Manage Your Personal Finances Seminar Final

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Manage Your Personal Finances Seminar Final

  1. 1. MANAGE YOUR PERSONAL FINANCES AS WOULD A SUCCESSFUL BUSINESSTM CASH FLOW IS KEY TO SUCCESS Presented by John Clausen CMA, ACIS, Acc. Dir. Clausen & Associates Copyright © 2009, Clausen & Associates. All rights reserved.
  2. 2. KEY CONCEPTS •  FORECAST YOUR CASH CASH FLOW MANAGEMENT  SET GOALS, STEPS TO ACHIEVE • PLAN  CONSOLIDATE DEBT FROM HIGH COST • LOWER COST OF DEBT SOURCES TO LOWER  ASSET ALLOCATION • RISK REDUCTION  EVALUATE DECISIONS, UNDERSTAND • PRUDENT PERSON RULE INVESTMENTS • NEGOTIATE  BANK SERVICES, PURCHASES • MINIMIZE TAX  TFSAs, RESPs, INCOME SPLITTING, RRSPs
  3. 3. CASH FORECASTING • What is it? • How can you use it effectively? • Cash forecast template working session
  4. 4. CASH FLOW FORECASTING TIPS • Assume that where your cash position is negative you must either borrow via bank or credit cards • Detail all major expenses and revenue • Plan for one time expenses, i.e. vacation • Plan for savings RRSP, RESPs, TFSAs • Build in mandatory Reserve Fund to cover events where one earner loses job
  5. 5. SAMPLE CASH FORECAST
  6. 6. Cash Mth 1 Mth 2 Mth 3 Mth 4 Mth 5 Mth 6 Mth 7 Mth 8 Mth 9 Open bank $ 1,000 $ 3,500 $ 4,800 $ 6,400 $ 500 ($ 900) ($ 1,800) ($1,300) ($ 1,300) Income 1 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 Income 2 3,000 3,000 3,000 0 0 0 1,500 1,500 1,500 Other 500 500 0 500 0 500 500 0 0 Total Income $ 5,500 $ 5,500 $ 5,000 $ 2,500 $ 2,000 2,500 $ 4,000 $ 3,500 $ 3,500 Total cash on $ 6,500 $ 9,000 $ 9,800 $ 8,900 $ 2,500 $ 1,600 $ 2,200 $ 2,200 $ 2,200 hand RRSP,RESPs 500 500 500 500 500 500 500 500 500 Home 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 Vacation - 1,000 - 5,000 - - - - 2,000 Living costs 1,000 1,200 1,400 1,400 1,400 1,400 1,500 1,500 1,500 Net Cash $ 3,000 $ 4,200 $ 3,400 $ 8,400 $ 3,400 $ 3,400 $ 3,500 $ 3,500 $ 5,500 Outflow Close Bank $ 3,500 $ 4,800 $ 6,400 $ 500 ($ 900) ($ 1,800) ($ 1,300) ($ 1,300) ($ 3,300) Loan Need ($ 900) ($ 1,800) ($ 1,300) ($ 1,300) ($ 3,300) Interest Cost $9 $ 18 $ 13 $ 13 $ 33
  7. 7. CASH FORECAST ADVANTAGES Plan for large expenditures, i.e. vacation Plan for borrowing with lower cost alternatives to credit cards Know in advance when cash is short so you can take corrective action See opportunities to invest excess cash Greater sense of control and security Plan for savings
  8. 8. Planning cash needs can save you $’s
  9. 9. BORROWING COSTS Unplanned cost of borrowing Using cash forecast and planning with credit cards  Planned need allows you to  Cash needs of $10,000 borrow from bank or credit unplanned at 18% per year union on unsecured or simple interest secured line of credit at say = $1,800 per year prime plus 1% or 5% per  Over 5 years compounded year for example  1 year cost of borrowing at 18% out of pocket interest cost = $11,000.00 $10,000 = $500 or 110% of your original  5 year cost of borrowing debt = $3,000.00
  10. 10. Borrowing Cost $11,000 vs $3,000 or $8,000 Savings over 5 years
  11. 11. CONSIDER CONSOLIDATING DEBT • Consolidate Debt from High cost sources to Low cost – Credit card debt at 18% to Secured Line of Credit at for example 5 or 6% – When renegotiating mortgage roll in your high cost debt to new mortgage and save
  12. 12. RISK REDUCTION • Successful businesses are always examining where risk lies in their business and preparing for it with strategies to reduce risk • HOW DO THEY DO THIS??
