Harry: Hello I'm Harry Kozak a client associate with the Kozak Financial Group at CIBC Wood Gundy.
Harry: I'm joined today by my father and coincidentally my boss Wade Kozak. Wade, over that over the last few months, has asked me to generate a list of FAQs or common concerns or misunderstandings that young people have about money and finance. Wade, as I understand it one of your common concerns is that younger people don't tend to understand time horizons. So could you start by defining what a time horizon actually is?
Wade: So when I meet with the young investor, or you know, a young adult child of an existing client who's maybe never invested before; one of the things they often talk to me about is how young they are and they say “you know look how much time I have in front of me, look how long my time horizon is that I'll be investing for.” And all of the traditional literature and the definition of time horizon says that since you're so young and since you have such a long period of time you should be taking a lot of risk with your investments. You should be investing in higher risk stocks investing in more growth stocks and essentially kind of playing the long game. But in my experience a young adult investor is somebody in their early 20s just getting out of university they don't actually have that long of a time horizon. And in my experience typically within five years of when I actually meet them when they have the very first money that they maybe want to invest, that came from a job or their parents, they want that money back. Whether it's for a vehicle purchase or whether it's for a house downpayment or whether it's just to start their life in a relationship or what have you. And almost always that initial money they came in with they're gonna need it in their early career. So for a young investor like that their time horizon, in my experience, is actually a lot shorter than even their 50 or 60 year old parents who are investing for perhaps the next 30 or 40 years of retirement a young adult really might only be investing for the next one or two or three years saving up for a down payment.
Harry: Right. So a young adult might be told that their time horizon stretches all the way to retirement and beyond. But in reality it's actually only to their next large purchase where all of the money they actually have is going to be used on a house or a car or an like an extended vacation.
Wade: And often it's something that they weren't even considering like whether it's a… I can think of some examples of somebody who had to change cities to go for a job and that has a certain amount of expenses in it as far as damage deposits and setting up your life and you city. Or whether it's a new relationship people moving in together and they get an opportunity to buy a house and they need that money for a down payment, or whether it's a vehicle that disappears that they have to go and replace or repair. It's not uncommon for a young adult who's just starting their investing career to actually need all of that money back in fairly short order.
Harry: Right. And so I think a lot of younger people understand their time horizons as being both short term and long term. They're thinking short term about their next big purchases and they're thinking long term about their retirement or saving to have kids and what that means for their lifestyle changes in the future. So could you speak to how one could avoid those stresses of trying to manage all these different timelines, but only being able to control sort of what's going on today?
Wade: I mean the typical young adult doesn't have the cash flow or the assets to sort of address all of those concerns of saving for a house down payment, making sure they can replace a vehicle, and saving for their retirement. Often my client, who's introduced me to a young adult, their primary goal is for their child to sort of get a handle on that the longer term side. And sometimes that stems out of a desire that they have that maybe they wish they would have started saving for their retirement earlier. But they kind of forget all of the pressures and stresses that they had on them as a young person just setting up house and all of that sort of thing. So when I'm talking to a young adult I want them to keep front and center in their mind that they will have needs for capital in the very short term. And so we shouldn't be putting this money into a long term growth stock under the idea that it's just going to stay there for the next 20 or 30 years. It's important to keep those longer term goals in mind and think about it. But in my experience with, you know, being in this business for over 25 years most adults have saved for their retirement in that last final 10 years of their careers. The path that people typically take is: they're getting themselves set up in a job, they certainly aren't in their peak earning years when you just start on your new career, your perhaps buying a house and now you have to go and pay off a mortgage, and maybe you're raising children and you have all of that expense, then you're putting children through university and you have all that expense, and maybe you're even still paying off your mortgage at that point. And then that very final 10 or 15 years before retirement they're at their peak earning years. They're making more money than they ever have before the mortgage is paid off the kids are through university. They have more free cash flow than they've ever had before. That's when people put most of the money aside for retirement and when it's looming on the horizon so to speak. And it would be great if we could all, you know, as the financial planning charts show put in a fixed exact amount every month starting at age 20. Up until a point you retire but reality doesn't work that way and life gets in the way and expenses get in the way.
