Short term pain equals long term financial gain

Page 10

Smart financial planning involves three basic steps that everyone should know and put into practice to build a secure future. That is the advice of Vic DeLaet, owner of DeLaet Financial Services and CEO of Turtle Island Financial Corporation in Regina.

"What I find over my last 12 years of experience in this field," says DeLaet, "is that a lot of people just don't plan for anything. They work paycheque to paycheque. They're busy paying their bills. They never set down the time necessary to do some long-range planning."

The first step, DeLaet advises, is set aside an emergency fund to meet important needs that arise outside of day-to-day budgeted expenses. For instance, the sudden loss of a major appliance, such as a refrigerator.

The second component of financial planning is to acquire and maintain an appropriate level of insurance. DeLaet says most people have home insurance.

"In case their home burns down, they need the money to replace it, but a lot of people don't realize the same thing should happen with their income. If they lost their principal bread winner, that's tough enough as it is, but you don't have to go through any financial hardship," DeLaet said. He adds most people don't like the idea of life insurance. "They're afraid of it, they don't understand it, and they think it's a rip-off, but there are certain types of life insurance that are really good, and they don't cost a lot."

Life insurance for the average family is about $60 a month, according to DeLaet. "We're talking about two or three dollars a day to properly protect a family in the event of loss of income. You could equate it, almost, to two cans of Coke."

De Laet asks whether the decision to protect your family isn't more important than having those two cans of pop, if a choice has to be made. He recommends term life insurance to provide for the needs of young families.

Once you have an emergency fund and insurance in place, it is time to create a long-term investment strategy.

You can do this with as little as $50 a month, DeLaet says, especially if you start young. "You can get involved with a lot of good quality mutual funds, or other investments. If you set aside $50 a month for a child from the age of zero to the age of 18, and then you stop contributing, that child would have over a million dollars when they got to retirement."

DeLaet illustrates the magic of compound interest another way: If a person puts away $2,000 a year in an RRSP for six years from ages 22 through 27, and leaves it there to grow without adding any additional money, he could have $1,348,440 at age 65.

Another individual the same age may not save anything during the same six years, but then begins to save $2,000 a month. Not only will the second person have to save $2,000 every year until their late 50s to catch up to the person who started saving six years sooner, but he will have to continue saving $2,000 a year to age 64 to acquire $1,363,780 at age 65. DeLaet bases these retirement totals on an interest rate of 12 per cent.

"The same sort of philosophy can be applied at the band level, of saving for the future and not spending it for today," says DeLaet.

If a band got a $10 million land claim settlement, for example, and invested it at 12 per cent-which according to DeLaet is entirely achievable-"your money doubles every six years." So in six years time, it will double to $20 million, and in another six years it will double to $40 million," he said.

At that stage, DeLaet suggests, if you just withdraw 10 per cent off the $40 million each year, you have $4 million a year to pump back into the community.

"And that's the same thing that can be applied at a smaller level to an individual, planning for the future. If they can build up . . . $200,000 and live off the interest of that, that's $20,000 a year (at 10 per cent interest) and you'd never have to worry about money again."

Apart from these three financial planning components, DeLaet adds it is important tohave a will and to understand how your company pension plan works. He points out that when registered Indians die intestate, their assets go to the Crown. DeLaet says many people are unaware of the law in this regard. He also thinks it is preferable to have a lawyer prepare your will rather than doing it yourself. Also, he says people should understand where their pension money is invested and what it is earning. "Most people don't care-but they should."

The most important thing to do is make a financial plan and stick to it, DeLaet says. About half the people he meets don't follow through. "I've dealt with people who make a hundred grand a year who don't save anything. I've also dealt with people who make $12,000 a year who can save $200 a month," he said. He recommends getting professional advice from an independent financial planner or a bank, and start planning for your future today.