  13. 13. RISK REDUCTION STRATEGIES RISK STRATEGY • Stock Market Crash • Asset Allocation, Risk Tolerance Assessment • Build Cash Reserves, Home • Job Loss Business, Develop New Skills/Education, Lock in Lines of Credit with Bank • Home Disaster or Death • Review Insurance Policies
  14. 14. ASSET ALLOCATION TO REDUCE RISK • Let’s look at 2 scenarios, a good and a bad risk profile for a couple of 40 to 55 years of age • Have approximately $100K in combined income • Their jobs are in volatile industry sectors • Heavy weighting in stocks for investment • Significant amount of debt relative to assets and age to retirement
  15. 15. ASSET ALLOCATION POOR STRATEGY BETTER STRATEGY Asset Value $ Value Home Home Stocks Stocks $20 $10 Bonds Bonds $45 $150 $300 $400 Cash GICs $400 GICs Autos $75 Art Art $50 $100 $50 $5 $200 Autos Debt Home $0 $50 $5 Debt Other Debt
  16. 16. TO FURTHER REDUCE RISK If they have Poor Asset Allocation Strategy with High Risk: – Prepare a Cash Forecast – Consolidate debt – Alternative income strategies – sublet, home business – Downsize home – Refinance home over slightly longer term and role in high cost debt – Sell or terminate lease on one car – Review risk level of investments and consider reallocating to lower risk with an experienced advisor
  17. 17. PRUDENT PERSON RULE • In the USA and in Canada there is pension legislation that governs how corporations manage their employee pension plans • One of the general rules set in all legislation is The Prudent Person Rule • This rule states that corporate pension fund managers must manage their fund assets as would a normal Prudent Person and minimize risk; the best funds follow this and you should too!
  18. 18. CORPORATE PENSION FUND ASSET ALLOCATION FUNDAMENTALS 1. The greater the base of retirees relative to active employees, the higher the proportion of pension assets in Fixed Income Investments 2. As the employee workforce ages, they move a greater percentage of total invested assets into Fixed Income, i.e. Bonds, Money Market 3. Maintain liquid assets to meet current pension disbursement needs, i.e. T Bills, Cash
  19. 19. PENSION FUND INVESTMENTS Younger vs. Older EEs 70% < 40 years old 70% > 40 years old Other Other Bonds Cash, Tbills Low Risk Low Risk Cash Tbills Bonds Avg Risk Avg Risk High Risk High Risk Real Estate Real… Stocks Stocks 0 2000 0 2000
  20. 20. PERSONAL ASSET ALLOCATION • Consider the pension fund model to optimize the safety of your retirement monies due to market fluctuations • As you get closer to retirement age, move a greater proportion of your investment into stable, less volatile investments, i.e. high quality bonds, T-bills, cash • Always retain a cash or near cash component to meet retirement needs for short term, less than 1 year
  21. 21. NEGOTIATE DEBT & BANK SERVICES • Successful corporations search out service providers who will give them the best possible service at the lowest cost or a reasonable cost relative to service provided • Businesses define needs, negotiate and investigate • WHY NOT YOU?
