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Chapter One, BREAKING THE ICE - The First Saturday

"Well, Grandpa, here we are," enthused Kevin, as he and older sister Jenny joined me for our first Saturday discussion on wealth-creation. "I can't wait to find out how we can become rich!"

"Kevin, don't be a nerd! Money isn't everything!"

"You know, Jenny, you're absolutely right. There is much more to life than money. But would you agree with me that whenever the money you earn from your part-time job runs short, you're more stressed and less happy than when you receive that pay cheque every second Thursday? Don't you feel more comfortable and independent when you're not scraping together loonies and toonies to put gas in your car?"

"I guess what you're saying, Grandpa, is that we need enough money to be able to meet our daily needs comfortably," acknowledged Jenny.

"Told you, Jenny," said Kevin. "It all boils down to having lots of money."

"You're both partly correct. Earning enough money is important. And because you both intend to pursue some form of higher education which will give you a good start up the career-ladder, I expect you'll do well in that regard.

You may not be aware that with the Canadian population shifting dramatically toward a higher proportion of retirees, landing a good job for a hard-working, well-educated individual, should not be too difficult in the next several decades."

"The unfortunate reality however, is that many Canadians do make good money all their working life, yet they never really achieve financial independence. Often in fact, they have to really tighten their belts when they retire. Why do you think that is?"

"They don't know how to save," offered Kevin.

"They don't know how to invest their money," added Jenny.

"You're both on the right track. And here's my first tip for you."

TIP #1..... The total income earned in one's working life is much less important to wealth-creation, than how one uses the money earned.

"Knowing how to save money and how to invest wisely are only two elements of how one uses his disposable income. We'll deal with both of these in detail, later in our discussions. But first, what do you think are other factors important to our smart use of money?"

"Don't fritter your money away," suggested Kevin.

"You're absolutely right, Kevin! Before we even consider savings and investment ideas, every one of us, at any age and income level, should be shrewd in how we spend the money we earn. Can either of you think of any examples of the smart use of one's disposable income?"

"What do you mean by disposable income, Grandpa?" asked Kevin.

"Good question, Kevin. I'll try to define any new terms we come across."

DISPOSABLE INCOME is the money actually deposited in one's bank account. It is the amount left over, after an employer subtracts income taxes, pension contributions, insurance costs, union dues, employment insurance contributions, or any other required deductions. It is the amount of money that is actually spendable.

"Oh -- well, in answer to your question, I've been with you when you were buying expensive or multiple items, and I've seen you, often successfully, negotiate the asking price," offered Kevin.

"Right again, Kevin! I learned that tactic from watching my father when I was young. I often squirmed when I was with him and saw the lengths to which he carried his negotiations. I'm a bit more conservative in my approach, but I do instinctively look for any reasonable opportunity to negotiate a purchase. You've seen a few examples, but here are some for Jenny's benefit:

• Each year, when I order eight hanging baskets from my favourite nursery, I search out the owner and routinely receive a significant price reduction.
• When booking a hotel room, especially for multiple nights, I always check out the best online price, but then I go a step further. I use the 1-800 number for the hotel and speak to the reservations manager, to ask for his best price. Very often, I'll get a discount that beats any online deal.
• Even when buying appliances that are on sale, or expensive electronic items, I'll ask for the department manager and try to negotiate a further discount. Often I'm successful.

These are just a few examples. Individually, they seem to amount to very little. But over the last forty years, when most people would not even think of trying, I have saved tens of thousands of dollars by negotiating purchases.

The key of course, is to be reasonable and polite when asking for price consideration. Although you may not always be successful, you definitely won't be if you don't try.

Can you think of other smart ways to limit your spending?"

"I guess you should not only negotiate, but shop around first, and compare alternatives that may be available," suggested Jenny. "I know Mom uses coupons, and watches for sales, or she'll get a great discount because something has a scratch or a dent."

"Right, Jenny! There are many examples I could give you, from furnishing a home, to car-buying, and even to choosing the lowest-fee bank accounts. But perhaps the most significant ones you're likely to encounter over the course of your life are:

• When buying a home, the effort you invest in really looking around, comparing options, and looking for best value, even before negotiating price, can save you many thousands of dollars on each purchase.
• Perhaps even more important, shopping around for the best-value mortgage, whether for your first home, or the renewal of a current mortgage, can save you tens of thousands of dollars over the life of your mortgage.

