Let me be clear, I favour these types of lending products over all others, any time I can make it work. I think they are the most effective and efficient tools to be pared with a debt and cash flow plan. And they should be used far, far more frequently than they are. A few years ago I spent hours, over 140 hours to be exact, interviewing advisors, bankers and managers about these products, and it all came back to one issue when you dug under all the extra words: SPENDING.

Guess what, that is a very, very valid issue. Advisors should be concerned that their clients will overspend, because most of them will. That is if they don’t have a cash flow plan—not a budget, but a behaviourally compatible method to manage spending in a way that is not stressful to the client. To be clear, the product is not the problem, the problem is the problem, but also the product on its own is not the solution.

Advisors should also not throw the baby out with the bath water, so to speak, when it comes to these products. I’m not saying don’t use them because your clients will likely overspend. I’m actually saying you should use them. But, I’m saying your clients are likely overspending now, and this product could change everything, but only as part of the plan not as a band aid or some form of financial magic beans.

What if we invested in ourselves and learned how to use these things as part of the plan? What if we found the safety switches and put on the protective equipment, what if we knew how to set our clients up for success from the get go? If that happens, I know that these things will happen too:

1)   We would know we have done our jobs; this should be required, period!

2)   Our clients will be far less likely to overspend, and if they do, they would be fully conscious of their actions and chose to do so and not blame you for that.

3)   Our clients would finally gain control over their money and not let it control them.

4)   Our clients would feel good about their finances and not fear talking to you about their debt or spending.

5)   Our clients would not be so emotionally rocked by the market because they’d be reducing debt rapidly while simultaneously putting far more money away monthly than ever before. In other words, the market would not be the lone factor in determining their net worth at review time every year.

6)   Our clients could take less risk in their investments if they wanted to because they could put more away and wouldn’t need to try to yield the same return to the get the same result.

7)   Oh, and people whose financial advisor does this for them…they send a ton of referrals that advisors way.

So if you want to do financial planning for real life, you’ve got to add debt and cash flow to the mix, and the all-in-one account is not only your friend, it is key to the future of you and your clients.

And to those of you who say, “If your clients overspend, don’t worry about it because they would have overspent anyway, except it would have been more expensive the old way”; that’s bull, and you know it.

Give your clients the owner’s manual; don’t lead them to the power tool and leave them to cut off their fingers.

Don’t have the owners manual?

Then you need Money Finder Bootcamp which includes a major section on how advisors can use the all-in-one and how to provide clients with the instruction manual they need so that you both succeed.

Case in point:

A couple who owned their first home for 5 years: how much did it cost? (Figures are rounded off for simplicity.)

Purchase price          $167,000 with 5% down

Mortgaged                 $158,650

Costs: 

Down payment               $8300

CMCH                              $3,000

Home insurance             $3,600

Finishing basement       $7,000

Landscape and deck       $9,000

Gas fire place                  $5,000

Utilities                          $21,600

Maintenance/décor     $15,000

Interest                         $36,000

Total cost for 5 yrs     $108,500 (not including the principal payments to the mortgage)

Mortgage balance      $138,000

At year 5 they sell their home for $250,000 and buy a new one for $300,000.

To avoid CMHC (Canadian Mortgage & Housing Corporation which insures your mortgage when you borrow more than 80% of the value of your home) they put down 20% on the new home or $50,000.

Here is what that looks like:

Selling price of house           $250,000

Mortgage due                             $138,000

Realtor commission                  $12,500

Taxes and legal                          $5,500

Moving                                        $3,000

New appliances                          $7,000

What’s left?                              $71,500

Now they put at least $50,000 down but have a bigger mortgage and other costs go up; but let’s say they keep the $21,500 out to finish the new basement, buy new furniture etc.

