Hi Sandi

I know you are often looking for article ideas and I'm wondering if you would feel in the mood to write something to motivate folks who are doing okay, have a plan, no debt,....but need to avoid the temptation to go into debt (aka buy a cottage). It's nice not having debt, but I could use a lecture on staying focused and sticking to the plan. ~L

Let's unpack this request a little, because it seems as though there's more than just "tell me not to do an unwise thing" going on here. There's a lot to say about the specific temptation - the cottage, and the borrowing to get it - but there's even more to say about the whole concept of goals, motivation, and success. What I really want to know is why "doing okay"

isn't enough for you.

Are you really okay?

Like every professional everywhere, my knee-jerk response is to believe that what you really need is me, so forgive the bias inherent in this question: how do you know you're okay? Are you using your lack of debt as a proxy for overall financial well-being? It's dangerous to move on to the advanced classes before mastering the prerequisites, so before graduating to "now what", re-examine your true financial situation, and be careful to identify any risks to your ongoing stability that you might have overlooked.

Are you aiming at what you're really interested in?

If you're spending well, saving appropriately, on track for the goals you've planned, and have adequately protected yourself from as much risk as you can, congratulations. Why aren't you satisfied? 

Is it possible that the plan you have right now isn't motivating you because it isn't actually what you want?In my profession, we're very guilty of focusing on the goals to the exclusion of anything else - the educations, the vacations, the retirements, and leaving the meaning and fulfilment (which can't be measured and don't pay a commission) to sort themselves out.

This is partly because we're trained to think in the language of dollars and cents and amortization and future values and rates of return, and have a very difficult time translating those useful concepts into the language of humans and relate them to meaning and relationships and value. We focus on reaching SMART goals, but don't spend much time worrying about whether the direction we're headed is the right one.

I want to pause here for a minute and illustrate what I mean when I talk about the difference between goals and direction by going on a canoe trip together down the Spanish River. Our friend is going to drop us off at Duke Lake on Saturday, and will be at Agnew Lake Lodge the following Saturday to pick us up. That means that our specific, measurable, achievable, relevant, and time-bound goal is to be at Agnew Lake Lodge in seven days. Everything else is direction.This means that we have a whole host of choices in front of us:

• We could paddle flat out, make it to the Lodge by Wednesday afternoon, and lounge around until our friend shows up

• We could take it easy, picking the perfect campsites and enjoying long afternoons by the river

• We could run each set of rapids twice, because we love whitewater so much

Of course, it also means that there are quite a few things outside of our control that will have an effect on how enjoyable the trip is and how quickly we reach our destination (or if we reach it at all). One of us could get sick and need to be evacuated. There could be a flood, fire, or crazy bear attack.

Our goal – the Lodge on Saturday – might not be the most important thing about this trip. Let's face it, our goal is only the thing that happens at the end.

If the goal was Being at the Lodge rather than Getting to the Lodge, our perception of the journey itself would change dramatically. Forget paddling, let's just drive to the Lodge and hang out for a week, right?

I could go on with the analogy, but I think you get the picture. Goals are important – they're the proverbial tip of the iceburg – visible, measurable, top of mind in a traditional financial planning engagement – but direction is what's going on under the surface. Goals change. Purposeful direction doesn't change much.

Let's talk about this cottage thing

So is the lure of the cottage really about the cottage? Or is it about the cottage lifestyle? Is it possible that the thing you're tempted to go into debt to buy is just a stand-in for the kind of life you wish you had?

I live in beautiful Muskoka, which means that from Victoria Day to Thanksgiving thousands of folks from Toronto stream past my front porch on the way to their cottages. I envy them their early mornings on the dock, days spent canoeing on the lake or reading in a hammock, and long evenings around the campfire, I really do. I'm intimately acquainted with the dream of cottage life.

But I'm also intimately acquainted with the work involved in owning the cottage life instead of renting it for a week or two in the summer. People who own their cottages have to either pay for property maintenance or spend a lot of cottage time repairing the dock, opening or closing for the season, fighting carpenter ants, trimming back trees, fixing the roof, and repairing the garbage bin after (another) bear visit. Owning a cottage costs money and time. You'd better be really, really clear that you want what you're buying.

Would-be cottage owners sometimes think to solve the problem of cost of their vacation property by renting it out, which - of course - means that there's even less cottage time to go around, and even more maintenance to do yourself or pay someone else to do to keep the property clean and rent-able. Being able to deduct the partial cost of owning and operating your cottage as a rental property and breaking even on cost doesn't offset the fact that you won't be the one there enjoying it most of the time.

Asking "now what?" might be signal that you want something else

So the real cottage question is this: what is it about the cottage (or any temptation to go "off-plan") that is more attractive to you than the goals you already have, and does it make sense for you to re-examine those goals? Is your life too fast? Too crowded? Too busy? Do you need to be purposeful about taking time off and giving yourself permission to relax? Do you just need to get outside more?