Harry: Right. And I think what you're referring to there is that classic chart of, if you put in a hundred dollars a month due to compounding interest by the time you're 60 you'll have over 2 million dollars or whatever the figure is.
Wade: Exactly. And these are these are charts that are important they reflect the importance of starting early and the importance of compounding growth. And if you're a robot who didn't actually have to buy a house and you know set yourself up in all of that, those could be very relevant for you. And I think it's also important that a young person starts investing somewhere so that they can get a feel for what it's like to invest and they can start learning with just a little bit of money and make mistakes with just a little bit of money and learn a lot of those lessons that you know their parents have learned years before and everybody else has learned around them years before.
Harry: Right. Thank you.
Wade: You're welcome.
Harry: If you have any questions or would like to see a topic covered in a future video you can reach me the following information.
Planning for Future
Harry: I'm Harrison Kozak a client associate with the Kozak Financial Group at CIBC Wood Gundy. I'm joined by my father and coincidentally my boss Wade Kozak.
Harry: Wade, as you've asked me to develop these questions or find out what younger people are curious about what their own finances and their own money; One of the main things that I've been asked about is how do I know what's important or how do I tune out the static of what everybody else is telling me about my financial life and focus in on what's really important to me and make sure that I achieve my own long or short term goals.
It's unrealistic to expect a 23 year old to go and get a financial plan for their entire life as likely in five years they will be completely irrelevant and won't be realistic anymore. So where should one start in taking the first steps into their financial sort of life cycle?
Wade: I think one of the one of the most powerful tools and habits a person can form early on to keep track of [their financial position], is keeping track of a personal net worth statement. This is just a, this doesn't have to be complex. This is a spreadsheet that basically lists your assets and your liabilities. I've kept one myself since I was in my 20s and the one that I'm keeping today is essentially the same spreadsheet that I started many many years ago and just modified over the years. And I have it categorized into into three basic categories. One is cash and short term assets bank account balances credit card debt that sort of thing.
One I have listed as fixed assets. So on there would be the value of your house the outstanding balance on your mortgage on your house, if you have one of those, if you own a vehicle what's the value of that vehicle, things that don't change a whole lot. Or there isn’t a whole lot of flux in.
And then I have a third category of longer term cash investments or longer term liquid investments so there I would have my RRSP account, my tax free savings account, my open investment accounts, company savings plans if you have those.
And my own habit, I basically forced myself to keep track of this once a month and once a month go and update all those numbers. The power in doing that is that it forces you to focus on it at least once a month. And also it allows you to see that you're making progress on some of these goals even with that progress isn't may be evident in your day to day life that you can actually see your mortgage balance creeping down a little bit so you realize that OK I'm making progress on this net worth statement even though my bank account balance hasn't risen even though my investment account hasn't gotten bigger and I haven't been able to save a whole lot of money there. I can see that my net worth is growing simply from paying down some of that debt. And it helps keep you focused on what's important.
Harry: Right and you mention assets and liabilities and just as a short explanation, a liability is something that you owe somebody and an asset is something that you already own.
When you're speaking about things like a car that we know depreciates or goes down in value over time, you still feel that it's important to keep track of that so you know how much what you own is worth?
Wade: I think so. If only for the matter of that, you know, if you if you need a car and you own a car and so you have to go and purchase a car. You don't want your net worth statement to suddenly drop dramatically because this money disappeared that you used to go and buy a car and then you feel like you've failed somehow in your goal of increasing your net worth. So it's important that OK I've bought this car, have it show up on that net worth statement. So you can see [the money used to buy the car] showing up somewhere else. And fair enough once a year feel free to go and re-evaluate how much that car is worth and update it. But, you know, I'm not talking about getting like a really sharpened pencil here and keeping track of every single knickknack you have in your house and what it's worth at the moment. But just the big things.
And the goal here is to keep yourself on track and keep yourself interested (Which, you know, to myself who does this for a living and I look at this everyday all day long.) It's easy for me to keep myself interested in all of this, but I also understand that most of our clients maybe think about this stuff tops once or twice a year. The younger you are and the less investments you have, you probably think about it even less. And so any habit I can suggest that at least keeps a person focused a little bit on keeping track of, you know, making sure that net worth statement is marching in the correct direction I think is a helpful habit to build on.
