Managing Your Money

I remember early in my career trying to convince a client why keeping so much money in her bank account was a bad idea. When I asked her why she was insistent on leaving such a large balance, she explained to me that when she was much younger, her parents were stuck overseas in the middle of a full-scale war. She was so worried about them and did everything she could to save up enough money, so she could get them to Canada on a moment’s notice. Her parents eventually made it to Canada. She is now in her 70s but that feeling of needing the security of having quick access to money has never left her. So, whether or not she’s losing money by keeping her money in a bank account is irrelevant to her. She feels a great deal of security and comfort knowing that, that money is there. And that, for her, out weights what she could be earning on that money.

On the flip side, I have other clients who hate keeping any money in cash. They want all their money working for them. When I first brought up an emergency fund to this couple, they assured me they were quite comfortable using their line of credit should an emergency come up. In their minds, the line of credit IS their “emergency fund”. Many people avoid going into debt at all costs, while others don’t necessarily see short term debt as bad. I will make one caveat here, the clients I’m referring to have substantial savings, very good incomes, and minimal debt. They do not abuse financing and pay down any debt efficiently. In cases where I see people who have trouble managing debt, this would not be a good solution.

All that to say that different backgrounds, philosophies, and experiences affect the psychology behind how people see money. That’s why there isn’t always a “right” answer when it comes to making financial decisions. It often depends on priorities, risk tolerance, and other factors.

I met with a client this week who was commenting on how he increased his tax deductions at work so that he would get a tax return. Some people would think this is a preposterous idea to give more money than necessary to the government and have to wait for them to give it back to you. But my client simply stated that he HATES writing cheques to the government and feels much better when he gets cheques back from them, even when it is his own money. He also sees it as a forced savings since he always knows he’ll get a tax refund.

The debate extends to so many other areas such as: whether to take QPP at 60 or 65, whether to pay down your mortgage or add to your savings, whether to buy GICs or stocks. It’s easy to find conflicting opinions on many of these topics, and I have my own opinions, which is not the point of this article. Putting aside factors and assumptions that could skew the outcomes, such as assumed return or tax rate, what is not factored into the results is the weighting of an individual’s psychology. A simple financial calculation can easily show that after tax and after inflation, GICs look like a terrible investment in comparison to stocks. But what if the investor loses sleep at night when the value of their money goes down? Or if the unpredictability of the future value causes them unnecessary anxiety. It’s not all about money.

One thing that I’ve noticed with people who have built a good amount of wealth, is that they often start out with the focus on growing their wealth, and when they get there, the focus changes to protecting and preserving what they have built, rather than keep growing it. So, ideas about money can certainly change and evolve over time. And this is why investing, and financial decision making is far more complicated than simply choosing the right investment, or doing a simple dollar and cents calculation.

Money tends to be one of the high conflict areas in marriage and romantic partnerships, and at the root of the issue is usually differences in values, beliefs, and philosophies about money. From spend vs save decisions to whether to pay down the mortgage vs invest, understanding the underlying core beliefs can lead to a more successful outcome and ultimately a more peaceful communication surrounding money.

From a pure financial perspective, when we get down to the nitty gritty numbers, of course there is often a “right” answer, financially speaking. But in my experience the few hundred or thousand dollars that are being forfeited to have peace of mind become fairly insignificant to a person who has a strong underlying belief about something.

So, I believe financial beliefs and preferences make sense and should be respected as long as they are clearly understood. In two of the scenarios above, the clients I’m talking about are engineers. They’re smart people and understand the numbers. I do think it’s important for people to understand what they are forgoing financially or what risks they are taking on in order to fully embrace their decisions. I also believe that as an advisor it is my job to get a deeper understanding of their financial beliefs and philosophies. Only then can I truly guide and advise them towards the options that are best for them, both financially and for peace of mind.

Lynn MacNeil, F.PL. Vice President, Investment Advisor, is a Financial Planner with Richardson GMP Limited in Montreal, with over 22 years of experience working with retirees and pre-retirees. For a private financial consultation, or more information on this topic or on any other investment or financial matter, please contact Lynn MacNeil at 514.981.5795 or Lynn.MacNeil@RichardsonGMP.com.

The opinions expressed in this article are the opinions of Lynn MacNeil and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances. Richardson GMP Limited, Member Canadian Investor Protection Fund.