UPDATE YOUR FINANCIAL POSITION

Transcription

1 UPDATE YOUR FINANCIAL POSITION

2 Why save and invest? 4 Where to begin 6 Calculate your net worth 6 Calculate your income and expenses 8 Analyze your income and expenses 9 How to find money to save or invest 9 Consider systematic savings 10 Set goals 10 Who can help you update your financial position? 11 Monitoring your financial position 11 Note: In this brochure, the masculine form may refer to both women and men. Dépôt légal Bibliothèque et Archives nationales du Québec, 2006 Dépôt légal Bibliothèque et Archives Canada, 2006 ISBN-10: (Print version) ISBN-10: (Electronic version)

3 UPDATE YOUR FINANCIAL POSITION Autorité des marchés financiers The Autorité des marchés financiers (AMF) is the body mandated by the government of Québec to regulate Québec s financial sector and to offer assistance to consumers of financial products and services. Its mission is to protect the public by applying the laws and regulations governing the following areas of activity: insurance, securities, deposit institutions (other than banks) and distribution of financial products and services. Purpose of the brochure The purpose of this brochure is to highlight the importance of savings and investment in achieving your financial goals. It will also help you update your financial position and think about your capacity for investment. This AMF brochure is provided for your information. It does not offer any advice on the purchase or use of specific financial products and services. 3

4 1 WHY SAVE AND INVEST? How can you ensure financial well-being for you and your family? This is one of the most important questions you will have to answer during your lifetime. Whether you re planning your financial future for the very first time or reviewing your current plan, it s important to set clear goals. This brochure will help you gather the necessary information to analyze your financial position. Thus, you will be able to identify or specify your financial goals. DETERMINING THE RESOURCES THAT ARE AVAILABLE TO ACHIEVE YOUR GOALS IS A SIMPLE WAY TO BEGIN YOUR SAVINGS PLAN. CONTEXT Ed carpenter Ed, age 38, is a carpenter with a construction contractor. He is the father of 8-year-old twins. His wife Claire works part-time for a department store and is finishing her Bachelor of Education degree. Ed and his family lack for nothing and don t deprive themselves of much. By their own admission, money burns a hole in their pockets. However, they are aware that they aren t putting enough money aside for their daughters education, for retirement or for a rainy-day reserve. They cherish the hope of buying and renovating a hundred-year-old home. For the time being, this idea seems to be nothing more than a dream because, as Ed and Claire admit, they re living from payday to payday. Even though he has a steady job for now, Ed is aware that a slowdown in the home building industry could reduce his income. As they are about to turn forty, Ed and Claire have decided to stabilize their financial position and set specific financial goals. You probably have plans you really care about: buying a home, enjoying a worry-free retirement, ensuring your children s financial security, helping them pay for their education, etc. In general, long-term savings and investment are the way to ensure your financial security and achieve your goals. 4

5 UPDATE YOUR FINANCIAL POSITION What do you think of when you hear the words savings and investment? There will always be time to think about it. If only I had known sooner. What does my retirement have in store for me? Where will I find the money? I ve always lived with uncertainty. I would have invested if I d had the money. I m going to work till I die. My children will look after me. I don t know how to save or invest. Couldn t I lose money? Isn t it risky to invest? Maybe your thinking should go something like this: I know that my chances of having more money in the future are clearly better if I set goals and plan for these goals starting now. I can start with a small amount and watch it grow. Little streams become mighty rivers. Whatever your financial position, what s important is to start thinking about saving and investing. The difference between savings and investment Savings Savings is the amount of money you manage to put aside. It represents the difference between your income and your expenses. As a general rule, when someone manages to save money, these savings often end up in chequing accounts or savings accounts. These are safe vehicles for your money. However, this safety has a price. There is little return on the money you save. AS A SAFETY MEASURE, SOME PEOPLE SAVE TO PROTECT AGAINST CERTAIN EVENTS, SUCH AS A SUDDEN LOSS OF EMPLOYMENT. The return on a savings account may not be enough to achieve your financial goals. What use is the safety of a savings account if the low return it provides over the years prevents you from achieving your financial goals? The price of the goods and services you consume today could very well double by the time you retire. Thus, it could be advisable, and even necessary, depending on your financial goals, to convert part of your savings into investments to generate more income. 5

6 Investment Regardless of whether you invest in a home, land or a business, you hope to derive more money from it than you invested. When you invest, you run a greater risk of losing your money than when you save. But it is also more likely that your investments will generate a better return. To find out more about the different types of investments, their risks and their returns, see the brochure Choose the investments that suit you or Short Investment Glossary. 2 WHERE TO BEGIN Using the grids in this brochure, gather the necessary information to establish your personal balance sheet. Calculate your net worth Calculating your net worth simply means producing a snapshot of your assets and liabilities. Your assets correspond to everything you own, all your holdings. They may include liquid assets, cash you hold in a chequing account or a savings account, personal property, investments, real estate, etc. Your liabilities correspond to your immediate and future financial obligations toward your creditors (lenders), such as your mortgage balance, your bank loans, your credit card balance, etc. 6