  22. 22. Canadian Mortgage Rates ------------------------ Fixed Term Open Term ------------------------ Lender Name 6 Mo 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 7 Yr 10 Yr 6 Mo 1 Yr Note: Rates effective as at March 2, 2009 Servus Credit Union 5.20% 4.50% 5.15% 5.15% 5.69% 5.79% -- -- 7.10% 7.45% Best Available Rates 5.20% 3.50% 4.75% 4.75% 4.39% 4.39% 6.00% 6.45% -- -- AGF Trust 5.50% 5.50% 5.80% 5.75% 6.05% 6.45% -- -- -- -- Alberta Treasury Branch 5.20% 4.50% 5.15% 5.15% 5.69% 5.79% 7.00% -- 7.00% 7.45% Bank of Montreal 5.20% 4.50% 5.15% 5.15% 5.75% 5.79% 7.00% 7.15% 7.00% 7.45% Bank of Nova Scotia 5.20% 5.50% 5.15% 5.15% 5.69% 5.79% 7.00% -- 7.05% 7.75% Cambrian CU 3.79% 3.99% 4.19% 4.29% 4.29% 4.39% -- -- -- -- Canadian Western Bank 5.20% 5.00% 5.15% 5.15% 5.69% 5.79% -- -- 7.00% 7.45% CIBC 5.20% 5.00% 5.75% 5.75% 5.69% 5.79% 7.00% 7.30% 7.25% 7.45% Citizens Bank 5.25% 5.25% 5.25% 5.25% 5.25% 5.25% 6.50% -- -- 7.10% Coast Capital Savings 5.10% 4.00% 4.30% 4.30% 4.30% 4.30% 5.25% 6.00% 6.90% 6.70% Credit Union Atlantic 5.20% 5.00% 5.15% 5.15% 5.69% 5.79% -- -- 7.70% 7.45% Effort Trust 5.20% 5.25% 5.50% 5.70% 5.70% 5.70% -- -- 7.75% 8.25% Envision Financial 5.25% 5.00% 5.75% 5.75% 5.69% 5.79% 7.00% 7.35% 7.00% 7.45% First Calgary Savings 5.20% 4.50% 5.15% 5.15% 5.69% 5.79% -- -- 7.00% 7.45% First National Financial 5.20% 4.00% 4.75% 4.75% 4.29% 4.39% 6.00% 6.35% -- -- FirstLine Mortgages 8.05% 4.40% 5.25% 5.05% 4.59% 4.69% 6.45% 6.65% -- -- FirstOntario CU 4.79% 4.59% 4.99% 4.89% 4.39% 4.49% 5.79% -- 7.00% 7.45% HSBC Bank Canada 5.20% 5.00% 5.75% 5.50% 5.69% 5.79% 7.00% 7.35% 7.00% 7.45% ING Direct -- 4.50% 4.99% 4.75% 4.14% 4.34% 6.25% 6.45% -- -- Investors Group 5.20% 5.00% 5.75% 5.75% 5.69% 5.79% 7.00% 7.15% 7.00% 7.45% Laurentian Bank 5.00% 5.00% 5.25% 5.50% 5.69% 5.79% 7.00% -- 7.20% 7.45% League Savings 5.20% 5.00% 5.15% 5.15% 5.69% 5.79% -- -- 7.00% -- London Life 5.20% 5.00% 5.75% 5.75% 5.69% 5.79% 7.00% 7.15% 7.00% 7.45% MCAP Mortgage Corportion 5.20% 5.00% 5.75% 5.75% 5.75% 5.79% 7.00% 7.15% -- 7.45% MRS Trust 3.90% 4.15% 4.70% 4.70% 4.85% 4.85% -- -- 4.45% -- National Bank 5.00% 5.00% 5.25% 5.50% 5.75% 5.79% 7.00% 7.15% 7.00% 7.25% North Shore CU 5.20% 4.50% 5.15% 5.15% 5.69% 5.79% 7.00% 7.15% 7.00% 7.45% President's Choice -- -- 4.99% 4.80% 4.34% 4.44% 6.30% 6.55% 6.99% 4.25% Prospera Credit Union 5.20% 5.00% 5.15% 5.50% 5.69% 5.00% 7.00% -- 7.00% 7.15% Lender Name 6 Mo 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 7 Yr 10 Yr 6 Mo 1 Yr Royal Bank 5.20% 4.35% 4.55% 4.65% 5.44% 5.79% 7.00% 7.15% 7.00% 7.00% TD Canada Trust 5.20% 5.00% 5.75% 5.75% 5.69% 5.79% 7.00% 7.35% -- 7.45% VanCity 5.20% 5.00% 5.75% 5.75% 5.75% 5.79% 7.00% 7.30% 7.05% 7.45% Westminster Savings CU -- 3.75% 4.25% 4.25% 4.40% 4.39% 6.25% 6.85% 7.00% 7.45% Assiniboine Credit Union 5.20% 5.50% 5.75% 5.75% 5.75% 5.80% -- -- 7.05% 7.45% Alterna Savings 5.20% 4.50% 5.00% 5.00% 5.00% 4.49% 5.85% 6.15% 7.00% 7.45%
  23. 23. SAMPLE VARIABLE RATES FOR FIXED TERM Financial Institution Variable Rate Quoted CIBC 4.0% Bank of Nova Scotia 3.3% BMO 4.0% Royal Bank 3.3% Meridian Credit Union 4.0% DUCA Credit Union 3.5% MCAP 3.3% Manulife Bank 3.5%
  24. 24. MORTGAGE RATES – WHAT DO WE NOTICE? Fixed Term Open Term • Rates are generally higher • Rates are lower in shorter terms than fixed term rate due to • Rates in each term vary widely ability to pay out anytime • Rates quoted for variety of • Rates are only quoted for 6 varying terms months and 1 year • Variable or Fixed rates available for fixed terms • Variety of financial institutions compete for mortgage business
