The other day I had one of my “get to know you” calls with a potential client. In our conversation, he said that his financial knowledge is pretty good, but he’s looking for a review of his situation from an experienced professional because he’s worried about his blind spots. In essense, he’s asking “What am I missing?”
My car has a blind spot indicator – when a car is coming up next to me on either side, a little light on the side mirror goes on. Although it’s a little too conservative – and warns me of people who are actually quite far behind me – I appreciate it. It gives me a little heads up and reminds me to take a look and apply my own judgement about whether it’s safe to change lanes.
We have blind spots in all kinds of areas of our lives. A blind spot becomes visible when we get a new piece of information that we’d never considered before. Here’s an example that’s happened to me (and probably you). When I develop some irritating health issue, I sometimes think I know what’s wrong with me and go the drug store and take the appropriate over-the-counter medication. However, when the issue doesn’t resolve and I end up at the doctor, I might learn that my health issue is something I’d never heard of before – and therefore hadn’t considered. It’s often eye-opening to learn about (and a relief to be properly diagnosed).
Blind spots exist in personal finance too. When I bring one to a client’s attention, a common response is “I had no idea.” Sometimes the blind spot is something that they need to stop doing. Sometimes it’s something they’ve been ignoring. And sometimes it’s an opportunity that they didn’t know existed.
For personal finance beginners, blind spots might include not using a TFSA, not taking advantage of the RESP, paying interest on their credit card instead of paying it off monthly, and inadvertently damaging their credit rating by not paying their bills on time. Learning about personal finance early in life can eliminate these blind spots.
For older and more experienced folks, other blind spots exist. Here are a few examples that I’ve seen with clients I’ve worked with.
1. Having money in an RRSP that’s not invested
It’s common to hear someone say “I bought an RRSP.” You don’t buy an RRSP – you open one and contribute to it. Once you’ve done this, you will have a crucial next step to take: investing that money. If you do nothing with it, it will probably sit in a savings account. Most RRSP savings accounts pay next-to-nothing.This means that inflation is eating away at your purchasing power with every year you leave it sitting there. The same applies to your TFSA, RESP and FHSA.
2. Paying too much in fees
The most significant category of fees is investment advisory fees. If you have a financial advisor, you’re paying them. It could be that the fees come out of your account or you may be paying them indirectly through the management expense ratio on a mutual fund. Many people have no idea how much they are paying and if they better understood the fee structure, they could very likely lower their fees by asking their advisor to get them out of an expensive mutual fund. Other fees that people don’t think about include bank account fees, credit card annual fees, and late payment fees. Although these fees have a much smaller impact on their finances, you should never pay more than you need to.
3. Investing too conservatively
For people who are nervous about the stock market and volatility, the opportunity cost of investing in savings accounts and GICs is a blind spot. For someone in their 50s for example, having a retirement portfolio invested too heavily in these safe investments means they are giving up the opportunity to have their money grow at a faster rate, and they could be giving up a more secure or fun retirement. Having an understanding of how the stock market moves over time and knowing how to be properly diversified to manage risk can allow people to take advantage of higher returns while still sleeping at night.
4. Profitability of rental properties
There’s a simplistic way of looking at the profitability of owning a rental property: the rent received covers the mortgage payment. However, this math is too simplistic. Some property owners don’t account for the costs of owning and maintaining the property. Repairs, property taxes, insurance, replacing broken items, missed rent due to tenant turnover, and income taxes all need to be added to the calculation to get the true picture of the profitability. The income property might not actually be providing income.
5. Spending leaks – “I had no idea we were spending so much money.”
The process of reviewing your spending in detail is tedious and a bit painful. But not doing so means you probably have some blind spots in your cash outflow. In almost every case when a client does a review of their spending they say “I had no idea we were spending this much on ______.” Some expenses are easy to reduce – cancelling subscriptions and memberships you don’t use and curbing the Uber Eats habit are two that come to mind - and can help you feel more in control of your spending and of course, have some money to add to your savings.
Revealing your blind spots
You can eliminate some blind spots with reading and learning. The light on your figurative sideview mirror will come on when you come across an idea or concept you hadn’t heard of before. You’ll be able to ask yourself whether it applies to you.
And even if you have a pretty good handle on your finances, working with a financial planner or coach can help you identify any blind spots - we are pretty good at seeing the things you might not see – and you will then feel confident that you’re not missing anything important.
Photo by Kalle Kortelainen on Unsplash