7 UPDATE YOUR FINANCIAL POSITION ASSETS YOU YOUR SPOUSE Calculating your net worth Cash and cash equivalents Before filling in this grid, make copies so you can update it regularly. You should perform this financial exercise at least once a year. Chequing and savings accounts Employer pension plan Cash value Life insurance 1 2 If you decide to call upon the services of a financial representative or financial planner, the information compiled using your calculation grid could be very helpful. If you contribute to an employer pension plan, your plan administrator can help you determine its present value. 1 RRSP/RRIF Real estate 3 Home Other Non-RRSP holdings Personal property Vehicles (market value) Jewellery and art objects For life insurance, insurers send policyholders a document at least once a year stating the value of their insurance policy. 2 To determine the value of your property, you can find information on the Internet on the selling price of comparable homes in your neighbourhood. Note: The municipal assessment can serve as a basis, but is not necessarily up to date. 3 Commercial property Other assets Subtotal Total assets LIABILITIES Mortgage balance YOU YOUR SPOUSE If your assets exceed your liabilities, your net worth is positive. If your net worth is negative, you can set up a financial recovery plan. 4 Car loan balance Bank loan balance Credit card balances Taxes payable Other debts Subtotal Total liabilities Net worth (Total assets Total liabilities) 4 7

8 Calculate your income and expenses The next step is to calculate your income and expenses for a one-month period. First enter what you and your family members earn, and then list your monthly expenses. INCOME Your income and expense summary Before completing this calculation grid, make copies so you can update it regularly. Don t forget to include all your expenses. For annual expenses, divide by 12. For non-recurring expenses (such as furniture), estimate a monthly amount. EI: Employment Insurance CSST: Commission de la santé et de la sécurité du travail RRQ: Régie des rentes du Québec SAAQ: Société de l assurance automobile du Québec OAS: Old Age Security 1 Note your expenses for a few months to validate your estimates. Subtract your monthly expenses from your monthly income. If your expenses exceed your income, you can set up a financial recovery plan. 2 Net employment income (total income after all deductions for income taxes, contributions and other amounts) = what is left on your pay cheque Self-employment income Investment income Rental income Benefits from government plans (EI, CSST, RRQ, SAAQ, OAS, etc.) Benefits from private plans Other income Net monthly income EXPENSES Rent/Mortgage payment Electricity, heating Telephone Cable and Internet Real estate taxes Furniture Property and car insurance Life and disability insurance Payments on loans/credit cards EXPENSES (continued) Clothing Recreation Medical/dental care Education Personal care Gifts and donations Subscriptions Transport (other than expenses related to vehicle use) Repairs 1 Groceries/food items Other expenses Total monthly expenses Net monthly income Total monthly expenses 2 8

9 UPDATE YOUR FINANCIAL POSITION THE FINANCIAL CONSEQUENCES OF AN ACCIDENT, ILLNESS, PREMATURE DEATH OR THE LOSS OF CERTAIN PROPERTY CAN BE DISASTROUS IF ADEQUATE INSURANCE HAS NOT BEEN PURCHASED. Analyze your income and expenses If your income exceeds your expenses, consider the monthly surplus to be the amount you could save and invest each month to achieve your goals. If your expenses exceed your income, it s time to think about ways to reduce your expenses or increase your income. CONTEXT Ed and Claire analyze their financial position Ed and Claire have now determined the figures needed to analyze their financial position. A review of income and expenses confirms that they spend almost as much as they earn. However, they are surprised at the amounts they have spent on certain items. They start identifying expenses that could be eliminated or reduced. How to find money to save or invest If, like Ed and Claire, you spend everything you earn and can never put money aside, you must find ways to reduce your expenses. Review them carefully. You ll be surprised to see what you can save every day. For example, if you buy a coffee at $0.50 a day, it costs you $ a year. If you save this $ for just one year and invest it at a return of 5% per year, you ll have saved $ in five years. If a small cup of coffee can go such a long way, imagine how you could make your money grow if you decided to reduce certain expenses! DEPENDING ON YOUR SITUATION, SOME EXPENSES ARE EASIER TO CONTROL OR REDUCE. THIS DOESN T NECESSARILY MEAN MAKING RADICAL CHANGES IN YOUR LIFESTYLE, BUT CHOOSING EXPENSES YOU CAN REDUCE SO YOU CAN SAVE. CONTEXT Ed and Claire had promised Ed and Claire had promised their daughters that they could go downhill skiing as of next winter. They will keep their promise. However, they will limit expenses by buying used equipment. 9

10 Consider systematic savings At the present time, how much do you put aside each month? To help you determine this, add a category for savings and investment to the expenses column of your income and expenses summary. One simple savings method is to authorize your financial institution to deduct money automatically from your pay cheque and deposit it in a savings account. Set goals Why do you want to save and invest? a house; a car; education; a worry-free retirement; disability or a health problem in later years; unemployment periods; caring for parents. Make your own list, then ask which goals you care about the most. Enter them at the top of the list and estimate the number of years it will take to achieve them. When you save and invest, you must find the financial product or products that will help you achieve your goals within the time you have set. Here is a brief exercise that could be useful to you. GOAL AMOUNT REQUIRED ACCUMULATION PERIOD My principal financial goals are: You can identify or classify your goals as follows: short term (2 years), medium term (10 years), long term (retirement). a) b) c) d) e) 10

