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Column: The wealth triangle

A strong foundation in personal finances help prepare us for the future
Richard Vetter (WealthSmart)
Richard Vetter is a columnist with the Richmond News.

The ancient Egyptians learned that broader pyramids with larger, wider, and stronger bases were less likely to collapse. This is how we must think about our personal finances. We call it the wealth triangle (because pyramids carry too much negative baggage!)

There are five stages:

Level 1: Protect Your Wealth

Every project begins with a firm foundation. We need to plan for the obstacles, risks, and dangers:

  1. Insurance to protect your financial future. Cash flow is key. If you cannot work because of a critical illness, disability, or death your wealth and your family’s wealth will be impacted.
  2. Wills and Powers of Attorney. No one can guarantee tomorrow. We need people in place to make our decisions if we die or become incapacitated.
  3. Reducing/eliminating consumer debt. Consumer and credit card debt charges high interest rates and is used to buy things that either depreciate quickly or have little enduring value. This type of debt must be avoided or paid off quickly.
  4. Emergency fund or secured line of credit. Emergencies and unexpected expenses happen. We need a buffer of at least 3 – 6 months of expenses.

Level 2: Build Your Wealth

What job do you want your money to do for you? Answering this question will guide you in building a structure for your wealth.

For instance:

  • Retirement Planning. To save for long-term retirement income, you will probably need a Registered Retirement Savings Plan (RRSP) which will allow you to deduct the amounts you set aside from your taxable income and defer that income tax into the years when your income will probably be lower.
  • Tax-free long-term accumulation. If you are saving for mid to long-term goals, including retirement or a long-term savings goal, a Tax-Free Savings Account (TFSA) could be the right structure. Your investment grows tax-free, and you can withdraw your money any time.
  • Home Ownership. Home ownership is a serious long-term decision and needs to be planned for without compromising your long-term wealth.
  • Post-Secondary Education. Saving for post-secondary education can seem like a challenge. The Registered Education Savings Plan (RESP) together with the Canada Education Savings Grant (CESG) can help.
  • Short-term Savings Goals. For short-term goals, set up a separate account that is not so easy to spend. Stick to guaranteed vehicles such High Interest Savings Accounts or GICs.

Level 3: Grow Your Wealth

Warren Buffet said: “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insight, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”

Investing requires purposeful thought. Rather than seeing your portfolio as a casino where you ae placing multiple bets, see it as a pension plan or endowment fund that manages serious wealth.

Level 4: Enjoy Your Wealth

This is the great transition where our earned income slows down or stops and we rely on other sources that we have built during the working years.

Government benefits is one option. You may be wondering when you should apply for your Canada Pension Plan and Old Age Security Benefits. It is important to understand your options.

Income options for your RRSP or LIRA including the Registered Retirement Income Fund (RRIF) for RRSP proceeds, Life Income Fund (LIF) for LIRA proceeds transferred in from a pension plan, or a Life Annuity. The RRIF or LIF give more flexibility and control over your income and investment options. The Life Annuity guarantees that you won’t outlive your income, but you sacrifice control and flexibility of your investments.

To best enjoy your wealth, you also need confidence in knowing that there is a plan in case life throws you a curveball, especially when it comes to the potential for increasing healthcare costs.

Level 5: Impact

You have probably seen the bumper sticker “I’m Spending My Kids’ Inheritance.” This is not a financial strategy.

By planning to accumulate more than we need, we build in a “Plan B” in case of financial emergencies. We also build in the capacity to leave legacies that will have a long-term impact.

Only you can know how you want to be remembered, how to have an impact. A great financial plan and advisory team can help you make that happen.

Richard Vetter is a Certified Financial Planner and owner of WealthSmart Inc.