Harry: So do you have any advice for our viewers who worry about what their parents are thinking or what their friends are thinking about their financial situation. I know a lot of my friends tend to compare themselves to others and think “Where am I at as compared to Jeff?” or “where am I at as compared to Sydney?” in their financial health. They worry about what they own and what they owe and they don't so much think about their own situation but more comparing it to others. Do you have any advice to combat that?
Wade: A little bit. So no one is as concerned about your own personal financial situation as you are. And that goes for your parents, that goes for advisers that you might deal with. No one cares quite a much as much about you and what's important to you as you do. And, you know, between the two of us I'm the gray haired fuddy duddie, so to speak, right. But even I'm not so old as to not be able to remember that when I was when I was young, my parents had certain ideas about what should be important to me and I had different ideas about what should be important to me. You shouldn't necessarily adopt your parent's ideas because of the world has moved on to a certain extent.
Like for example, back when I was first getting a job, was sort of right at the beginnings of the time when it was fairly rare to go and get a job that had a defined benefit pension plan attached. Whereas my parents, almost every job that existed that you could get back in the 40s and 50s that was a full time job came along with a defined benefit pension plan. And my grandparents and my parents all kind of fell backwards into these retirement plans without really thinking about it too much. These days, very much, we are being left to our own devices to save up our own pension plans and no one's going to start handing us a monthly check when we turn 65 except, you know, through the CPP and OAS. And so we had different things to worry about and different things to think about.
And today when I'm talking to young adults and, you know, adult children of existing clients of mine, it's evident to me that that the current crop of young people, so to speak, they find different things important. And not all of them are married to the idea of buying a house or, you know, getting that career oriented job that lasts for 40 years and then they retire. They have different ideas of how they think this should work and maybe in the modern world those are the ways it's going to work. So don't just adopt necessarily what your parents have to say but you have to sort of find your way on your own.
Harry: And building off of that sort of “non-traditional lifestyle”, a young person's parents might be expecting them to buy a house and have kids and have a career the last of them 55 years. A lot of my friends or a lot of people I went to school with were looking into signing on with a startup company a pretty risky job, right. It might last. It might not. You might see big benefits out of it. You might not. Or they might be thinking about moving to a different country and teaching English for five years after university or traveling after school rather than settling into a job, even if it's not their permanent career path. So a lot of those people worry “can I recover from this? If I spend five years teaching English in Cambodia, can I come back and still live a fruitful life and save for my retirement or will I be five years behind everybody else and just sort of putting a dent into my own plans?”
Wade: And that again, a very much personal choice. But what I will say is that if you're contemplating a big move to a different country or a risky opportunity that may flame out but it may be famously good, when your fresh out of university and don't have really ties to anything, that's the time that you can do that without a whole lot of disruption in your life. You're still living like a student; you aren’t spending a whole lot of money. You don't have, presumably, you know, three kids to go and make sure that you can feed. And so if you are going to make a decision like that, that's the time to do it.
And I can think of decisions that I made fresh out of university that I look back and I wonder had I taken that risk how my life might have turned out differently. Not that I regret how it's turned out and it has turned out just fine. But I think about those same opportunities arising after I'm married and I owned a house and I have some children to go and feed and suddenly going and teaching English in Japan for six months is an operation that's fraught with despair of “OK what I do with my house and how do I feed my family”. I'm not saying it's impossible but suddenly it's a whole lot more difficult. So if you are contemplating doing something like that the time to do it is when you're young and unestablished.
Harry: Thank you.
Wade: you’re welcome.
Harry: if you have any questions we'd like to see a topic covered in a future video. You can reach me at the following information.
Understanding Corporate Benefits
Harry: Hi I'm Harrison Kozak, a client associate with the Kozak Financial Group at CIBC Wood Gundy. Once again I'm joined by my father Wade Kozak.
Harry: Wade, one of the more common questions that I've been asked, since we started this video series, is that a lot of people are just setting out to new jobs or starting their career out of university or a few years removed from university and they're confused about the benefits packages, pension packages , the share purchase plan that their company might offer for them to get involved in the ownership of the company or for them to get involved in the health or dental or other benefits for their retirement, sort of, planning options that their company might offer to them. So people are frequently asking: should I dive into this right away? I'm trying to get used to this new job or can I just put it off and deal with all of this in a year once I've sort of gained my legs?”
