When you are in control of your finances, your income, and your debt the feeling is truly empowering. Now is the time to get control. Interest rates, which have been low for some time, will begin to rise in late 2017 or 2018 and that usually means inflation is not far behind. Now is the time to focus and make sure your financial game is in perfect working order. Here are Ten Financial Rules to Follow for your investment plans.

Ten Financial Rules to Follow

Take control of your finances

Take the time to develop a financial plan that meets your personal goals. Brush up on your financial know-how through courses and seminars. Whether you are a small investor or have a large investment base, getting in control will truly be empowering and it will set you free from worry about your finances. Map out a plan and follow it. Adjust it as the financial landscape changes. Review it regularly and fine-tune it as needed.

Pay down your debt

Paying your own debt first is an obvious kind of thing to do, however, there is a priority in terms of which debt to pay. Store credit cards carry the highest interest rates, sometimes upward of 28%. This debt is what you should focus on and pay off first. You will and must meet all of your obligations at the same time. Make sure you pay all of the monthly installment payments on your other debt to avoid bad credit ratings. Once you pay the credit card debt, focus on the next highest-interest debt that you have until it is paid off.

Spend less

Once you decide to pay off your credit cards, you will have less to spend, however, you want to make sure you are not racking up new debt at the same time. Set a budget that allows you to live within your means. Spend less at least for a while. You will find that the extra money you gain will be useful in reducing debt and also saving for the future. This is a life-changing habit to form and it is important to spend less so that you can reduce debt as well as not create new debt.

Save more

Most Canadians save on average less than 5% of their personal income. We used to save about twice that and the folks in the US save even less than we do on average. Try to get into the habit of saving 10% and have it taken directly off your paycheck so that you do not even need to think about it. After a while, it will be just another deduction on your paycheck and you will benefit by building your savings which will come in handy if you are laid off or better still for retirement.

Develop a personal investment policy statement

Large companies do this because it is a professional way to manage money and manage a business. Why should you not do this as well? Write out your goals and review them at a minimum of once per year, more often if the market is volatile or you have additional money to add to your portfolio. Take into account your tolerance to risk and also decide between the growth of stocks vs. income from dividend stocks and bonds/GICs.

Re-balance

As part of your investment plan review, review the balance of investments that you have between bonds, stocks, mutual funds, or other investment vehicles that you may have. Try to diversify your investments and strike the right balance of stocks, bonds, and mutual funds. Does your current investment mix meet your investment goals and your investment plan? As the markets increase and recede, you may need to re-balance your investments to keep the right balance in your investment account.

Get tax efficient

Being tax efficient is just good business sense. Take advantage of all of the programs to defer or decrease your taxes. Can you increase your deductions, defer taxes to another year or share your taxes with your spouse? If you do not have the time, if you are uncomfortable, or if you just do not want to do your taxes, hire an accountant to review your taxes to make sure that you are getting all the tax deductions you are entitled to. Even if you do your own taxes every year, you might benefit from having an accountant review your taxes for one year to see if you missed anything.

Get insured

Most people have car and house insurance. Many do not have life insurance or disability insurance. If you have this kind of insurance through your job, review it to make sure that your family could continue to live comfortably without your income. If you do not have life insurance or disability insurance, consider purchasing this type of insurance. You do not want to leave your family destitute and poor.

Don’t give up

If you are investing in high-quality stocks, bonds, and mutual funds, chances are you can weather any storm. In 2009, we saw one of the largest drops in the stock market in history. Watching your investments drop in some cases up to 40% is very hard to take. Staying true to your investment plan and sticking with high-quality investments will usually bring consistent returns as well as withstand financial shocks over the long term.

Ten Financial Rules to Follow – Review, adjust, and enjoy

Consumers really need to take responsibility for their own investment plans and their own retirement. Continue to review your plan. review your investments and make adjustments as time goes on and the markets fluctuate. Maintain diversity and maintain a balance with your investments. Stick to blue chip and remember the golden rules of investing.

Diversify, never put all of your hard-earned money in one stock, etc, or even with one investment adviser.

If it is too good to be true, then it probably is not true.

Take control of your investments and learn what you need to know to make informed decisions.