11 UPDATE YOUR FINANCIAL POSITION Answer the following questions. This will help you evaluate and place a priority on each of your financial goals. 1. Today, I have $ to invest, and I plan to invest an additional amount of $ each month or each year. 2. My income sources are: Very secure Fairly secure Somewhat uncertain Very uncertain 3. Can I realistically achieve my principal financial goals? If you answer no to the last question, achieving your goals could require more savings and investment. 3 WHO CAN HELP YOU UPDATE YOUR FINANCIAL POSITION? If your work, family or other responsibilities leave you too little time to look after your savings, investments and income taxes your personal finances or if you think you don t have sufficient knowledge, you could need advice. Financial institutions, investment dealers and insurance companies offer financial products, advice and services that can help you achieve your goals. See our brochure Choosing a securities firm and representative. 4 MONITORING YOUR FINANCIAL POSITION Update your net worth and calculate your income and expenses at least once a year, or when major changes occur in your personal circumstances. This will help you measure developments in your financial position. THE KEYS TO FINANCIAL SUCCESS EARN INCOME DON T SPEND ALL OF IT START TO SAVE AND INVEST HAVE YOU MADE A WILL? THE ABSENCE OF A WILL CAN RESULT IN SUBSTANTIAL COSTS AND NEEDLESS DELAYS FOR THE DISTRIBUTION OF YOUR ASSETS AFTER YOU DIE. WITH A PROPERLY DRAFTED WILL, YOU CAN ALSO ENSURE THAT YOUR ESTATE WILL BE DISTRIBUTED ACCORDING TO YOUR WISHES. 11

12 CONTEXT Ed and Claire are saving money Ed and Claire took the time to review their personal balance sheet and their income and expenses. They now pay much closer attention to their spending. By being more disciplined, they have managed to save some money. Claire will soon begin a teaching career, which will allow the couple to benefit from additional income. Ed and Claire have started to gather information on the types of investments they can make. By continuing on this course, they increase the likelihood of achieving their goals. Your financial habits The following table contains 25 statements that allow you to review your financial habits. Discuss them with your family members, your friends or a financial adviser, and think about what you could improve. STATEMENTS YES NEEDS IMPROVEMENT Your financial habits We have a filing system to keep track of our bills, payments and other financial documents. We know how our money is spent. We spend less than we earn. We avoid making large expenditures on a whim, especially if this can hinder the achievement of our financial goals. We regularly identify expenses we can reduce or eliminate. We set limits on the gifts we give so as not to compromise the family s financial health. When we are short of money, we are able to reduce our spending temporarily to correct the problem. Our assets exceed our debts. We have an easily accessible emergency fund that would let us live comfortably for at least three months without income. 12

13 UPDATE YOUR FINANCIAL POSITION STATEMENTS YES NEEDS IMPROVEMENT Your financial habits (continued) We prepare a budget to ensure that our income covers our expenses. We have drawn up a list of our financial goals, including the amounts necessary to achieve them. We regularly put aside the amounts of money required to achieve our financial goals. We update the information concerning our financial position (personal balance sheet, statement of income and expenses, etc.). We have compared the various chequing accounts available on the market. We have compared the costs and benefits of the various savings accounts available on the market. We transfer money from our savings account to a higher-yield investment whenever possible. We use credit cards carefully and avoid interest charges by paying the balance monthly. We borrow reasonably at the lowest possible rate. We understand what our disability insurance covers. We are aware of the coverage limits and exclusions of the insurance provided by our employers. We assess the impact of change in our personal lives and how it may affect our financial position. We know how much we should save to achieve our retirement goals, and the time required to accumulate these amounts. We know how much of a pension we will be receiving at retirement. We regularly read articles and other material to improve our knowledge and better manage our money. We have taken steps for estate planning (valid will, life insurance, etc.). If any points need improvement, you should repeat this review in six months or a year to determine any improvements you have made. 13

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15 TO CONTACT THE AUTORITÉ DES MARCHÉS FINANCIERS QUÉBEC CITY Place de la Cité, tour Cominar 2640, boulevard Laurier, bureau 400 Québec (Québec) G1V 5C1 (418) MONTRÉAL 800, square Victoria, 22 e étage C.P. 246, tour de la Bourse Montréal (Québec) H4Z 1G3 (514) ELSEWHERE IN QUÉBEC Toll-free number: INFORMATION CENTRE FOR CONSUMERS (418) (514) Toll-free number: Fax: (418) renseignements-consommateur@lautorite.qc.ca FOR FINANCIAL SECTOR PARTICIPANTS (418) (514) Toll-free number: renseignements-industrie@lautorite.qc.ca You can also visit the website of the Autorité des marchés financiers at

16 Brochures to help you with your investments Update your financial position Choose the investments that suit you Short investment glossary Choosing a securities firm and representative Mutual Funds Watch out for securities fraud Prospectuses made clear Prospectus exemptions