Wade: Do not put it off. If you're starting a new job with a company that has any kind of benefits package where you have to make some choices about how you take part in them, this is critical. This is a critical part of your compensation package that you have to pay attention to, even if it's something you have no interest in. Sometimes if you don't respond to your human resources department within a certain number of weeks or months, essentially you've lost the opportunity to go and take part and you can't re-enter it until the next calendar year or until 12 months later because they don't want to have to constantly revisit this. So it's important that that you talk to somebody, and here's an ideal opportunity where your parents actually can help because your parents probably have worked places where they've had to deal with share purchase plans, matching contributions for your RRSP.
It’s basically free money the company is putting on the table in various ways but you actually have to opt into collecting it. And if your parents aren't prepared to [help] then, you know, advisors like myself, or certainly within the company you're working for are. There should be somebody in the human resources department who can guide you through this process and help you make some of the decisions about this.
Harry: And as for opting in a lot of people ask “Are these benefits really worth it?” I’m early in my career I'm a young guy. I don't really need medical benefits. It's not like I'm visiting the doctor a lot. I don't have kids who have pediatrician appointments. Should I just take this money on my paycheck and run with it?
Wade: You know, I guess that's one option but I think that's fairly short sighted. You might not have those kinds of issues right now today, but you might six months from now or nine months from now. Or you might have an expensive dental problem that, you know, these benefits could help you with. And you shouldn’t opt out of that.
These programs are in place, and have been negotiated by employees before you, to put yourself into a better financial position where you're not taking the risk for some of these expensive, you know, dental procedures and that sort of thing or expensive prescriptions and all of that type of thing. So it's important, I think, that you take advantage of it and if you are thinking of starting a family it's even more important that you have that to protect you and your family.
Harry: Right. And I think that a lot of people see their taxes or union dues or other fees coming off their paycheck and they don't see those, they don't ever think about that. They don't think “My paycheck is this much smaller than it should be.” And so similarly the benefits packages often come off in the same way. Does that sort of psychological effect, of never actually having that money and having to pay it out, make an impact do you think?
Wade: I think it makes it easier to pay it when it disappears off your paycheck. You're not actually having to physically, I was going to say write a check but that never really happens anymore, you're not actually having to like electronically send the money, or you don't make the choice every month to go and pay that money. So it is easier when it's happening in the background. That’s not to say it costs any less, that expense is still, there but it's very important.
I think one of the ways people can make mistakes at this early stage in their career with some of these benefit packages though is, you're getting the advice from a human resources person who's probably older than you, probably more established than you, and they are talking to you about: “Yes we have this matching program for your savings. Let's go and put that into this RRSP.” And here you are, in your lowest earning years ever, making RRSP contributions and possibly taking those deductions on your tax return when five or ten years from now you'll be in a higher tax bracket. And maybe it's more worthwhile to save some of those contributions until then.
So perhaps as a young person you should consider, depending on your salary, looking at the tax free savings account contributions being matched instead. But don't leave that free money on the table that the company is offering to match either on a share purchase program or a RRSP or a tax free savings account savings program. Make them pay, right? Make them give that money to you by actually putting your money up there for them to slide theirs in alongside of it.
Harry: Right. So in that case, do you have any advice to maximize the benefits that I'm going to see from my benefits? A lot of companies offer something like a dollar benefit matching program or dollars of benefits that you are allowed to spend on their behalf.
So you have all these options of dental and health then and other types of benefits like life insurance or other accident insurance. So I have a certain number of dollars to spend, how do I figure out where I put my dollars that I'm going to see the most benefit from them?
Wade: That's very personal to you, and we've been talking about two different things here. One is the health benefits package working for an employer so that would be your dental plan; your medical benefits plan; maybe your employer group provided life insurance, that there's like a small amount that's provided to everybody but you have the option to increase it if you want; the disability insurance that's protecting you against, you know, not being able to work and still having some kind of an income. And all of those things will have a different value to you depending on: are you married, do you have children, or are you just on your own. You will have you have to make some decisions about using that company money, that they've provided, about which way you want to steer it.