The recent economic and stock market downturns have taught people the need to spend responsibly, within the context of a financial plan and their lifestyle. Having a solid financial foundation in place frees you up to do all those things that give your life more meaning. These Ten Financial Rules to Follow could make a difference for you in terms of quality of life.

I strongly believe in diversification to avoid jeopardizing your total investment and possibly losing your entire portfolio. There have been recent examples of people who have placed their nest eggs with one person  ( recent Ponzi schemes ) and lost everything. The returns sounded good and these people wanted to consolidate their investments in one place so it was more easily managed.

Consolidating Investments

I read several articles recently were the writer indicated that there were some reasons that you would want to consolidate your investments. I will repeat them here for your consideration and then discuss them in more detail.

• It is easier to track and re-balance  your assets
• Lower Fees
• Fewer dead trees
• No more orphan accounts
• Peace of mind

There is always a balance between diversification and consolidating accounts under one investment adviser or one set of investments. The fundamental rule is that you do not want to risk everything you have with one adviser or one investment. If the adviser is not what he purports to be or if the investment goes south then you have lost everything.

There is a case for having a reasonable amount of diversification, and there is a case for consolidating many accounts and investments into several to avoid a financial meltdown while making it easier to manage over all. Never put all of your eggs in one basket. Lets look at a few of the suggestions in more detail.

It is easier to track and re-balance  your assets

There is no question that it would be easier to track your assets and re-balance them as needed if all of your assets are in one place. One of the benefits of having everything in one place is monitoring asset allocation and  making sure you are investing following the guidelines appropriate for your risk assessment.

Still, our belief is that you really should diversify across several accounts with different advisers to avoid all of the eggs in one basket syndrome. A benefit of this approach is that you can get advice from two advisers and compare their suggestions and strategies to make the best decision for your personal investments. This takes more time and effort, however it is the best long term strategy by far.

Lower Fees

There is no question that if you have multiple accounts, you are going to have to pay multiple fees , one for each account. It may be $50 an account, but that is $50 you do not have. Consolidating accounts can certainly save you money in this area .

Compare the advantage to diversification. You have $100,000 to invest. You can place this all in one account and have it managed by a single adviser with a $50 fee each year for the account. All o your eggs are in one basket, and if that adviser does not do what he or she is supposed to do, then your full $100,000 is at risk.

Diversifying across advisers certainly means you will probably pay $50 twice, but at least if one adviser goes bad, you still have $50,000 of your money. We just have to look at the recent Ponzi schemes that even sophisticated investors got caught up in.

Fewer dead trees

Consolidation of accounts certainly means less paper and less mail to your home with account statements. That is an advantage for sure. But all you are doing is reducing a bit of paper.

Compare to receiving paper for two accounts with diverse investment advise and guidance that allows you to compare and make more informed decisions. Sure you get more paper m but won’t you feel better and worry less if the advice from two advisers match up? I think again the diversification angle is much more valuable than saving a couple of pages.

No more orphan accounts

This is a weak benefit at best. True, there are less accounts to worry about should you move and forget to advise the institution about were you are moving to . The institution does not know where you are, cannot find you and the account becomes orphaned. This does happen, however if you are dealing with a credible investment adviser, you will be discussing your investments on a monthly basis.

This will occur with any account. The solution is to make sure that you always update the company with your up to date contact information. Also you should be providing next of kin and back up contact information for every account. Again a little more attention on your part will also make sure this never happens.

Peace of mind

This is one of the weakest points anyone could make. I would be more worried if all of my investments were invested through one adviser. Or even worse in one investment. There is certainly no peace of mind in locking everything you own in one investment.  There are various schemes that are going on and have been in the news recently. I would be lying in bed awake at night worried if I had done the right thing. Even so-called friends of the family have been found to be as corrupt as anyone when it comes to money. Protect yourself and make sure that you are well diversified at all levels.

Hopefully this post makes sense to readers. If you agree or disagree, I would like to hear your thoughts on what you think about consolidating investments vs. diversification of your life savings.

