Life may feel like a financial roller coaster, but we've found some experts to make your ride smoother.

Like many Canadians, Patrick Tierney and his wife, Cassie Kelly, owned a lot of stuff: a nice house in the Ottawa area, two cars, several computers and a home-theatre system. And like many, they hoped for an even better life-with future trips to Europe and the Caribbean.

But Tierney, a 46-year-old project manager for Nortel Networks, suddenly found himself out of work last year when the boom economy slowed and the company cut 47,000 jobs. A few months later, Kelly lost her contract management job when fibre-optics giant JDS Uniphase more than halved its workforce.

The couple took immediate action, casting their job search far and wide. Kelly soon landed a position with an engineering consulting company in Oakville, Ont., while Tierney decided to finish his master's degree in engineering. The family sold their home and moved to a new property west of Toronto. Recognizing that their children wouldn't be living with them for much longer, they chose a smaller house to cut costs. Still, they ended up paying $100,000 more than their former home sold for because of the tight local real-estate market.

Meanwhile, they've decided that when it comes to stuff, enough is enough. The big-screen TV Tierney was thinking about? Maybe later. Far-flung vacations? No, they'll stick to camping and visiting family members. "Defence is the best offence," says Tierney, "and that means living within your means."

The couple needn't worry about paying university tuition for their teenage daughter and son; they've been piling money into a registered education savings plan (RESP) for years and have already set enough aside. They've also kept to their habit of feeding their registered retirement savings plans (RRSPs).

Another plus: Tierney and Kelly kept their credit-card balances to zero and owed nothing on their line of credit. "We also had a few months financial cushion with our savings," says Tierney. "And our untapped credit gave us another buffer."

This family has done all the right things to survive in uncertain times, say personal-finance experts. If their income remains steady, they're on the way to financial security because they've cut their spending, avoided consumer debt, saved cash and returned to a financial discipline many folks haven't practised in years.

Perils of Prosperity

From 1989 to 1999 the average Canadian family's net worth jumped 11 percent. The bad news: debt also increased. From 1989 to 1999 the average household debt rose 17 percent. In 1991 the average credit-card balance was $948; by 2001 it had more than doubled to $1,985.

"While family incomes have been flat for close to a decade," says Robert Glossop, executive director of programs for the Vanier Institute for the Family, "expenditures have increased." The result, says Glossop, is households have taken on debt and eschewed savings. In 1989 the average family was putting aside $6,250 a year. A decade later that figure was just $1,664. Savings during that period plummeted from 13 percent of after-tax income to just 3.6 percent.

People have also been consuming products and services that were once the province of the rich, says Glossop. Big-screen TVs, superfast computers, days at the spa, gas-guzzling sport-utility vehicles and monster homes no longer seem extravagances.

Imagine what will happen if the economy really does hit the skids, and people keep living in the
manner to which they have grown accustomed. "The economic elastic band is pretty well
stretched as far as it will go," says Glossop. "Many people are economically vulnerable, especially if interest rates rise."

Finance experts say you can stay in the black in turbulent times. But you have to think like a chief financial officer running a household company. "You'd never run a business without forecasting where your revenues are coming from, and knowing how much money you have in the bank and what you are spending," says planner Warren Baldwin. "By cutting back on expenses and putting away savings, you would be surprised at what you can build up."

Good Debt/Bad Debt

First, determine your debts and the interest rates you're paying. You want to cut the amount of "expensive money," hold on to "cheap money" and maximize "free money."

High-interest credit cards are the most "expensive" money in most budgets. And credit-card debt in a downturn can be deadly. "Most people who go bankrupt do so because of credit cards," says Janet Freedman, a financial planner.

Take a look at this calculation: If you owe $2,500 on a credit card with 18.5 percent annual interest and make only the minimum monthly payments, it will take more than 15 years to pay it off-including a whopping $2,428 in interest. But if you double the minimum payment, you will pay it off in less than seven years and save almost $1,600 in interest.

Another wise credit-card strategy? "While you're paying off your balances, look for budget-oriented cards that charge half the rate of interest and transfer your outstanding balances to one, and you can instantly halve your carrying costs," says Baldwin.

Resist the urge to increase your mortgage payments, say experts, a common ploy to "get ahead of the game." Mortgages are "cheap money," assuming that your interest rate is relatively low (less than seven percent). You're better off placing the extra payments into a retirement fund and using any tax return your contribution earns you to reduce high-cost debt. "An RRSP is a better choice because if you do run into financial difficulty, you can access the money," says Freedman. "But if you lose your job and think you can refinance your mortgage to free up cash, think again; you might be turned down when the mortgage company learns you're unemployed."