If you've critically examined your desire to own a cottage and it's not a stand-in for something else that's missing from your life, and if the realistic costs are well within your ability to pay without jeopardizing your financial well-being, or if you're willing to sacrifice equally costly goals to move towards this one, then maybe you should do it.

Where's the sense in saving wisely for a goal you might not actually want?  

Last year, what I wanted most for you was clarity, remember?

How would your life be better if you were absolutely clear about what you want your life to look like, the resources you have or will have at your disposal, and the obstacles that you’ll have to get over, around, or through to make it happen?  

Would knowing how you’re invested make it easier to make decisions about the uncertain future? Would having a clear debt-free date encourage you to keep on keeping on? Would a precise knowledge of how you spend help you understand why you spend and when to cut back (or spend more)? 

I submit to you that it would. At the risk of really oversimplifying your complicated life, understanding where you are now is the only way you can make plans to get to where you want to go. Clarity about your direction is the only sure defense against getting lost when bad news spins you one way and good news spins you the other. 

One thing to understand about the pursuit of clarity is that it’s not a once and done activity. Life changes. Goals change. People change. My husband and I have been married for fourteen years, and I don’t think there were two in a row that were the same in terms of jobs, homes, cities, or plans. 

My hope for you this year is that – no matter what your circumstances – you take the time to get really, really clear about what those circumstances actually are, and plan to repeat the process when they change.

As we face 2016, what I want for you hasn't really changed, just matured: I want you to have clarity, but I also want you to be engaged. To make an effort.

To take ownership.

Now, let's be clear (there's that clarity thing again), because words like "ownership" and "effort" can easily convey a sense of finger-wagging accusation, as if any mistakes you've made or trouble you've encountered could have been easily avoided if you'd just been carrying your money around in envelopes like you were supposed to.

This coming year has nothing to do with guilt and everything to do with encouragement: now that you know where you are, I want you to commit to where you want to go.

If clarity about your current circumstances equips you to aim for what you really want, ownership equips you to act. The coming year is guaranteed to be full of surprises. Clarity - knowing how surprises have affected you in the past - is good, but organizing your financial infrastructure around adapting to surprises is better, and that's ownership.An easy example: the holiday season is almost over. Calculating how much you spent on gifts, food, and general 'it's the holidays"-type things and reflecting on how well that number matches up with what's really important to you is an exercise in clarity.

Ownership is starting a holiday savings plan in January or talking to your family about alternatives to gift giving in order to more purposefully align the kind of holiday season you have next year with what's actually important to you.

Too often in finance we use grand goals to motivate behavioural change: "Save for your early retirement on the beach!" or "Fund a year-long trip around the world!" Most of us don't have goals that glamorous; in fact, most of us don't have specific goals at all. I'd bet that the overwhelming majority of folks reading this right now just want 2016 to be better than 2015.

You'd like to be able to pay the bills with less worry. You'd like to save a little more. You'd like a little more wiggle room, a little more flexibility, a little more stability.In the past, you wished for things to be better. You hoped for your circumstances to change, rather than your behaviour, but incremental improvement is a goal, you know, however unsexy it may sound.

Just like the glamorous ones it's a goal that needs to be worked towards, and that means taking ownership. This year you're going to identify that small handful of improvements that you can make to better align your money with your life, that prepare you just a little better for all that 2016 might hold, and you're going to actually pursue them.

This is the year you stop wishing and start doing.  

The point: Yes, your own bad investing behaviour costs you, but your advisor's bad investing behaviour has the potential to cost you a lot more.

First off: I'm not a portfolio manager or an investment advisor (or adviser, for what it's worth). I was a registered representative (read: mutual fund salesperson) at CIBC for many years, but gave it up when I started my financial planning practice.

These days, I don't manage anyone's money but my own, and am happy to concentrate my expertise on what too many investment professionals would call "the other stuff"; things like behaviour, spending, debt reduction, and retirement planning, to name a few.

But just because I don't advise clients on securities anymore, doesn't mean I don't get to see what they're invested in. A big part of my work is helping my clients set reasonable expectations for their investments, which means looking at what they own and helping them understand what they're paying for. Whether they're investing in Realty Mogul or Fundrise, it's important people understand what they own.

How much does your bad investing behaviour cost you?

I had to laugh when I read the series of intro pieces written for the unveiling of the MoneySense Approved directory, in particular Preet Banerjee's How your own bad investing behaviour costs you, which begins with an interestingly-worded contrast between "advisor-hating, DIY couch potato investors in search of the lowest cost" and "those who believe in the value of higher-cost, actively-managed full-service advice", and goes on to say:

What often gets overlooked by investors who ascribe to such polarizing views of financial advice is the less salient cost of making avoidable investment mistakes. This is more colloquially referred to as “behavioural drag,” which is the tendency to second-guess investment strategies and make changes to portfolios, generally, at the worst possible times. It can have a big impact on your ultimate bottom line.