With the March 1st Registered Retirement Savings Plan (RRSP) contribution deadline for Canadians now past, the 2013 RRSP season has come to a close and time has run out, now is a good time for investors to save on tax now while saving for the future they want and plan for this year. While this post focuses on the Canadian system, Americans can follow the same general guidelines to maximize their retirement benefits as well.

When investing for retirement, no other registered plan offers tax advantages as compelling as the RRSP. Your annual RRSP contribution not only goes toward reducing the amount of tax you pay on income but your qualified investments grow tax-deferred within the plan until withdrawal, when you may be taxed at a lower rate after you retire. If you are a member of a company pension plan, you will even be better off by also having an RRSP. If everything goes well you will be able to collect your pension and your RRSP as well.

Tax Efficient RRSP Investing

Your RRSP can also be an insurance plan. More and more people are either losing their jobs, retiring early, or finding out that their companies have gone bankrupt with no provision for retirement benefits. Don’t depend on anyone else but yourself. Put a plan together which is diverse and plans for emergencies and unforeseen conditions. An RRSP is one of the building blocks for this plan.

The following tips may help investors invest efficiently and maximize their savings for retirement to ensure a retired life that is comfortable and allows you to do the things that you plan to do.

Know your contribution limits

As RRSP contributions are 18% of an individual’s earnings from the prior year, the amount of income needed in 2009 to generate the maximum contribution room of $21,000 is $122,222. Looking ahead, the RRSP contribution limit for 2010 has been increased to $22,000. If you were unable to maximize your contribution in previous years, you may be able to contribute even more than $22,000 for 2010.

In recent years, RRSP contribution limits have been increasing by $1,000 per year. 2011 will mark the first year that the RRSP limit increase will be indexed to inflation, at $22,450, generated when 2009’s income is at least $124,722.

Leverage a Spousal RRSP

Higher-income earners can take advantage of their spouse or partner’s lower tax rate once they begin withdrawing from their RRSP in retirement. Contribute to a Spousal RRSP now. Higher-income contributors receive a tax deduction for contributions made to their spouse or partner’s plan. Spousal contributions do not interfere with the other spouse’s or partner’s own RRSP limit.

Remember that a Spousal RRSP does not allow an individual to exceed their personal RRSP maximum contribution threshold. Which can be allocated between the individual’s own account and that of their spouse.

Remember RRSPs are for more than retirement

RRSPs can be used to invest in financial goals other than retirements, such as education or a first home. First-time homebuyers can withdraw up to $25,000 tax-free from an RRSP under the Home Buyers’ Plan (HBP). They can repay the funds, interest-free, over a 15-year period. However, failure to repay will cause the amount to be included in the income.

Under the Lifelong Learning Plan (LLP) investors can also withdraw up to $10,000 in a calendar year. And up to $20,000 in total from an RRSP to help pay for training or education for yourself or your spouse or partner. The LLP withdrawal must also be repaid, over a 10-year period to avoid having it included in income.

Even though early withdrawals generate taxable income, sometimes you will have no choice but to withdraw early to replace lost income. This is not something you should plan to do, but it can be part of your income insurance plan.

Contribute early, contribute often

If you can afford to contribute to an RRSP, do so. It’s never too early to start contributing. But you might regret not doing so sooner. As with all investments, the more time you can give your plan to grow, the better.
Many investors find it much easier to make small but regular contributions than to come up with large lump sums annually. Consider setting up a regular investment plan to help make contributing to your RRSP a priority all year long.

After making your RRSP contribution, apply to the CRA using Form T1213 for a reduction of payroll tax at the source. By doing so, you can benefit from your tax reduction throughout the year on each paycheck, instead of waiting until you file your tax return in the spring of 2011.

Discuss your plans with your adviser

Make time to discuss your options with a professional financial adviser.
Remember, you’re building a long-term plan. Take time to sit down with an advisor. Get their help in choosing the right solutions. Get started today in saving for the retirement lifestyle you want. Also, discuss your plan with your spouse. Make sure that he or she knows where you are invested and what your contributions are. Involve your spouse in discussions with your financial advisor. Both you and your spouse should have joint financial plans with similar goals, and practice diversity. Avoid investing in too good to be true investments. Before you leap, talk it over with someone and think about it for several days.