So technically they spent $108,000 to create $71,000 by the time they move from one house to the other. Yes, there is a profit on house one, but the profit is not equal to the $83,000 increase in the homes value. In fact if you just took the cash and deducted how much the home actually cost after 5 years, the profit would be about $3,500 {$250,000 – ($108,500+$138,000)}. Now of course you’d have to pay to live somewhere anyway, so you wouldn’t live for free if you didn’t own a home, but it isn’t quite the windfall it seems when you really look at it. Most people would say, “Wow, our home appreciated by nearly $100,000,” but the reality is that there was a cost to that growth.

Don’t get me wrong I believe in home ownership, and my family (and the bank) own a home but I haven’t lost sight of the fact my home is more of a place to live than an investment.

Try it on your own home. Are you in the black by as much as you thought?

The magazine is amazing enough in itself but the CD included in each issue (for someone who sometimes lives in their car, on the road or an a plane) is a brilliant use of my time. This month the theme was happiness. Deepak Chopra gave an interview for the CD. I love his point that happiness is fleeting and that only fulfillment is long lasting. You see, you can buy happiness, but only for a moment. Deepak insists that the very poor and the very rich often share the same constant obsession with money—for two opposing reasons of course, one obsessed worried about surviving, one obsessed worried about amassing money—a fact that massively reduces happiness. On the other hand, Deepak says fulfillment is a state of being. Fulfillment is long lasting, self-perpetuating and, the best part, totally under your control. While money, or financial stability, will be a part of fulfillment, money alone cannot buy it for you.

Doing financial planning for real life must include all aspects of finance, not just investments and insurance. It also must be done for the clients’ reasons, like spending more time with their family or achieving a life goal of some kind, not to arrive at a certain financial sum. Helping a client create a plan for fulfillment is what we were really made to do. Sure the products help fill in the gaps, but a plan built on a purpose is all that matters to your client.

It’s well worth the investment of less than ten dollars to pick up this month’s Success Magazine. If you like it, subscribe. If you really love it, pass it on!

And no I don’t get a kick back from the magazine for this, it’s just the way I feel and I want to share it with you.

Yes, lots of people are starting to listen to my message. But far too many are still vigilantly holding their hands tightly over their ears. Why? They are hoping that when I talk about the need for debt and cash flow planning that I’m excluding their clients. They see training as a pure expense. Many advisors don’t want to invest in themselves. Many managers, wholesalers and companies would prefer to invest in sessions about their products, rather than planning in general. I get it. I know the conversation you have with yourself, where you think that paying for training is an expense, and that you’d be missing a few possible closing appointments, which you tell yourself increases the expense. That would be a reasonable argument if training were an expense. Unlike your light bill, which is an expense, training is an investment. If you pay the light bill all that happens is your lights stay on. If you invest in your process, in training, in a skill that all financial advisors and planners should have, but almost none do, then that time is an investment that will pay great dividends to you for all of your career. When you offer planning for real life, those dollars will come back to you with lots of friends.

The most brilliant and successful people I know, who are always in growth mode, are life-long learners, and they know that training is an investment, that learning is the only real way to attain continued growth.

There is a big difference between an expense and an investment. The real cost of bootcamp is approximately 10% to 20% of the pay on an average case. That’s just one case, how many new clients can you take on in a month? Does paying your light bill give you a return like that?

“But Stephanie, I can’t get my clients to send me info in advance.”

“But Stephanie, I can’t control how much I spend on groceries.”

“But Stephanie, I sent one of my kids to Europe when I couldn’t afford it so I have to send the other two.”

The thing with most sentences that start with “But Stephanie…” have in common are that those two words are followed by crap, by fear, by ingrained beliefs you’ve never thought of questioning. My response is generally the same: “Ok then never mind. Oh wait, why are we talking about this again? You wanted to stream line your client, approach incorporate debt and cash flow into your process and still profit? You want to figure out how to manage your cash flow in a way that allowed you to have the life you want from the money you have? You wanted to learn how to teach your children how to be responsible with money?”