Luxe Life Redux

Like Tierney and Kelly, maybe it's time to take stock of all that stuff that seemed so important several years ago. Perhaps the computer doesn't need an upgrade; no sneakers are worth $150; and a global positioning system doesn't have to be standard in the new car.

Speaking of cars, along with homes and credit cards, the biggest debts for many people are car loans. "Buy the best car you can afford and drive it into the ground," advises George Iny, president of the Automobile Protection Association. Take the money that went for car payments and put it towards an RRSP.

If you do need a car, Phil Edmonston, consumer advocate and author of the Lemon-Aid car-buying guides, recommends you buy a three-year-old domestic model or a five-year-old import. "You'll pay half of what a new model costs and your insurance will be lower."

Folks can cut 20 to 30 percent of their expenses by looking at the small stuff, says personal-finance expert Ric Edelman, author of Ordinary People, Extraordinary Wealth. "You don't need all those premium cable channels," he says. "And ask yourself if those three-dollar caffe lattes are that much better than a regular cup of joe. You need to recognize that you're throwing away money on things that have no long-term impact on your life."

And buying lottery tickets does not count as a retirement plan. Think those ducats don't add up? Per capita spending by Canadians on lottery tickets was $370 in 1999. "When I'm standing in a checkout line behind someone who is spending $100 on lottery tickets, I want to tell them to take that money and put it in RRSPs," says Freedman. "Along with getting a tax refund, they'll save more than they can imagine."

How much? Suppose you spend $25 a week on lottery tickets. If your marginal tax rate is 50 percent, you are really gambling away $200 of salary each month. Have that $200 taken off the top of your pay and invest it in an RRSP each month; after just ten years, you'll have around $35,000, assuming you earn a conservative seven percent interest a year on average. Do it for ten more years, and you'll have about $105,000.

Freedman agrees that changing old habits can be hard, but it can be done. And to prove it, she changed her driving habits, from using her own car to taking taxis. When she slipped on her steps and broke her neck, one of the first things she did was sell her car. "I didn't just save on gas and insurance, but it freed up some capital right away," she says.

Change your money habits by tracking everything you spend for a few months, and then go through your list and red-circle everything that you absolutely didn't need to spend. Be ruthless. "People pick up a coffee and muffin on the way in to work and buy a sandwich for lunch," notes Laurie Campbell of the Credit Counselling Service of Toronto. "By the end of the day, they've spent $12." Do that for a year and you've frittered away $3,000.

Smart Banking

Most people know that having their paycheque direct-deposited is a great way to avoid temptations. "If you never see it, you can't spend it," says Freedman. Start it working for you right away: Have a portion routed to an RRSP.

Once you're saving automatically, shoo the kids off the computer and start paying bills on-line and tracking your finances using Quicken or Microsoft Money, says Freedman. "You can break down your spending into categories and analyze where your money goes." And the minimal fees some banks charge for on-line banking are offset by the stamps you won't use to mail bills.

And when you do spend money, says Freedman, instead of using credit cards or cash- at a grocery store, a shoe store, a restaurant-use your bank debit card. "You can only spend what you have in your bank account." What you buy shows up on your bank statement, so you can see where your money is going. But be careful. "Make sure you aren't being charged extra fees," says Freedman, "and if you have overdraft protection, make sure you maintain a positive balance because the interest rates on overdrafts are very high."

Keep Investing

So you're drinking coffee at home, brown bagging it at the office and tracking your spending on-line. The credit cards are under control, and your bank balance is rising. Now you should avoid the wild ride that is the stock market and stash all that cash in a coffee can, right?

Wrong. All our experts agree: Keep investing, and buy when prices are low. "Too many investors are preoccupied with accumulating a portfolio consisting of yesterday's winners," says investment counsellor Adrian Mastracci of KCM Wealth Management in Vancouver.

"Chasing the best-performing stocks and mutual funds is an excellent way to get burned." You can often find good value in out-of-favour investments precisely because they aren't the flavour of the month. "Be a little contrarian," says Mastracci. "Buy where the herd is not."

Experts like Baldwin agree. In the United States, where records have been kept all the way back to 1926, there's never been a 20-year period when you would have lost money if you had invested in a broadly diversified portfolio of stocks.

Mastracci suggests primarily investing in index funds, as well as exchange traded funds that match the performance of Canadian and international indexes. And then leave them alone. History shows that more active investors frequently get lower rates of return.

"If you had a lot of money invested in tech stocks, you know what you lost, so just call it tuition," says Baldwin. "You've taken a course in how not to invest, and now you can begin anew."

Related link:
Beware Seven Sins of Portfolio Building
By Steve Maich, National Post, February 16, 2002
State of the Markets/Quarterly Report
 

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.