Many of us are like the ostrich with the head in the sand when danger is around. Especially when it comes to thinking about and planning for our retirement.  For the young, it is so far off that there is no need to think about it. While people are in the middle of their lives, they have too many other financial pressures to give much thought to. By the time we are in our 50’s and 60’s, panic has set in. We realize that we will not have the kind of retirement we had all planned since our savings are too low.

This usually means working a lot longer, sometimes well past age 65. Some people want to work, while others never want to work again. Let’s at least have a choice.

How Can We Avoid this Panic?

The answer is quite simple. It does take some willpower and some perseverance. However, if you start saving early enough for your retirement, it can be quite easy to have large retirement savings when you retire. The best part is that after a short while, you will not even miss the money you save each week from your paycheck. Just take 10% and put it in a savings account. Somewhere you cannot touch it for any reason until you retire. Let’s illustrate this with a couple of small examples.

If you were to start setting aside $100 a month until retirement at age 60, at an average of 7% interest rate, you would have $239k in your savings for retirement. If you retired at age 60 and lived until age 80, you would receive $22k per year. Not bad for just setting aside $100 per month!

We use this example to illustrate how easy it is to build up a retirement plan by saving a small amount each month. We go further by suggesting that a person should set aside 10% of their salary yearly for retirement.  Ten percent is certainly affordable. Once you get used to being without the money, you do not even think about that 10% you are setting aside.

The Ten Percent Investment Plan Solution

Let’s assume that you make $50 thousand a year and are disciplined to set aside 10% or $5000 per year in your retirement savings plan. $5000 per year sounds like a lot, but it is only $416 monthly. You might have done without a car or some other convenience, but that should be an easy sacrifice to make your retirement comfortable.

So with our example, you will set aside an average of $5000 a year into a savings plan at an average of 7% interest rate until age 60. By the time you are age 60, you will have $998k or almost a million dollars saved. If you live for another 20 years until age 80, you can afford to draw $94k per year from your retirement plan. Wow, that is not too shabby! All for just setting aside 10% a year.

Some Issues to Consider – Ten Percent Investment Plan

Now some people will say that there is no way I can afford to set aside %5000 a year in my early 20s. True, our best earning years are later in life. However, if you always invest 10%, you may end up only setting aside $2k a year initially, but in later years as salaries increase, you may find that 10% means you are investing as much as $10k a year. This will more than make up for the difference in the beginning years.

Can you make an average of 7% return every year? Probably over the lifetime of your savings plan. You will make significantly less in some years, while in others, you will make significantly more. Based on past market statistics, it should average around 7% over the 40 years or even a bit higher.

But the government will tax me and take a lot of my earnings. This is true, and that is why you need to invest your money in a tax-free savings account ( Canada) or an RRSP ( Canada ), or a 401 K ( United States ). These accounts will let you build up your nest egg without being taxed by the government while saving for retirement. When you retire and begin withdrawing funds, you will be taxed at the tax rate commensurate with your total income.

This is Your Life. Take Care of Yourself

We have seen over the past decade that several really big companies have suffered badly or gone out of business. Also, the volatility of the markets has caused many retired or pre-retirement people to wonder if they will have enough money to be comfortable.

We have all learned that we must look after ourselves and not depend on our company or government to look after us. That means we must take responsibility for our savings investments and practice good savings techniques and strategies. This means we need to be involved with our investments.

Diversify

Be extremely careful and invest wisely. Avoid placing all of your investments in one place. If it is too good to be true, then it probably is. Just think about the recent Ponzi schemes that have come to light. Investors lost millions of dollars when the investment was too good to be true.

Diversify investments across multiple companies, diversify investments across multiple advisers, and then pump them for information to make decisions about the best approach for your investment strategy.

Summary

Invest 10% of your income every year into triple-A investments inside a tax-free account, diversify your investments, and avoid investments that sound too good. Start early in your life with your 10% plan, and in no time, you will have a nest egg that will help ensure your comfort during retirement.

Placing the 10% in your investment savings plan every year takes discipline. It also takes discipline not to touch this nest egg when you are short of money or need to buy a house.