The other half of what we're talking about are the employee benefits that you might get from savings plans. So whether it's a pension plan, that the company offers, is it a defined benefit or defined contribution? And how do you make sure you take part in it and get the company contributing alongside of you. It might be savings accounts matching, where if you're making monthly RRSP contributions the company will match a certain portion of it; or it could be share purchase plans, where if you agree to take a little piece of your paycheck each month and buy the shares of the company you're working for, the company actually matches that and buys more shares on your behalf. And each of those programs has its own rules of when will it vest, when does when does the company money actually turn into your money? How long do you have to be participating?
They'll have their own rules about how often are you allowed to change your mind. It's not atypical for it to be only a once a year decision that if you want to stop making that contribution and having it matched you're not allowed to restart it until the next year, to kind of penalize you a little bit for, you know, making those choices. So it's important to have all of that on the table and understand all of it and at least make a conscious choice rather than “Oh this is just too much to think about right now. I'm going to slide it off to the side of the table and not think about it.” And then suddenly six months has gone by and you're not in the pension plan, right, and you can't get it back in until maybe a year later.
Harry: Right. I understand. So frequently then you would say that the dollars for health benefits or dental benefits you're being offered wouldn't cover the top tier program every time. So I can't get the gold plan for health, the gold plan for dental et cetera because there just wouldn't be enough offered to me. So in making those choices that I want to have more health than dental or vice versa. The main goal is to just spend all those dollars, is that what we’re getting at here?
Wade: I think so. And spend them in a way that that is most suitable for you. You're talking here about, not every company has plans like this, where they give you a certain amount of health benefit dollars that you have the control to direct. Do you want the more gold plated dental plan or do you want the more gold plated medical benefits plan? And if, you know, if (everybody has their own circumstances) but if you have some medical condition that involves expensive equipment you have to buy it occasionally, Maybe that medical plan is the wiser way to go for you. If everybody in your family has had braces and your wisdom teeth aren't out yet maybe, the dental plan is the way to go for you but I can't think of any companies, with the exception of perhaps, you know, working for the government, where you have the benefit of having the gold plated everything plan all provided for by your employer.
Harry: Right. And as far as, sort of, the employee matching in those savings plans go if my employer is only matching 2 percent of my annual salary in contributions if I even contribute the full 2 percent. Is it even worth that at that point it's such a small percentage?
Wade: It seems like a small percentage but really what they're doing is, for your savings they're matching perhaps 50 percent or 100 percent of that “up to 2 percent of your entire salary”. So for somebody making, I'm just pulling numbers out of the air here, forty thousand dollars a year. And you say “OK I'm going to start saving a thousand dollars a year in this plan”; the company might kick in an extra 500 or possibly a thousand dollars to match that. So even though 2 percent sounds like a small number that we should just sort of not worry about it's significant. And if somebody is offering me a thousand dollars or if I see that, you know, in cash on the street I'm bending down to pick it up, thank you very much.
Harry: Yeah. And with the ownership options, it's pretty common in both private and public companies that a corporation would say “Oh you have the option to buy, sort of, shares of this company.” Is that worth it? And how do I determine, you know if I'm not working in the finance industry and I'm not sort of an analyst of stocks and securities and I'm just working that job because it's the first job I got offered and that's the only job I got offered. Is it worth it? How do I know if I should be putting my money into this ownership plan when I might not be here for that long?
Wade: Well you're typically being allowed to buy into the shares and then the company puts their money alongside yours and buys more shares on your behalf. So let's say the matching is 50 percent, which isn't atypical. So if you put a thousand dollars in and then you get five hundred dollars from the company you're working for, you have fifteen hundred dollars’ worth of that stock. That stock has to drop 33 percent in value over the next 12 months before you wish you hadn't done it. I'm not saying it's an absolute safe bet, but it's a pretty safe bet that after a year later you'll look back and be thankful you did this. It will be worth more than the thousand dollars that you actually put in of your own money.
