​By Robb Lovell, MBA

They say that the true sign of genius is the ability to successfully learn from the mistakes of others.  The attached article is comprised of the top ten common pitfalls that Canadians face when dealing with their personal finances. Our family has been working with Individuals and families for  nearly 50 years and here are the most common errors we see in our office.



1. Not having a Financial Plan



A Financial Plan is a road map that will help you find your way to your goals.  Having a plan in place and a relationship with a good financial adviser will help you avoid many (if not all) of the pitfalls we have laid out in this article.  Plan often and plan early.  Planning early provides you with a great deal of advantage. Re-evaluate your plan on a regular basis with your planner to ensure that your plan still fits your needs as your life changes. Discuss money with your spouse or partner, meeting regularly to go over the budget and common financial goals.



2. Spending more than you earn



No matter what you earn, spending more than you earn is a sure way to end up in financial trouble.  Wasting money frivolously on things that you don't really need could keep you in a cycle of debt.  Before every major purchase ask yourself if you really need the item.  If you can't pay the item off immediately consider delaying your purchase until such time as you have the funds saved up to cover the purchase in full (add the cost of credit card interest on to the purchase price and suddenly that price might not look so attractive).



We would be remiss if we did not mention the number one error we see with many Canadians which is buying a new car every two to three years,  Automobiles are very expensive and they depreciate very quickly so buying a new car is like throwing money out the window.



3. No insurance or the wrong type



Have in place a Risk Management Plan with the right type of coverage to protect you and your family.  Having a plan to deal with an untimely death or loss of income (disability) can save you and your family from financial ruin.  Having the right type of coverage and dealing with an independent broker who will shop the market and find the best products with the best company to meet your needs is essential.



4. Not Using Tax Shelters



Not using and maximizing your use of an RRSP is a huge error.  Indeed you have two choices, either pay yourself or pay the government.  If you are making $45,000 in income you will recover roughly $30.00 for every $100 you deposit into an RRSP account, that is a 30% rate of return on your funds.  Not to mention that from now until you finally pull the funds out of that RRSP in retirement,  those funds you put away will grow for you fully tax free.  In 2008, the government introduced the Tax Free Savings Account (TFSA) which provides an additional type of tax shelter with a different set of rules and benefits.  We lay out a plan of action for our clients to take maximum advantage of all tax shelters and develop a tax efficient portfolio.

​5. Taking on too much debt

Abusing credit cards and racking up debt at high interest rates is a huge mistake that can put you in a cycle of debt and poverty that could last a lifetime.  If you have debt, a good advisor will work to consolidate your debts at lower interest rates and may even be able to find a strategy to make your debt tax deductable.  Make sure you have a plan in place to systematically pay down debt starting with the highest rate first.

6. Not expecting the unexpected

Life happens, and if you don’t have any emergency savings, life insurance on yourself and your spouse and contingency plans for potential income loss, you’re setting yourself up for financial trouble. Planning to save three to six months’ expenses is essential.

7. Saving off the top of income

Pay yourself first, the best way to save is automatically and with regular and systematic payments to investments with every pay cheque.  By saving automatically and up front, you can make sure you are saving to build up a portfolio for yourself and your future.  When you save automatically with each pay cheque, before long you won't even realize the funds are gone from your cash flow but before long you will have a nice nest egg.

8. Not having an Estate Plan

An Estate Plan can save you thousands in Probate and Legal fees.  This type of plan is important to ensure that your affairs are in order and that the maximum amount of funds ends up in the hands of your family or beneficiaries and are not lost to probate fees, legal fees and taxes.
We encourage clients to develop an Estate Plan no matter what their age but if  you have elderly parents or relatives encourage them to work with a planner like 7th Wave to develop an effective estate plan.

9. Not Having Diversification in your Portfolio

If you have saved up a portfolio, make sure it is balanced and diversified.  Diversification can reduce risk within your portfolio.  Remember, Canada makes up only 3% of world markets so investing in only a few stocks in one small economy is not wise.  Diversify across types of investments as well (stocks, GIC's funds, bonds, etc.) each type has its own unique set of advantages and drawbacks and 7th Wave will design a plan that will work well for you and is tax efficient.

10. Not Starting Early

Start planning and saving early as this is a fantastic advantage.  People that take the time to plan early in their lives, end up with more savings and more time for those assets to grow.  Younger people can benefit from locking in lower insurance rates, as well.  Having a plan from a young age and developing good savings and investment habits early is of great benefit..  Having said that, no matter at what age you are planning, now is better than planning later, so start today and give us a call.