September 2000

The Forgotten Half
of Financial Planning

© Talbot Stevens

Disposable income is what is left over after paying taxes. It is what we can control.

The personal savings rate - the portion of disposable income that is saved - was 12.5% in 1977, 9.1% in 1987, and as low as 1.8% in 1997.

As indicated by the significant drop in the savings rate, "spend more" seems to be more popular than "save more".

The challenge for those individuals who do not want to retire dependent on others is the trend and magnitude of the savings rate. At one point, the savings rate in the U.S. was slightly negative. This means that the average American was spending more than 100% of their disposable income.

How much money is needed to retire comfortably is a complex calculation that depends on many factors. Two of the most important are how long your savings are allowed to grow, and how long you need them to last. I think we can all agree, that unless you have an excellent, guaranteed, indexed pension, savings need to be a lot more than 2% of your income to produce the required retirement fund.

There are certainly many reasons that the savings rate has dropped from over 12% to less than 2% in the last two decades. But what is the solution? What can we do to help Canadians increase their savings rate and thus the chances that they will be able to afford to retire comfortably?

Part of the solution is for everyone, especially the media, to recognize that financial planning involves more than investing.

The growth of the financial industry has spawned a mini-industry in financial education. Now, all forms of traditional media and, of course, the internet have carved out niches catering to the public's desire for more financial information. Whether it is from books, magazines, newspapers, newsletters, web sites, or 24-hour-a-day financial news broadcasts, over 90% of this information directly or indirectly relates to investing.

But all of the best investment information in the world is of little value to individuals if they have no money leftover to invest. We must recognize the forgotten half of financial planning: how to be a better consumer.

One of the ways I attempted to be unique in my book Financial Freedom Without Sacrifice, was to try to first focus on how to be a better consumer to save an extra few hundred or thousand dollars. Some financial planners do this to add value and differentiate themselves from the competition.

Regardless of age or income, everyone spends moneys, so everyone can benefit by learning how to be a more effective consumer to free up additional money to start or increase an investment plan.

Only after you've learned more practical consumer strategies and you're able to invest more than 2% of your disposable income is it meaningful to learn how to invest more effectively.

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