It's important though and it's, you know, maybe not for a young person but, it's not uncommon for me to meet somebody who's in their 40s and really the only saving they've done is through their share purchase plan. And so I'll sit down with somebody who's now thinking about retirement and they've been putting money into one of these share purchase plans for many many years and we'll discover that two thirds of their entire net worth is all in this one company’s stock through this share purchase plan simply because they haven't really thought about it. It's just been going in there and it's been added to and this other money has been going in there. And yet anybody, you know, logically would say having that much of your net worth tied up in one company's stock is probably not the definition of diversification. And even if it's worked to that point because that stock has done well that probably isn't very wise.
Having too much of net worth tied up in there, and this sort of goes back to what we talked about in one of the other videos; that it's important to sort of keep that monthly net worth statement, even if not to sort of monitor “well how much of my total assets is tied up in this one investment that's being made that I'm not thinking about in a month to month basis?” It's important to look at that from the point of view of “Oh look like my net worth is growing through the share purchase plan, or through the savings that are being made for me through the, perhaps, the defined contribution pension plan.” things that nobody is showing you on a monthly basis. But you can actually see your net worth growing from all of those moving parts being added to on your behalf. And so it's important to take part in them.
Harry: Thank you.
Wade: You're welcome.
Harry: If you have any questions we'd like to see a topic covered in a future video you can reach me the following information.
Getting Ahead of Expenses
Harry: Hi, I am Harrison Kozak a client associate with the Kozak Financial Group of CIBC Wood Gundy. I'm again joined by my father and boss Wade Kozak.
Harry: Debt is a common source of confusion for a lot of people, young people and older people alike. They don't tend to think about a credit card as a debt instrument, or that they're racking up debt by buying things on their credit card because at the end of the month they pay it off. They could have spent that money on their debit card. And a lot of younger people tend to have that opinion that “I can pay the minimum on my credit card, and I've just moved into this new apartment so I need some new furniture because I'm having a house warming party so I'm going to buy this couch and put it on layaway and I'm going to buy a new coffee table on my credit card.” and they slowly start to develop that little bit of debt. And a lot of them don't really see the issue there; could you sort of explain what those small pieces of debt are doing to them?
Wade: Well this goes back to that net worth statement I talked about, right? Every single piece of debt that you put on, whether it's credit card debt that you don't pay off each month or whether it's consumer debt through a department store card or line of credit or whatever, adds to the negative column on that net worth statement. And this is actually a topic near and dear to my heart.
One of the most powerful things that you can do, and habits that you can build, that you kind of have to build when you're young, is not to actually buy things unless you have the cash on hand and not go in debt to buy those depreciating assets.
Once you start the habit of sort of always being ahead of your finances, of always owning the material goods, the things that you would like to have because you think you should be able to afford them even though you can't quite afford time just yet. My experience is you tend to stay in that mindset even as you continue to make more money you’re spending just goes up along with it.
And you know I don't meet people like this too often because they don't have money to invest quite frankly. But I'm sure credit counselors do meet people who can't quite understand that, “I'm making more and more money each year but I can't seem to get ahead. I can't seem to actually go and get two quarters to rub together.” One of the most powerful habits that you can build early on as you set up your life is keep your lifestyle below what you can afford.
So if your income is here, live like your income is there, and you'll always have that little bit of extra to sock away and save and have for a rainy day, and when that emergency comes up there'll be some cash there. And by building that habit early, that's a habit that tends to stay with you. And if there's one thing that I can sort of point at all of my clients who deal with me who have significant assets to invest you know into their 40s and 50s and 60s and beyond; it's that they built this habit early and they stuck with it and they've always lived slightly below their means.
That's the most powerful thing any young person can do and it's pretty easy, right? Not to drag this on but it's pretty easy to do that because perhaps you're used to living like a student right now, right? Maybe you're living in shared accommodations, you're not used to living that high. And so once you get your first job don't increase your living standard just yet, you know. Get your first few paychecks. See them roll in. Watch how much of it you don't have to spend to support your lifestyle. And then very reluctantly increase your lifestyle expenses.
Harry: So I think what you're talking about is a concept known in sort of the finance world as free cash flow or “how much extra money do we have floating around that isn't tied to anything else?” It's not tied to “I've got to pay my credit card bill with that money and I have to pay my electricity bill with that money et cetera.” So how much extra money at the end of the month do I have that's just sort of sitting idle ready to be saved or spent? So how would you recommend a person goes about developing that free cash flow or developing that extra money outside of living below their means? Do you have any tips for budgeting or do you have any tips for ways that you can plan ahead for what your expenses will be and still leave room to save that money or keep that money for a big purchase you'd like to make in the future, like a new couch?