Both of these scenarios have such a huge potential impact on the growth of your long-term net-worth, that we'll spend more time discussing each in a later session.

Always keep in mind this next tip."

TIP #2..... There is no easier way to stretch disposable income, and indirectly, to add to net-worth, than to minimize the cost of planned expenditures right at the time of purchase.

"I'll be referring to net-worth often, so I'd better explain what I mean by that. In simple terms:

NET WORTH is a measure of wealth. It is the total of all your cash, savings, real estate market value, vehicles, financial or other investments (YOUR ASSETS), less any money owed by you (YOUR LIABILITIES).

If the total amount of your assets exceeds the total of your liabilities, you have a positive net-worth.

The fundamental objective of wealth-creation is to increase net-worth. Your ultimate aim is to keep increasing your assets, while reducing your liabilities toward zero."

"Since we're talking about net-worth, can you guess what the median net-worth of young Canadians, say at age twenty, might be?"

"Not much, if they're anything like me," quipped Jenny.

"You're right, Jenny, and that's normal at your age. In their early twenties many people may well have student-loan liabilities, minimal income and very few assets. This often results in a negative net-worth at this stage of their life.

This is not necessarily a bad thing. If ever there were a good reason for debt, it's a student loan to upgrade one's education. An investment in post-secondary education of any type, should pay off big time.

Canada's Money Sense magazine quoted a People Patterns Consulting statistic showing as of September, 2009, the following distribution of net-worth, by age group, for Canadian households:

	Average	Median
Under 35	$100,000	$ 25,000
35 to 44	$325,000	$145,000
45 to 54	$490,000	$245,000
55 to 64	$670,000	$420,000
65 Plus	$505,000	$315,000

The median net-worth numbers are more representative of reality. The average figures are skewed upward by relatively few, very wealthy households.

The reduction in net-worth after age 65 is due primarily to retirees beginning to draw down their accumulated wealth once employment income disappears.

Today, these may seem to you like fairly high numbers. However, as our discussions continue, I'll share with you how, relatively easily, you can each far exceed these levels of net-worth by the time you reach these age groupings."

"I knew you'd show us how to get rich!" enthused Kevin, still focused on being a millionaire.

"Well, I've heard that a million dollars is no longer enough to retire on -- that inflation has eroded its value so much that it isn't such a great number to aim for," Jenny commented. "Is this true?"

"Good observation, Jenny. I've often heard the same. But let's put that one-million-dollar figure into perspective.

Do you know that only about 9% of all Canadian families have a net-worth of more than $1 million? Moreover, most of that select group are over age 60, with a significant portion of their net-worth comprised of the equity built up in the value of their home.

Yet, many other retired Canadians live very comfortably, even with modest net-worth.

The reason is that net-worth is only one major element of one's retirement standard of living. The other component, perhaps more important, is the combined retirement pension and investment income that the retiree receives on a regular basis. We'll delve further into investments and pensions in our future discussions.

So, Jenny, one million dollars in net-worth is still a very big number. Proof of that is in the fact that this goal has not been attained by more than 90% of all Canadian families.

I believe I'll be able to show how you can each not only achieve, but even beat that number, if you determine it to be a reasonable target. It's premature at this stage however, to start speculating what your target should be. You simply don't have all the information you need at this early stage in our discussions."

"So, Grandpa, what's next?" asked Kevin.

"Well, now that you understand the concept of net-worth and the interaction of assets and liabilities, you'll probably understand intuitively, that if we don't control the liabilities, or debts that we accumulate, we'll have less money to invest. We therefore undermine our ability to increase net-worth."

"Seems to me we just have to figure out the difference between what we want and what we need," commented Kevin.

"You're on the right track, Kevin.

This is so important, I'd like to spend a bit of time chatting about the whole concept of debt and its role, not only in your lives, but in the lives of all Canadians."

UNIQUELY CANADIAN -- A PRACTICAL STEP-BY-STEP GUIDE TO WEALTH-CREATION

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