Ask JKE is our monthly advice column written by Jackie Kai Ellis. Submit your questions anonymously here.
I’m a 30-something person who has yet to make any investments. I have a negative narrative on money but I know it’s time (or it’s too late?) to plan for my future. Any advice on how to get started? Do you manage your own finances or do you have a financial advisor?
Dear Money Worrier,
You are definitely not alone. Many of us are mystified by the notion of financial planning. Perhaps it’s because money has been treated as a taboo topic in so many cultures, or because most of us are not even taught the basics of handling our own finances before we are taught calculus. Inversely, we are also exposed to economic materialism and taught to desire things even before our first encounter with a children’s cereal commercial.
Most people, including myself, have some negative narrative on money. These beliefs can range from, “I’m no good with money,” to, “people with money are selfish,” to, “money is vain,” to, “you need money to make money,” to, “only lucky people are rich, so why try?”
Whatever the case, the narrative tends to be judgmental, confusing, and intimidating. Most of us avoid looking, sticking the topic behind the curtain for so long that it becomes the Wizard of Oz himself.
I will confess that I am pretty average with my finances. I have made very calculated risks with my career and businesses, some successful. I have made some good investments and have a rough retirement plan, though I have no pension and could have saved much more. I also could have invested in much more logical, much less satisfying things than a Parisian apartment. But my personal philosophy about money is that it is one of many important and useful tools to help me achieve my life goals, and to experience the things I deeply value. In short, money itself isn’t my goal, so the way I use it is different from those who have other dreams.
I also recognize my strengths—investing not being high on the list—and rely on those much stronger to advise and teach me. I’m not an expert, so I thought it would be more helpful to ask the two people in my life who have helped me most with my financial literacy: my investment and wealth advisor Sharon Wong, and my mom. I’ve asked them questions in the hopes that these two perspectives might set you in the right direction as you take your first steps. There are also some great financial literacy tools out there that are easy to use and understand; see suggestions here.
Sharon Wong, Investment and Wealth Advisor at RBC Dominion Securities Inc.:
What do you recommend as the first three steps for a 30-something to begin taking charge of their financial situation and future?
Taking charge of your financial future is extremely important and, in my opinion, financial literacy is key. The first step is to find an advisor who has the experience, resources, and time to engage in a meaningful discussion to help guide and empower you with the knowledge to make informed decisions. Once you have found the right advisor, I would recommend sitting down with them to have a deeper discussion around your financial and personal situation, your goals, any obstacles you see in achieving those goals, and any special situations that could arise. From there, the advisor could help you develop a budget and savings strategy to reach those goals and address any stumbling blocks that could get in the way of those goals.
After someone feels they have some control over their financial situation and future, what would you suggest as the next step to increasing their financial literacy?
Regular reviews are key. A person’s situation is constantly evolving, and so are the markets and rules. I would recommend regular meetings with your financial advisor to update them on changes to your situation or goals, and for them to address what is happening with your portfolio in context of what is happening in the markets and to monitor that you are still on track. I would also ask your advisor to discuss with you specific topics of interest and forward literature on those topics. For instance, my team and I engage in regular financial literacy sessions with our clients that can range from budgeting and savings at the initial stage in financial life to more complex issues.
What do you think is the most common misconception around money, investing, and financial planning?
Some of the most common misconceptions, in my opinion, are as follows: that you need a lot of money to invest; that you need to take on a lot of risk to make money (as in: that it’s like gambling); and that the best performers historically will be the best performers going forward. Investing is a process, and having a disciplined process and well-laid-out plan is key. With my clients, we start with a rigorous discovery where we build a deep understanding of your wealth goals, current situation, potential obstacles, and preferences. From there, we develop a personalized wealth plan and investment strategy. We build a portfolio that addresses those goals and respects your risk tolerance. Thereafter, we bring in our wealth management specialists (in the areas of estate, tax, insurance, banking) when appropriate. Once your wealth plan and investment portfolio are established, we continue to monitor progress towards your goals and adjust accordingly.
I also think people focus too much on the upside and not enough on the downside risk management. Returns are asymmetrical. If you’re down negative 10 percent, you need to earn plus 11 percent to recover and to break even. If you’re down negative 30 percent, you need plus 43 percent to break even, and if you’re down negative 50 percent, you would need to gain plus 100 percent to recover to break even. That’s pretty daunting. So, managing the downside risk is important, and it gives you a better chance of maintaining and growing your money consistently and reaching your goals.
If a 30-something can only do one thing to improve their financial future planning, what should it be?
That is simple: save. The best way to make money is to save money. There is no magic bullet, and winning the lottery is not a sound financial plan. Saving consistently is the best way to grow your money and ensure financial security at the end of the day.
My mom, a retired realtor and the woman who taught me never to go into debt for anything other than a calculated investment:
Back when you were just starting out with a new family and working multiple jobs, what was the first thing you did to improve your financial future?
We saved for years to buy our own house. The Chinese advice is always to invest in your own living space, house, or apartment because you don’t have to pay taxes on the capital gains you make on your principal residence, and you don’t have to pay rent while you live in it. It is something to fall back on if times are hard.
How did you buy a house with so little savings?
We saved what we could, then we bought whatever we could afford, with a mortgage we could afford. Then we saved and built from there, moving to bigger homes when we could. It’s a common mistake in real estate that I have seen: if you wait, then you may not get your foot in the door. People wait until they have more than enough, but because real estate has historically gone up, they can’t chase the rate of growth. My advice is always to buy whatever you can reasonably afford, then grow and move to a bigger place if you have more money.
How did you save enough to buy a property when you began with so little?
We made sacrifices: not eating out, not buying personal items for years. Everything we want has a cost, and back then, we wanted a more secure financial future. If someone wants a certain lifestyle, then that is their choice and they should enjoy their life. It’s just a matter of priorities.
Do you think 30-something is too late to begin investing and planning for the future?
The thirties are the perfect time to start! Many in their twenties haven’t had the funds to invest and many don’t even begin to think about it until their forties or fifties. Someone thinking about it in their thirties is good; it means they are conscious about growing assets. It’s not too late. It’s perfect timing.
Disclaimer: This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that any action is taken based upon the latest available information. The strategies and advice in this newsletter are provided for general guidance. Readers should consult their own Investment Advisor when planning to implement a strategy. Interest rates, market conditions, special offers, tax rulings, and other investment factors are subject to change. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under licence. © 2020 RBC Dominion Securities Inc. All rights reserved.