Wade: I think the strongest thing you can do is set yourself some tangible short term goal that is relatively easily achievable in a short period of time.
So financial goals often are looked at as very long term events like saving for retirement, you know, saving up for a down payment for a house, that might happen in eight or nine years. But I think that that the first goal the person should have, if you are currently debt free which isn't uncommon except for perhaps student loan debt etc., but the first thing you're going to do when you're setting up your house and setting up your life is say “OK I want an emergency fund saved up. I want a few thousand dollars, I want two or three months of earnings, essentially in something very liquid that are available to me in the event of emergency.” And sort of set that task that I want to see a couple of thousand dollars or 4000 dollars saved in this separate bank account that I've opened six or nine or ten months from now and then attempt to achieve that goal by putting away that little bit of extra money because you haven't increased your lifestyle just yet and putting that little bit of extra money away in that account and then having that warm fuzzy feeling of achieving that goal six months or 10 months down the road.
I think that's really important to get to sort of be able to achieve that very first short term goal because it gives you the tools and it gives you the knowledge that you can do this. If you can do that 10 month goal you can do that 10 year goal.
Harry: Right. And that 10 month goal can then sort of flip over and become another short term goal. It can become “I've saved up this emergency fund in case my car breaks down and since it's on its last legs I'd like to start saving up to buy a new car at some point.” So would you recommend sort of laddering those goals that as you sort of achieve one you make sure you set a new one either short or a little bit longer? And do you think that's a strategy to sort of start developing pockets of money towards your longer term goals that you can build in the short term?
Wade: They kind of all tie together as you start to do this. You have that very first simple short term goal and then once that's achieved you should ladder that into your next goal whether it's saving for a car, whether it's paying down a student loan, whether it's maybe you did have a bit of a credit card addiction problem and you got some credit card debt to go and pay off and start getting that paid down. When it comes to paying down debt, I always recommend to a young person: focus on the smallest one first, and be able to achieve that goal of paying down that 1000 or 2000 dollar credit card balance that you can then kind of reward yourself internally. Right, look I've accomplished this goal. And in my own experience when I would do those net worth statements I've talked about before, and update them, at the very bottom in the net worth statement I have a little text box and I actually have one or two things written in there that over the next over the next 12 months this is what I want to focus on achieving. Whether it was paying down the mortgage, or whether it was saving up for this event or whatever or paying for a vacation. But there was something that every month when I went and updated that [spread] sheet it would be there and I would look at it and, you know, maybe I was achieving it maybe I wasn't. But it sort of reminded me that there are those goals there to look at.
Harry: Right, and so I think a lot of people would hear this and say, you know, this is great and all but I'm not making that much money; it's my first sort of big kid job and I make a small salary. I still have expenses to pay. I'm renting an apartment with a couple of friends. How to do I avoid getting caught up in the hubbub of what everybody else is doing and sort of stick to these goals if all of my friends are always going out for a few beers after work, but I can't quite afford that? How do I develop these habits even though I might be being pulled away from them?
Wade: I want to say first off that I'm not saying you can't live, right, that you have to like go to work and go home and, you know, sit in your barren living room without a TV and, you know, do nothing. So, you know, we have to live too and you have to afford yourself that balance of living for today and saving for tomorrow and so don't get me wrong I'm not saying, you know, this is 100 percent austerity or anything. And honestly like how do you avoid that peer pressure of going out and spending? You know if I could answer that I'd have some of the keys to the universe.
But all I can say is that it's so important to sort of build that habit in early, start as you mean to go and saying today that “Well I'll start doing that a year from now maybe after I get my first raise.” It's not going to work. You have to start from day one and have the balance, you can't live like a pauper but have that little bit of free cash flow you can point out and say “Yep I'm saving this each month.” Whether it's going against debt, or whether it's going into a savings account and being able to see yourself achieving some of those short term goals.
Harry: Thank you.
Wade: You're welcome.
Harry: If you have any questions or would like to see a topic covered in a future video you can reach me the following information.
