Your Finances are your own Little Empire

How you think about your finances and your self-image will act as constraints on the solution space of your financial future, creating artificial limitations. 

In 2006, Rhonda Byrne published The Secret which outlines a phenomenon known as the “Law of Attraction”. The assertion made here is that an individual can manifest into reality the thoughts and desires they might have through Pure Energy, which then brings forth health, wealth, and positive relationships into your life.

It goes without saying that this is complete and utter bunk.

I’m picturing certain scenes from Looney Toons where Wile E. Coyote paints a tunnel on a solid rock wall into which the Road Runner uncannily passes right through at full tilt. If reality is an illusion, it is a persistent one.

But maybe it’s not COMPLETE trash.

See, our beliefs about what is true and possible in the world really do affect outcomes inasmuch as they constrain our actions. What I mean is, if you don’t believe you would ever be able to play professional basketball, you certainly won’t. This runs contrary to the Law of Attraction, though, as some poor souls on your [insert high school sports team] might have made clear, despite their best efforts and desires.

Here are some beliefs I try to help instill in my clients’ thinking so they don’t hobble themselves in dreaming the [otherwise] impossible dream.

Your Family Finances are your Business Empire

This is really true; you should absolutely try to think about your financial affairs the way that businesspeople think about running their businesses.

I quite enjoy working with businesspeople. Yes, personalities differ between folks, but there are many patterns of behaviour and thought that run as common threads. It’s a bit of a chicken-or-egg situation as to whether the beliefs exist and they bring about success, or perhaps the beliefs are hard-earned, bearing their own battle-scars. Regardless, let’s review some of these beliefs to help you hone your thinking about your own money management!

#1 – Debt is a Tool

This is one of my favourite conversations to have with new clients. I frame it as a gauge with three settings: 1) Bad Debt, 2) Debt IS Bad, and 3) Debt is a Tool.

We all know someone, perhaps a relation (maybe even Michael Jackson’s antagonist-in-the-mirror!), who has had their bout with debt; a mountain of student loans, an unsustainable mortgage payment, credit cards paying off other credit cards, or that dread species known as the Payday Loan (in the Latin, Cathartes Cathartidae).

And, so, debt can be a real problem. I observe that the most problematic debt tends to be that which is unplanned. Plan your debt. Get credit when you have a job; get insurance when you’re healthy. Because, when you lose your job or good health, you’re going to want the option or the coverage and no one is going to give it to you.

The completely understandable reaction for the witness of Bad Debt is the penultimately enlightened view of Debt is Bad. This is where most responsible folks find themselves.

I’ll never forget sitting down with a young couple for an initial consultation to discuss their financial goals. They reviewed a list of common goals and ticked off “Paying off my Debts” as a key priority. Naturally, I inquire about the nature of their debts, to which they respond, “Oh, we don’t have any debt, but we are thinking about getting a mortgage and want to pay that down.” Befuddled and bemused are words that come to mind, were one to describe my internalized response.

But there it is; a lot of people are VERY motivated to pay down their debts aggressively. And, in a sense, there is nothing at all wrong with that behaviour. Paying off your debts will absolutely put you in a better financial situation, who am I to criticize?

Except that there is a deeper reality at work. If you find yourself in my position as an Economist, needing to deploy as wisely as possible a set of limited resources to accomplish my personal goals. Then it’s worth considering how best to make such an application.

And, thus, we arrive at the enlightendest (all words are made up) view of debt – Debt is a Tool. What sort of tool? Debt is actually nigh on magical. It allows the most ordinary of people to achieve a scientific feat never accomplished by even the most sophisticated of Theoretical or Applied Physicists.

Debt is Time Travel.

Work with me for a moment here. Sure, you can’t translate your physical body into a novel or historical temporal phase, ok. BUT what if Future Nate were able to send financial resources to Current Nate to be employed at Current Nate’s discretion? Then I suppose CN (that is, Current Nate) would have an election to make as to how he might employ said resources. And what if CN were to invest wisely those resources such that, when CN catches up to FN, my future self enjoys greater wealth than he otherwise would have had there been no cosmic Money Gram? Well, then they might shake hands and say, “Job well done!”

