The Money Test

I received an email from David Bach, author of Smart Couples Finish Rich. There is a Canadian version of the book here.

David joined up with Edelman Financial Services in 2014 and continues to work extensively in the financial planning realm. David is holding a set of seminars on retirement planning in the United States and he recently sent me an email invitation to attend.

David also included a true-false quiz in his email. He suggested in his email that both me and my partner should take the quiz. I have modified a few of his questions below to make it a bit more Canadian. And I have provided my own answers. I’ve guessed Lorraine’s answer.

I know our current net worth (i.e. the values of the assets we have minus the liabilities we owe).

True. And, to be a bit more obsessive compulsive, I have a spreadsheet which has a 15-year view. Our net worth for the past five years and our forecast for the next ten.

Lorraine: True. She has no choice because I like to share this amazing spreadsheet with her every week or so.

I have a solid grasp of what our fixed monthly overhead is, including property taxes and all forms of insurance.

True. I maintain a budget spreadsheet which also keeps the prior five years of expenses and projects out the next five years. I update the current year’s data every week or two and I compare actual to forecast.

Lorraine: True.

I know how my partner feels about our monthly overhead. We have discussed both the size and nature of our regular expenses and obligations and are comfortable with them.

True. Although one can never have enough guitars.

Lorraine: True but one can have way too many guitars. And guitar pedals. And guitar amps.

I know how much life insurance my partner and I carry. I know exactly what the death benefits are, how much cash value there is in our policies (if any) and what rate the money is earning (if applicable).

True.

Lorraine: True.

I have reviewed our life insurance policies sometime in the last 12 to 24 months, and I am comfortable that we are paying a competitive rate in today’s insurance market.

True. Although I have only made changes to my insurance coverage in 10-year intervals (age 30, age 40, age 50 and soon, age 60).

Lorraine: False. I’m not sure that Lorraine has looked at our life insurance policies in the last two years. I could be wrong on that front though.

I know the current value of our home, the current equity we have in our home, the size of our mortgage, the interest rate on the mortgage, if the rate is competitive based on today’s rates, the type of mortgage rate (fixed or adjustable), and if it is an adjustable rate–the date on which it adjusts.

True. By fluke however on the current value. We have a friend in the real estate business who was kind enough to provide an appraisal for our home. I maintained a forecast of appreciation for the house based on our purchase price with a rate of growth of 2% per year. Our real estate agent’s evaluation placed the house with a rate of growth of 3% per year. I plan around the lower number. Why? Because our home is where we live. It is not an investment that I would use unless I sold it. If I sell it, I need to factor in all of the closing costs. The 2% rate of growth seems appropriate and, if we have a correction in residential real estate, even 2% will seem too optimistic.

Lorraine: True. Our friend in the real estate business is really Lorraine’s friend.

I know what type of homeowner’s or renter’s insurance we have and what the deductibles are. I know whether or not our policy would provide us with ‘today’s replacement cost’ or actual cash value, if our home and/or property were destroyed or stolen.

True. Largely because we have to fight the insurance company every year. It is not unusual for our house insurance premium to jump 30 – 50 percent year over year. We call to complain about the increase and we always seem to get a sharply reduced renewal rate.

Lorraine: True as she makes the call to the insurance company every year.

I know the nature and size of all our investments (including cash, checking accounts, savings accounts, money-market accounts, CD’s, treasury bills, savings bonds, mutual funds, annuities, stocks and bonds, real estate investments and collectibles such as stamps, coins, artwork, etc.). I also know where all the relevant paperwork is kept.

True. I have to because I am a DIY investor. I maintain all of my portfolio accounts online and, despite my best intentions, I mark to market every trading day. If I am happy it is because the markets are up and, if I am not happy, well you can guess which way they market is going.

Lorraine: True although she doesn’t mark to market every day. Or every week. Or even every month. And that is why she is always happy.

I know the annualized returns of all the above-mentioned investments.

True. I forecast a 6 percent rate of return on our investments. Fortunately the overall portfolio has outperformed my planning number. Better to be conservative though. I also have my own Investment Policy Statement which outlines my risk tolerance and my investment objectives. This helps me to be an investor for the long term and not a gambler.

Lorraine: True because I like to show her my investment chops particularly during periods when the markets are up.

I know the current value of all our retirement accounts (including LIRAs, TFSAs, RRSPs, company pension plans, etc.). I know where the statements for these accounts are kept and I have a solid grasp of how all our accounts performed last year.

True. All of our retirement accounts are online. Statements for things like pension plans are digitized and archived.

Lorraine: True.

I know what percentage of our income we are saving as a couple.

True. I calculate a series of financial ratios for our household including:

• Gross Debt Service Ratio
• Total Debt Service Ratio
• Liquidity Ratio
• Solvency Ratio
• Annual Savings Ratio
• Debt Payment to Income Ratio
• Total Savings to Income Ratio
• Total Debt to Gross Income Ratio
• Total Debt to After-tax Income Ratio
• Total Assets to Income Ratio

And I have targets for each of the ratios.

Lorraine: False. I do all of that geeky financial planning stuff and I don’t typically review the ratios with Lorraine.

I know how much each of us is putting into our respective retirement accounts, whether that amounts to the maximum allowable contributions and what our respective vesting schedules are.

True. I call this our “Freedom Account”

Lorraine: True.

I know how much money each of us will be getting from the Canada Pension Plan when we retire and what our pension benefits (if any) will be.

True. I have a spreadsheet which estimates my retirement income from all sources through to age 65 should I be working that long. If I retire early, the retirement income projection shows the estimate for any age between 2016 and 2022.

Lorraine: True.

I know whether or not we have a will or living trust, what its provisions are and how up-to-date it is.

True. Lorraine and I updated our wills a few years ago after my mother’s death.

Lorraine: True.

I know whether our income would be protected by disability insurance should I or my partner become unable to work. If we do have disability insurance, I know the amount of coverage, when the benefits would start and whether they would be taxable. If we don’t have disability insurance, I know why we don’t have it.

True. I have disability insurance through my employer.

Lorraine: False. My fault really as I don’t think I have ever gone through this with Lorraine.

I know what my partner’s wishes are regarding medical treatment (including being kept alive by artificial means) in the event he or she falls seriously ill or is seriously injured. I know whether or not our will includes a valid power of attorney covering such situations. I also know how my partner feels about being an organ donor.

False. I need to talk about this with Lorraine.

Lorraine: False.

I know if my partner has taken an investment class in recent years.

True. Lorraine has not although she has read some of my investing books.

Lorraine: True as I constantly read books about investing.

I know how my partner’s parents handled their finances and I know what effect that has had on how my partner feels about how we manage our money.

False. I have no idea how our parents managed their finances.

Lorraine: False.

So, there you have it. Not a bad set of questions to work through with your spouse. And it may provoke some thinking about financial planning.