Harry: Welcome back, I'm Harrison Kozak a client associate with the Kozak Financial Group, joined again by my father Wade Kozak.
Harry: Wade, a client’s child wrote recently and had sort of a complex question. They had two options presented for them. They could stay at home and there was a relatively safe, more “boring” job here at home in Calgary. Or they could move to Toronto and they could take a little bit of a riskier job that might eventually pay them some more and take that risk of moving to Toronto, something that they've always wanted to do. They were conflicted, they didn't want to make a foolish financial decision and then end up having to fall back on their mom and dad in a few years, if it didn't work out for them. But they also wanted to be able to pursue this unique opportunity that they've been sort of dreaming about, it’s sort of their dream career. So I guess their main question is, or the main question I find in this is, what advice can you give to someone considering a really big shift in their lifestyle like this? Like moving to a new city.
Wade: Well, you know, this is kind of beyond a financial decision to a very large extent. But from the financial side, you know, one of those options is more expensive, has more uncertainty involved, moving to Toronto, setting up house at a different place, not being close to mom and dad to provide a certain level of support in a new endeavor that is a little bit riskier that, you know, maybe it works out famously well maybe it doesn't. At the same time however the other option, you know, could be a really good career move that, you know, the safe option could end up working out very well.
I think it's important for a young person to stay flexible and understand that in these younger years no one can make that decision for you. But you kind of have to start building a pros and cons list of how important is it to you to sort of “leave this fair city behind” and strike off and seek your own fortune as the saying goes. Versus, how important is it to you to stay maybe closer to family and closer to friends you've made here in the city. And there's all these intangible non-financial sides to this decision.
But if a person is going to uproot themselves and make a big change like that, perhaps the time to do it is when you have the least ties in your life. You know, when maybe you aren't married or in a serious relationship, you don't have children, you don't own a property here yet. And so it's, you know, you're a couple of boxes and a suitcase away from actually making that trip to Toronto. And so of all the times in your life to go and possibly try this maybe this is the time that it's the easiest for you to go and try this.
Harry: I think they were also concerned about how they were prepared for, sort of the hiccups along the way. Being away from home, being a bit homesick, or whatever these sort of personal or social issues. One of the questions as far as the finance side of it goes is; how do I prepare myself to deal with those financial hiccups? You know, they moved into this new apartment sort of sight unseen and then they get there and it's just god awful and they've got this deposit but they want to get out of here because there's black mold everywhere. How do I sort of prepare myself for these unknowns that could come at me as far as my money is concerned?
Wade: I think if you're going to make a big move like that, you should almost build a little bit of a business plan. Of well, this is what it's going to cost. And this is my entire first year's budget sort of put down in advance of what I anticipate. And any good business plan, there will be kind of contingencies in there for unexpected expenses that come along the way. So having a plan like that before, you know, you step on the bus or the airplane, perhaps puts you in a better position for the first time that comes along it doesn't throw you completely off track. Then it's like, “OK we planned for this. I got this little bit of extra money here to go and get away from the black mold.” Or whatever it happens to be and make a different choice. But I think rather than just being a hobo and getting on the train and showing up in Toronto, actually having some kind of a one year business plan or financial plan of how this might look. And then you can sort of refer back to it and say “OK am I on plan? Or am I crazy off plan and this is failing around me?”
Harry: Right. And how could this person sort of action their stress or their concerns into something that they can do today? They can write this plan. Are there other tips or options for them to pursue that might eliminate this stress or might use this stress somewhere else?
Wade: Not everything is a financial decision. I think it's important to remember that and if this is a dream, if this is an opportunity that could pan out very well, it's possible that even just having this experience for the year even if it fails might, you know, you've learned something from it, you've grown from it. It's been worth it. And so even a failure can be a success; and that point of view of: what you take away from it, maybe you make contacts you wouldn't have made otherwise, maybe it takes your life in a different direction beyond that that never would have happened had you not made that move.
So don't panic if it's not working out exactly like you expect. Right off the bat it's a journey and it's a process. And sometimes that journey and the process is really what it's about rather than the end result.
Harry: Thank you.
Wade: You're welcome.
Harry: If you have any questions we'd like to see a topic covered in a future video you can reach me at the following information.