Preet then calculates how much this behavioural drag will decrease your rate of return, assuming a $100,000 portfolio invested for 25 years with a 6% rate of return before fees, which he assumes to be 2.5% for actively managed advisor relationships, 1.25% for passively managed advisor relationships, and 0.25% for passively-managed do-it-yourselfers.

Notice anything missing?

Of course many DIY investors make mistakes (despite tools like Stocktrades designed to ensure fully-informed decisions) "passive" couch-potato adherents and "active" stock-pickers alike. I've seen them first-hand. You can always start investing from your phone though if you are that lazy type. (Do magazine covers like this one contribute to the problem? Asking for a friend.)

What this calculation says is "your own bad investing behaviour costs you more than you're saving in fees by DIYing". But

I've seen some portfolios...

I would love to live in a world where engaging an investment advisor automatically meant eliminating behavioural drag, I really would. The portfolios I look at every day with clients are proof that we don't.

Consider the client who thought she had a 60/40 portfolio, but whose equity allocation was actually seven different income funds or managed portfolios at BMO and five at TD: BMO Asset Allocation Fund, BMO Dividend Fund, BMO Monthly Income Fund, BMO Income ETF Portfolio, BMO SelectClass Balanced Portfolio, BMO SelectClass Income, and BMO SelectTrust Equity Growth, TD Dividend Income Fund, TD Comfort Agressive Growth Portfolio, TD Comfort Balanced Growth Portfolio, TD Comfort Balanced Income Portfolio, and TD Comfort Conservative Income Portfolio.

Her equity allocation.

What does that tell you about the quality of the 2.08% investment advice that she was paying for?

Or consider the client whose advisor - after ignoring her for a year - finally decided to show up one morning and prove she's paying attention with a flurry of trades, including a buy recommendation on Potash. In July. What kind of drag did that set of trades have on the portfolio?

How much does your advisor's bad investing behaviour cost you?

That calculation could much more accurately say "your own bad investing behaviour costs you, but your advisor's bad investing behaviour costs you more, especially if you're paying a lot for it".

Forget about whether your portfolio is actively or passively managed for a minute and think about cost instead: high cost portfolios do damage to your investment returns, and that damage is magnified by bad behaviour (yours or your advisor's).

High costs are so damaging that even a perfectly-executed portfolio management strategy is likely going to underperform an imperfectly-executed strategy that costs dramatically less. If you're paying 2.5% for investment management, you'd better hope you've found one of the few human beings in the world immune to behavioural mistakes.

The choice to chart the cost of bad investing behaviour on every kind of investing model except for the "high-cost, actively-managed, full-service" advice he refers to at the beginning of the piece, coming as it does as part of a series introducing a list of investment advisors willing to pay $2,500 per year and able to prove that they're CFPs in good standing with clients who don't hate them (which, I believe, the Financial Planning Standards Council does a pretty good job of on its own), makes the whole exercise feel like an apologetic for an investment advice industry built around high embedded costs, justified by promises of better than average investing skill and long-term portfolio outperformance that just don't bear up under scrutiny.

Does this sound familiar?

You've read a book or a blog series or watched a show about budgeting and getting your money under control. You're all fired up, ready to really get it together, and get to work on that budget. The first few lines are easy:

Monthly net income? Read it off the paycheque, check. Mortgage payment? Burned in the memory, check. Oh, man. This budgeting stuff is easy.

Groceries? Uh...well, we usually shop once a week (unless we forgot something) and it usually comes in between $120-$180...I'll put $150.

Clothing? Oh, man. I don't know, $50? Except in September, when the kids go back to school, and October when their feet maliciously grow and we have to buy new running shoes with only one month until the snow falls...and April, when we realize it's too warm for winter coats and too cold for sweaters...

Entertainment? Erm...let's say $10. I dunno, do late charges at the library count?

When the time comes to "stick to the budget" and that budget is just a series of made up numbers, what happens?

Or this?

You take the advice most people are offering about controlling your spending: you begin to track your income. You get a notebook and a pen, and you write down every penny you spend, every day. Until Thursday comes along, and you're so busy that you just keep the receipts in the book, because you know you'll have time on Friday and you'll remember, but Friday becomes Saturday two weeks later, and you're sitting in front of a pile of little pieces of paper, trying to forensically reconstruct seventeen days of spending and hoping that missing the two pocketfuls of receipts that went through the wash won't screw you up too much.

