Pfft… Financial Facelift

One of Bonnie’s former classmates, let’s call her Skeletor (because she’s so bony), went for a “Financial Facelift” with her lover. It’s this thing where The Globe and Mail matches you up with a financial advisor, and well, you get advice on what to do with your money. The Globe then publishes your story in the paper and on the web. You can read about their “facelift” here.

For those too lazy to read the article, allow me to summarize:

  • The two of them are recent graduates, and they entered the workforce with upper-middle class starting salaries. They earn much more money than they were used to as poor, starving students.
  • So much in fact, that they don’t know what to do with it. Their after-tax savings rate is something like 55%, which amounts to roughly $4,000 per month. As a comparison, the typical North American has a negative savings rate (thanks to credit cards), and financial advisors usually tell you that you’re ahead of the game with a 10% savings rate. The Japanese are considered highly abnormal with their roughly 40% savings rate.
  • The pair have a couple of short term goals: 1) Save $20,000 for their wedding in two years; and 2) Save $50,000 for a downpayment on a house in 3-4 years.
  • Their long term goal is to have $1 million for their retirement fund.

The story started out interesting because Bonnie and I are in a similar position in terms of salaries and savings rate. It had my undivided attention until the “financial facelift” started to sound more like “financial sabotage”. Summarizing the advice:

  • Skeletor should put her portion of the savings into a money market account to work towards the short term goals.
  • Her lover should maximize his RRSP contribution, since his employer matches 50% of it.
  • They should drop their “poverty mentality” and spend the remaining money, because long term goals are too difficult to plan for – plans change, so why bother?
  • Besides, their company pensions, government pensions, and old age security will serve them quite well in retirement.

To quote a guy at work, “I was both shocked and awed” after reading all that. Seriously, people make a living giving out advice like this? Here’s what’s wrong with it:

  • At their current savings rate, their first short term goal would be reached in 5 months, and the second in 13 months – both way ahead of schedule. That leaves a hefty surplus for them to play around with.
  • Putting the surplus in a money market account is just about the worst thing you can do. At best a money market account will grow your money at the rate of inflation. My grandparents on a fixed income take on more risk than that!
  • Instead, Skeletor and her lover should be taking large, controlled risks with their surplus. They’re young and childless with no debts – what better time is there to be heavily invested in equities? Certainly not when there are mortgage payments and little Skeletors to feed.
  • Long term goals may be difficult to plan due to unforseen circumstances, but at least you can move in the right general direction. What boggles my mind is how the guy says they should spend instead of invest.
  • Company pensions? Does anyone nowadays plan to work long enough at any one company to save up a decent sized pension? A lot of places either don’t have pension plans, or they disappear if the company goes under or you’re laid off. Not exactly something you should be relying on.

I wonder if the shoddy advice has anything to do with the advisor being from Halifax. The east coast is the leech of the country. Government pensions and old age security indeed.

4 Comments

  1. Warren says:

    I agree. Saving $870/month would meet the first goal in two years. The remainder should be split towards a downpayment and long term investment. With their income level, I don’t know why they would choose such a small downpayment. Won’t it make more sense to maximize the principal, to make the mortgage period shorter? The average cost of a house is $325,000 in the GTA, with houses around $600,000 in the Markham/Richmond Hill region.

    I might have missed it, but advisor states that skeletor and company should “set sustainable targets for savings and spending.” Isn’t that a reasonable statement, since their spending habits would probably change now that they are no longer students?

    Lastly, old age security? Aren’t the current crop of seniors going to suck that fund dry before we even get a crack at it?

    I’m writing this message at this ungodly hour because a dozen thugs screaming at the top of their lungs outside my hotel room has just been dispersed by the hotel security and state police. I had to call security twice. You think Memphis was bad, Dave? =D

  2. Calvin Tai says:

    Cheers to that!

    Spending habits/financial situation will change a great deal once kids come into the equation(parenting is expensive).

    Saving ~10% of my near McDonalds income is amounting to nothing!! =)

    Maybe I should become a “finanial planner” instead. =P

  3. Dave says:

    A shorter mortgage period is not always advantageous. It’s really more of a psychological thing – i.e. to be able to say, “I paid off my house, I own it now.”

    The reality is that a few years after paying off their mortgage, many people will go back to their bank and get some kind of loan using their house as collateral. Instead of a mortgage, it might be called something else, such as a “line of credit”, but it’s basically the same thing with some very minor differences.

    You’ll always need leverage (i.e. borrowed money) to get decent investment returns, so why not take advantage of the lower interest rate you get with a mortgage? Combine that with the “Smith Manoeuvre” (which should really be called the “Singleton Manoeuvre”, methinks) to make your mortgage interest tax deductible, and you see the advantage of choosing to not make a huge down payment when you’re fortunate enough to have a choice in the matter.

    Wow, that’s pretty crazy Warren, which state are/were you in? Wait, IBM made you stay over a weekend? Odd, I hope it was by choice and not because they wanted to save on the plane fare. 😛

  4. Warren says:

    In the past, we had the choice of staying over a Saturday night if the total cost was lower than leaving before the weekend. With such stiff competition these days, many of the airlines have lifted this restriction.
    I was in New York and Boston last week, before flying into Vegas this week. Coming back would just add an extra flight along the way.
    Remind me to ask you about money managing next time. Hopefully before I visit the Fry’s somewhere here in LV. =D