This is a truth businesspeople inevitably engage with as they conduct their affairs. Corporate finance has two basic sources: debt or equity; take your pick and make your mix. At the end of the day, as long as you can manage your cash flow and continue to make profitable business investments the debt works to accelerate business growth that wouldn’t be possibly otherwise. Bringing us to the next lesson…

#2 – Cash Flow Issues vs. Accounting Issues

I was speaking with a friend recently who was asking me about a business interest I have that is among the harder hit by the COVID-19 pandemic shutdowns. It’s a really bad season for the business and our viability is a serious question which, due to the nature of the business, is no real secret to anyone. I’m a silent partner in the business so I don’t know much of the current financial well-being of the business. One of my business partners is an accountant and he handles that element of management.

What I told my friend is that we have a lot of money in the bank, I just don’t know who it belongs to.

What is a cash flow matter and what are accounting matters?

Cash flow what it sounds like. A bath-tub analogy is sensible. There’s the tap turned on at a certain rate of flow (current revenues), an accumulated reservoir in the tub (cash on hand), and then an open drain (current expenses). Cash flow challenges arise when the tap is pouring too slowly, and/or the drain too quickly, such that the tub is in danger of running dry. In our situation, we have a decent volume stored but the drain is sucking that back at a rate faster than the tap provisions the tub. It’s not a sustainable situation.

This is a problem a penguin can intuit.

Probably the easiest way to explain this distinction cash flow analysis vs. accounting might be to pick up apart the cost of home ownership. A typical list of monthly expenses to operate a home in Canada would include line items like property taxes, natural gas, electricity, water and sewage, and a mortgage payment (we won’t worry about repairs and maintenance). If you add up all those expenses you can establish the cash flow requirement to service those costs. However, from an accounting standpoint, were this a rental property, one of the expenses would not be fully deductible against your income for tax purposes; namely, the mortgage payment.

A traditional mortgage payment contains both principle and interest components. The principle portion represents a repayment of the mortgage and is not deductible. The interest portion represents a true expense and is deductible. It is still necessary to have enough cash flow to cover the full mortgage payment but, assuming a 25-year amortization, about half the mortgage payment is principle and puts money in your pocket over time.

I’ve seen many an amateur real estate investor stumble over this error in judgement. Don’t be that person!

#3 – Mental Accounting/Siloing

The final insight I’ll review here is the phenomenon of Mental Accounting or Mental Siloing.

Among the venerated economists of our time, professor Richard Thaler of the University of Chicago’s Booth School of Business coined the term “Mental Accounting” in reference to the observation that individuals are prone to applying labels to certain funds, tying them to a specific expense or goal (ie: this is my Boat Fund). It’s completely understandable as an extension of very sensible practices like building a personal budget.

Thaler argues that this categorizing can lead to irrational behaviour. Money is money is money, he might say, and creating an inextricable link between certain funds denies that excellent feature of money – it can be repurposed at will.

I am right now in the process of investing certain funds on behalf of a wealthy client who has loads of excess cash on hand. This person has a habit of Siloing funds meticulously (I won’t tell you which low-lying, north-western European country she descends from) and this cash is, in her mind, to be used exclusively for a large expense due in just over two years.

Did I mention she always has loads of cash lying around?

Due to the artificial constraint, I must assume a conservative mandate for the investment strategy. In reality, this money would serve her better under a long-term growth-oriented mandate, but because of her specification on use, my hands are tied. There will be no cash flow concerns when the expense comes due and such there will likely be an Opportunity Cost to her future net worth.

The best way to break this habit is to perform a Hypothetical Maximum Load test on your finances. Much financial stress is simply a matter of ignorance; fear exists in the unknown. Individuals and businesses that have been through the wringer due to any number of financial head-winds learn the hard way exactly how much they can weather.

The exercise is as follows: take stock of your current net worth and then imagine you had an immediate expense twice that amount. That is, if you are worth $500,000, imagine you had to cough up $1,000,000 by Friday. If you can come up with a plan to handle that expense you certainly will expand your mental toolbox and resource yourself to creatively solve future cash flow problems that might apparate from the ether.


As psychological creatures, we all are constrained in our actions by our thoughts and by our beliefs. Expanding your thinking to include possibilities you previously hadn’t considered will allow you to creatively solve problems that you thought were intractable.+

Check out more of what we do and how we do it.
Contact us at contact@howlettfinancial.com

Book your free consultation with a HFP Partner here.