Maybe, instead of the notebook or spreadsheet, you signed up for Mint or Quicken or YNAB instead, and you faithfully input or categorize all of your spending for almost a month. And then suddenly your checking account (according to the program) has $1,315.92 in it, when your checking account (according to reality) has $541.01. And you can't find the mistake.

When your books are a mess and you actually have no idea how closely you've been "sticking to the budget", what happens?

Protip: use what you already have to start budgeting well

Look, these things happen, even to someone who ::cough:: has been tracking her transactions and living on a spending plan for ::coughtenyearscough:: But when one of these is your first experience with the whole budgeting thing, it can very, very easily be your last. Or your last for a while.

I truly don't understand why the inevitable advice for first-timers is always A) write out a budget and/or B) track your spending. The only people who won't get lost in the land of 78 spending categories and account reconciliation are the ones who probably wouldn't have needed to read the book or watch the TV show to get themselves organized, and were going to be fine anyway.

The frustration goes away with time and practice, it really does. Any budgeting system will work if you give yourself enough time to learn and adapt to it, honestly. But why go through all the aggravation of trying to live by a guess-timated budget if you don't have to?

If you're convinced that some part of budgeting is worth doing, then the first place to start isn't how you're going to spend in the future; it's how you've already spent in the past. You have years worth of data lying dormant in your bank and credit card history as we speak - a complete picture of how you spent your money when you weren't paying attention, and accessing it is as simple as downloading a good sample size to a spreadsheet, sorting them out, and adding them up.

Easy for me to say

This is one of those pieces of advice that could very easily become that "just" advice that I hate so much.

"Just" is the dirtiest four-letter word in personal finance. "Just" DIY/"Just" cook at home, etc. #CPFC15

— Sandi Martin (@SandiMartinSPF) October 18, 2015

I use spreadsheets every day (and love every minute of it) so this is an easy thing for me to do and recommend. If you don't speak spreadsheet very fluently, this exercise might be as frustrating as trying to guess how much you're going to spend on clothes in the next _insert arbitrary period of time here_.

But, like most things prefaced with "just", it might be worth your time and effort to try. If you have even a passing familiarity with rows, columns, and cells, and know how to use the "sort" function, examining your past spending in aggregate is a good way to set yourself up for success with your future spending.

Why start with a guess when you can start with data? 

I was recently part of a presentation for financial advisors, put on by someone whose work I respect (and who I imagine probably would not have said this if he had had more time to think about it). Just before the end, this came out of his mouth:

Words I just heard! "If clients want to retire early & can't lower spending, then allocate their portfolio to earn a higher rate of return"

— Sandi Martin (@SandiMartinSPF) August 20, 2015

(Of course I tweeted it!)

What's going on here and why is it so outrageously wrong?

Let's unpack that a little bit, because - as crazy as this sounds - it isn't uncommon advice. Financial advisors all over the country look at people who don't quite have enough to retire early and give this advice with a straight face (most because they don't actually know any better, some of them because...well...)

First, someone who wants to retire early is going to spend more from their investments than they would if they retired later.

Second, someone who wants to retire early and is going to be spending more from their investments will be doing that spending sooner than they would if they waited.

Third, someone who wants to retire early is going to have reduced CPP and defined benefit pension payments because they either a) applied for the benefit early and are subject to the age adjustment factor, or b) have extra years of $0 income between their early retirement date and their "normal" retirement date.

Fourth, someone who wants to retire early is going to have to wait longer to be eligible for pension benefits like OAS (or CPP if this someone is hoping to retire before age 60).

Taken together, our poor client needs:

• His investment portfolio to last longer

• His withdrawals from that portfolio to be higher (to make up for the lower CPP and DB pension, and

• His withdrawals from that portfolio to start earlier

Sounds like a perfect recipe for over-exposure to sequence of return risk to me, and - to put it into the plainest language I know: this client probably shouldn't retire early.

So why is "be more aggressive" such distressingly common investment advice?

Most financial advisors depend on selling you a product in order to get paid or make their employers happy. Employers generally want their advisors to be efficient with their time, and therefore structure advisor compensation and training to both discourage complex (and time-consuming) retirement income planning and encourage the sale of new, more valuable products. Product sales are rewarded. Investment advice is not.

Most humans are reluctant to give other humans bad news, and sometimes - for instance, when the first human's income and/or job depends on keeping the second human happy (and lucrative) - advisors would rather promise higher returns through more aggressive investing, especially since the advisor and his or her employer is comfortably protected a familiar disclosure that says "past performance is no guarantee of future performance."

If you find yourself across the table from someone who is telling you to take on more risk so you can retire earlier, there's a small chance that you're getting good advice, but there's a much, much bigger chance that you're holding hands with a blind man and walking toward a cliff.

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Here's some outstanding additional reading on how dangerous this kind of thinking is: What does retirement actually cost | Think Advisor