Imagine the sinking feeling you get when you open your statement for your RRSP or your 401k. The market has tumbled and your investments have tumbled with it. What could be worse? At least you were invested across blue chip stocks in a variety of industries, Investment Diversification. When the market turns around these blue chip companies will be firing on all cylinders and your investments will surge. This is a good news scenario since you are well diversified and this is just a blip in the long term investment strategy. You sit back and relax.

Meanwhile your neighbor also just got his investment statement. Instead of the tried and true diversification, he put all his investment into GM or Enron. Not only is it down, it is gone. Sure you had some in GM as well and lost a fraction of your investment. But your neighbor had it all in, sure that the company would pull out and the share price would rebound. The lesson we have all learned in the last two years is that investment diversification is key to a long term strategy that will yield financial returns for our retirement.

What Do They Really Mean by Investment Diversification

There are numerous ways to interpret diversification. The most simple and straightforward approach is to invest across a wide spectrum of companies, healthy companies with good balance sheets and a proven business plan. The fly by night companies simply cannot pass the business plan test so stay away from them.

You might also pick one company, the one with the best balance sheet and revenue in each industry. Choosing companies across industries is a great idea to diversify and also protect yourself if one part of the economy takes a dive for a short period of time.

Another approach is to also add to the mix mutual funds that meet your investment strategy. Today you can choose from mutual funds that invest in bonds to precious metals to foreign to dividend stocks and more. This gets a bit more complicated. You will need to decide how much risk you want to take, whether you want income generating funds or growth type mutual funds. There are many different types and it is easy to diversify, however you should pay attention to the risk of each type. Bond mutual funds are considered the least risky , while precious metals might qualify as the most risky.

Bonds, both corporate and government represent another area to invest in. Bonds are rated from junk bonds to triple A. For most investors A , AA and triple A are the way to go. Essentially there is a good chance you will get your money back when the bonds mature.

Spread Your Money

Many of the banks have good tools to help you decide what type of investor you are. Can you tolerate risk or do you need something really secure? Do you want income for your retirement or do you want to take more risk and focus on long term grown? There are a few categories that I have found that they do not always talk to investors about.

First of all they are only selling their own investments. Some banks for example will only sell you mutual funds run by their bank. Some will not offer investments directly in bonds. Instead you can invest in a bond fund. My suggestion is that you spread your total investment between two different investment advisers. This way you will get advice from more than one source and you will build a little competition between them.

Set Diversification Limits

Another area that investment advisers may not necessarily discuss is setting limits of how much you have invested in a given area. Someone nearing retirement might lean towards bonds and income generating investments higher than others.  You might aim for 50% in bonds, 30% in stocks or mutual funds and 20% in GIC’s for rainy day needs. If the market starts to swing significantly, then only 30% of your portfolio is exposed. With proper bond laddering, interest rate changes will not have much impact on your bonds.

Bond Laddering

Bond laddering is simply splitting the maturity of your bonds across several years so that even if interest rates are low in the year your bonds are maturing, you only will need to reinvest a small portion of your investments.  Bonds are a great vehicle providing you stick to A rated bonds. Generally they pay reasonable interest rates, however most have what is called a “Call Option” . This means that the bond issuer can decide to recall the bonds. They will pay back the principle to you plus any accrued interest. Corporations will do this to reduce debt load and also if interest rates are now lower than the original bond value.

Investment Maximums

Another area to think about is the amount of money you will invest in any individual investment. Even though the interest rate on a bond is fantastic, or you are buying into a stock that is very low relative to its overall value, do you really want to place a large percentage of your investment at risk.Some people will set a limit of 10% of their total investments for each individual investment. Others will set it between 5% and 10%.

Many Ways to Diversify Your 401K or RRSP

As we have discussed there are many ways to diversify. We will list them here for your consideration:

• Across investment vehicles e.g. bonds, mutual funds, GIC’s and stocks
• Diversify across investment advisers
• Across industries
• Foreign and domestic
• Set limits on the amount of any single investment
• Set limits on the amount of any investment type

Depending on the size of your investment you may want to develop this model over time for your personal needs. What ever you do, never put all of your investments in one basket. If it sounds to good to be true then it probably is too good to be true.