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Dale Jackson

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A personal five-year plan

Dale Jackson


TORONTO (GlobeinvestorGOLD) - You can blame the Commies for turning the five-year economic plan into something negative. Soviet leader Joseph Stalin started the first one in 1928 to force agricultural and industrial output to meet designated quotas. They were rarely met but dictators around the globe have been using them ever since as political propaganda.

Well the year 2006 has dawned and it's time for the people to rise up and reclaim the five-year plan. It's a great New Year's resolution and an excellent way to not only take stock of your net worth but to create a benchmark for retirement planning. A five-year time span allows enough time for financial goals to materialize yet is short enough to create realistic expectations.

Before creating a five-year net worth plan it's important to define net worth. Statistics Canada's formula for household net worth is: total non-financial assets, plus total financial assets, minus total liabilities. For most of us the biggest non financial asset is our house and property. Other non-financial assets include the current market value of consumer durables such as vehicles, jewelry, furniture and appliances.

Financial assets include investments within and outside an RRSP, bonds, savings, pensions and the cash surrender value of insurance policies. Statistics Canada does not consider Canada Pension Plan contributions financial assets.

According to StatsCan total liabilities are any debts owing including: consumer credit, mortgages, loans to purchase securities, renovation loans and any accounts payable.

Statistics Canada keeps close records on the net worth of Canadians overall. The most recent survey pegs the average Canadian's net worth at $135,000 per capita.

But before you take out your calculator and start finding out how you measure up, there's a problem with the StatsCan formula. When determining non financial assets like vehicles and furniture, a complex formula is applied to determine depreciation. That means each year those items are worth less. The actual level of depreciation could be way more or way less than the formula - and it could throw your numbers out of whack.

For the purpose of this five-year plan only items that retain their value or appreciate, and can be independently appraised, should be included in your calculation of net worth. That means vehicles and appliances should be excluded. Items to include are real estate, jewelry, art, antiques and collectables. After all, when creating a five-year plan you want apples to apples comparisons from year to year to use as a benchmark for how well you are progressing.

So, the first step of your five year plan is to determine your current household net worth. Your own definition of household could include one person, a spouse, or each and every occupant striving for the same financial goal. The current market value of your financial assets is usually displayed on regular statements from your investment advisor.

The current value of residential real estate is a little more difficult to determine. One method involves starting with the original purchase price and adding the cost of improvements, plus market value appreciation. There are a few ways to determine market value appreciation. Most municipalities base the residential property tax rate on market surveys. Increases in your property tax rate could help determine increases to the market value of your home. You can also consult local real estate agents or independent appraisers who are more familiar with the market.

The final and most overlooked step in determining net worth involves subtracting debt. Debt should be subtracted when you determine current market value for both financial and non-financial assets. Your mortgage amount and renovation loans must be subtracted from the market value of your home and money borrowed to make investments must be subtracted from your financial assets. In addition, consumer loans including credit card balances or bills owing must be subtracted from your non financial assets.

Once you've determined the current market value of all your financial and non-financial assets add them up and subtract your total debt owing. The result is your current net worth.

Next, create a spreadsheet listing from top to bottom, financial assets, non- financial assets and total. From side to side leave six spaces for current market value, year one, year two, year three, year four and year five.

The second step is to determine your annual contribution goals for the next five years. This is where you have to be realistic. Take into account your RRSP and non-RRSP investments, contributions to a company pension plan by both your household and your employer, and any investments you will make in non-financial assets. When it comes to financial contributions a good investment planner will set up a monthly contribution schedule to help you meet your goals. Regular payments made throughout the year will also help you meet your growth goals because those investments will have that much more time to appreciate.

If you own a home don't forget to include mortgage payments made toward the principle and renovation costs. Your mortgage holder should be able to tell you how much of your mortgage payments go toward interest and property tax, and how much is actually going toward paying off the house. Whatever the amount, it adds to your net worth. During the course of the five-year plan the balance owing on your mortgage will drop and the amount going toward the principle will increase so it's best to estimate and average.

It's the same story for debt payments on any other assets. The more you pay down on those assets, the larger the portion that belongs to you.

Include investment and debt payment expectations for each year next to the corresponding asset on the spreadsheet.

In step three, estimate how much each component of your household assets will appreciate. Again, be realistic. Your investment advisor may have already established return goals going forward. Depending on your level of risk and market conditions, the equity portion of your portfolio could be expected to increase by eight per cent each year. Depending on the specific equities it may be more or less in the first year but could be expected to average off closer to eight per cent in the five-year period.

The fixed income portion of your portfolio is a little easier to nail down because it's fixed, but fluctuating interest rates could pose a problem. Bond yields are currently at record lows but are expected to head up in the next five years along with interest rates. A return goal of 5 per cent might be realistic for your fixed income portfolio.

Don't forget to include growth expectations for company pensions or any other investments.

To determine how much your residential property will appreciate over the next five years the Canadian Mortgage and Housing Corporation provides frequent data on residential real estate values going forward. House prices have been increasing at double digit rates but growth is expected to slow in the next five years. Depending on where you live, and what type of improvements you're making, you might expect your residential property to increase in value by 7 per cent each year. In the current market climate it's good to be conservative.

In the fourth and final step, take the current value of each asset, add annual contributions and then add expected appreciation. Enter the amount under the year-one column. Add those numbers together from the top down and that's your net worth projection after one year. Repeat the process for years two, three, four and five so you can see how your plan is progressing each year. By year five, the number in the total column will be your five-year net worth goal.

Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.

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