investments to large firms. When rates climbed and people stopped making mortgage payments everyone was affected.

 So what is being done today? 

I am sure you have all been hearing the R (recession) word being thrown around. By the time the data comes available that actually proves whether or not the US is in a recession they will most likely be half way out of it. What President Bush and the Federal Reserve are trying to do in the meantime is to take action now that will stimulate growth in the US economy. As announced on January 17th 2008, President Bush will be looking at tax cuts and the Federal Reserve will continue to lower interest rates (potentially to a level that would make these sub-prime mortgage payments affordable again).

So why did the markets take such a drop? 

Markets are emotionally driven. As key economic indicators were released (dropping retail sales) and big companies reported enormous 4th quarter losses due to their involvement in the sub-prime mortgage mess investors panicked and started selling. Panic leads to more panic and the selling continued all week. Markets took a beating.  Are we at the bottom? Well no one ever knows for sure when the bottom has hit, however, many feel we are getting pretty close.

So should I be selling?

Absolutely not. As I said before, this is not the time to panic and bail. If you were investing money for the long-term (3 years or more) then you must close your statements and continue on.
 

Rhonda Sherwood, CFP. FMA
Wealth Advisor
www.rhondasherwood.com
www.itsHERmoney.com