  25. 25. WHAT CAN WE LEARN? • There is competition for mortgage business, allowing for negotiation • Negotiate as you would for any other product or service, i.e. house, car, etc. • Select rates (fixed or variable) and term that meet your needs and risk tolerance • Consider using a mortgage broker
  26. 26. $ SAVINGS WHEN NEGOTIATING RATE • Assume a mortgage with a 20 year amortization and assume that you shop the rate vs. accepting posted rate from your bank • Assume a $200K mortgage for 20 years with a mortgage rate savings of 0.5% • Then let’s change the assumption and assume a 1% mortgage rate reduction on average
  27. 27. MORTGAGE RATE SAVINGS COMPARISON $200K with 0.5% rate savings $200K with 1.0% rate savings • Interest cost over 20 • Interest cost over 20 years at 5% is: years at 5% is:  $115,420  $115,420 • Interest cost at 5.5% is : • Interest cost at 6% is :  $128,508  $141,850 • Interest savings at 5% • Interest savings at 5% rate is: rate is:  $13,088  $26,430
  28. 28. CLEARLY IT PAYS TO NEGOTIATE! Also shop for other bank services at lower rates, i.e. bank debit card fees, RRSP admin. fees, cheque clearance fees
  29. 29. SAVING TAXES INCREASES CASH FLOW • 6 good ways to reduce income taxes: – Use RRSPs – Use RESPs – Use TFSAs – Split your income with spouse – Use of home for home based business – Life Long Learning Plan
  30. 30. RRSPs • Current annual limit, lesser of 18% of earned income or $20,000 for 2008 and $21,000 for 2009 • Tax deduction based on contribution at your marginal tax rate • Income earned tax free • May allocate annual contributions to spouse to split future retirement income
  31. 31. RESPs • No deduction for contributions • Income earned tax free as long as used for eligible education • May defer expenditure under new rules to age 35 • Can allocate to child and transfer balance if unused to another child • Canada Learning Bond to RESP – one time $500 plus $25 for set-up fees; $100 per year per child to age 15, if family qualifies for Child Benefit Supplement • Canada Education Savings Grant – may qualify for grants of up to $200/child/year on your first $500 contribution with further grants up to $400 on next $2000 contribution (up to age 17), based on income level, to a maximum of $7,200
  32. 32. TFSAs Tax Free Savings Accounts • No deduction on current contributions • Income earned tax free • Tax free when withdrawn from account • May contribute up to $5,000 per year • May hold for life • Transferable to spouse on death
  33. 33. LIFE LONG LEARNING PLAN • May withdraw tax free from your RRSPs up to $10,000 per year for training or education • Both spouses or partners qualify for same • You have up to 10 years to repay to RRSP after which you’re taxed if not repaid • Allows you to upgrade your skills and earn higher income or obtain better job
  34. 34. SUMMARY • Active management needed • Do your cash forecast • Review your risk levels relative to income, age, personal preference • Look at continued training • Consider methods to save and reduce tax • Negotiate for low cost debt and banking services Copyright © 2009, Clausen & Associates. All rights reserved.
  35. 35. Thank you for listening. Questions???

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