The fact is no truths ever follow “But Stephanie”; they are the last remaining puffs of “what if I can’t do this?” you have to get rid of before you are ready to really do something with the life and money you have. I can help you get over your “But Stephanie’s” sentiments if you are willing to accept they just might be the bologna you’ve been feeding yourself for years!

Anyone who learns to drive must learn by driving. Our doctors learn by doing, by working first with cadavers and then real patients, under supervision. It makes sense right? We know with these very differing skills, one that almost anyone could do and one that very few will do in their lifetime, when an activity is high risk we seem to understand the necessity for real experience.

However when it comes to teaching kids, frankly adults too, everyone looks to create simulations, to make up fake situations and play your way through. Well no wonder that doesn’t fully translate to a financially literate society. First, the simulation is often written by people who have no professional or practical experience in finance, or the management of other people’s money. Second, the best practices are often based on ideal scenarios because they are made up. Not a whole lot of making students go fake bankrupt while teaching money in class right?

I spent last Monday and Tuesday at Turning Tides in 21^st Century Education. It was quite the event. I talked about the definition of financial literacy, citing the 10 things a student would know if they were financially literate when they graduated from high school. I did two book signings. One of my favorite childhood authors whose books I still read to my son bought my book and got me to sign it. And I was invited to sit in on a brainstorming session with some influential people in the education and finance space to discuss how we could create financially literate students. It was a brilliant experience, and I was honoured to participate.

As I drove home from the last session I was thinking about how we learn other skills that come with very dangerous consequences if we don’t master them, and it struck me. We need real life experiences to enable true literacy and it’s going to take the community, the families, the students and the schools involved if we are to improve the current state of personal financial literacy. So what we really need are financial cadavers. The question is now is, what would that look like? What would we use to create these real-life learning opportunities in a way that the lessons would stick and be applicable for life?

I feel that 2012 will be a year of critical change, if I have anything to say about it!  The folks at Advocis made a great video preview of all the update segments. Please take a moment to watch! I hope you find Advocis’s first step to be as exciting as I think it is, and that you find the information shared in the update to be beneficial for your business.

Note for those non-industry readers of this blog CFP – Certified Financial Planner & CLU – Chartered Life Underwriter

5 GREAT things to do with YOUR Tax Refund!

1. Leave it in your all-in-one account. This way it pays down your debt, saving you interest for now, but it’s not gone forever if you have an emergency or want to invest it later.
2. Top Up Your Fun Money. Yes, I said spend it! The way I’d suggest you spend it is to top up your fun money, or vacation fund. Make sure you get to enjoy spending it rather than letting it just evaporate from your account. Separate it and plan something specific with it.
3. Save It. Again, separate it, top up your new car fund or put it towards another short-term savings goal.
4. TFSA. Maybe you are still in love with the idea of RRSPs and don’t have the extra cash flow to do TFSAs as well, then use your refund to build your TFSA.
5. Let the kids spend it. Not literally of course. Call a family meeting and have the kids come up with a way to use the money (or a portion of) in a way the whole family can enjoy. They have to argue their points and do the research on the cost of their idea, and everyone votes via secret ballot. No matter what happens, the kids learn something about money and gain perspective, and you all have fun!

Well interestingly enough, a recent article discussed that those who flaunt it may have high incomes but may not be so great at managing their ample funds. In fact when the habits of those who had been found guilty of serious investment fraud were examined, not only were they narcissists but they also had extreme spending habits! Example: Dennis Kozlowski, former CEO of Tyco, once purchased a $6,000 shower curtain for his NYC apartment. (The comedian in me would just like to say, “shower curtain, seriously, what’s the matter? too cheap to cough up enough for glass?”)

Compare this behaviour to someone really RICH like say Warren Buffett, who lives a relatively modest existence, compared to his net worth. So the next time you hear these words come out of your mouth, or the mouths around you, “Well they must have the money to afford that,” think carefully about the impression you are perpetuating. What we can see, and what is, are often two very different things, and the monkey-see, monkey-do approach to buying stuff can get you in big trouble!