Q4 is Here – What’s Your Tax Plan?

“Income Tax planning should be proactive and sophisticated. If you are paying significant sums, it can be immediately profitable to obtain sound tax advice.”

At Howlett Financial Partners, the fourth quarter is Go-Time.

Traditionally, busy season in the retail financial planning world rested upon the Registered Retirement Savings Plan (RRSP) contribution deadline, which is the period of time individuals can add funds to their RRSP and receive an income tax deduction against the previous year’s income. While that timing can still work just fine for some folks, we believe in proactive planning and I would categorize a First 60 Day contribution as reactive. Sometimes it’s the only option but I really prefer to get ahead of the issue and begin the conversation around income taxes prior to year-end.

And what a strange year it’s been! [At the time of writing, the COVID-19 Pandemic rages across the globe.]

We start reaching out to our clients in September and October to get meetings on-the-books. I ask clients to begin collecting the actuals for income over the course of the year, given at that point we have a reasonably good idea of where it will land come December 31st.

If I can collect all the data prior to meeting, then on our end we can begin to generate ideas about which strategies might prove useful and have the strategy discussion in full at the face-to-face meeting. If not, we finalize data collection on site and reconvene.

Because I know my clients well, I mostly just need in-year projected gross income, but then people have a way of doing things when I’m not looking so there are surprises: a change of employment, a pregnancy or birth, plans to relocate or purchase a vacation property, diagnosis of an illness, change of marital status, and the list goes on. These factors can all play a role in which strategies become appropriate or effective to use in a given year.

This is really fun conversation for me generally (who’s to say what THEY think?). When we go through the numbers, and through the circumstances and goals, it makes for a fun puzzle to solve. Sometimes the solutions are identical to previous years, sometimes they are easier, and sometimes they are downright mind-benders.

So, why December 31st and not the end of February? Most tax deadlines for non-RRSP deductions and credits have a calendar year-end deadline, meaning that if we want to employ more sophisticated tax planning it is incumbent upon us to hammer things out earlier than has been the industry standard for personal tax planning.

And that’s because most financial planners use only one tool to reduce personal income taxes – an RRSP contribution.

Crafting a tax plan is half musical composition, half horticulture. There’s a structure that needs to be established with all the nuance and mood of a symphony, and then the patience to tend regularly to the weeds and growth. [I know this sounds self-aggrandizing.]

Who Should Consider Establishing a Tax Plan?

The most obvious question to ask yourself is “how much income tax am I paying?” This SOUNDS straightforward, but many people tell me that they don’t pay tax because they receive a refund most years.

If only.

An individual’s entitlement to a tax refund is, in actuality, simply a cash flow issue. For most folks who don’t run their own businesses or receive substantial taxable income from investments, the tax is withheld each pay cheque to cover their anticipated liability come the following April. It is a convenience for a lot of people who don’t want to have to worry about budgeting for a significant lump sum expense.

[2020 Aside: this has received sufficient press if you follow the news, but if you were collecting the Canada Emergency Response Benefit (CERB) for a period of unemployment related to the COVID-19 pandemic shutdown then those funds had no tax withheld at source as per my commentary above. This means that you should plan to have some amount of funds available to pay this out in April, assuming you don’t engage in tax planning to reduce your liability.]

So, determine your tax liability. An easy way to do this is to look at your final paystub or tax return from the previous year, assuming this year’s income will be relatively constant. There are lines you can find on both documents which will indicate the amounts you paid, generally broken down by what amount was paid to the federal and provincial governments separately.

If your income this year is going to be materially different last year, then you can do a quick-and-dirty calculation with this great tool built by the fine folks at Ernst and Young LLP.

For some flavour, their default setting loads the calculator with $75,000 of gross annual income. At that level of income for an Ontario worker you’d be on the hook for $15,205 of combined federal and provincial income taxes.

That ain’t chump change! In fact, from my experience income taxes tend to be the single largest line item expense in the family budget assuming there are two incomes being earned and the mortgage payment isn’t completely insane (an assumption that is making me increasingly tremulous).

What is the Cost of a Professional Tax Plan?

This is going to vary significantly depending on who you want to consult and the complexity of your affairs.

We charge a flat rate of $1,000 for a basic scenario involving individuals only (no trusts or corporations) for a comprehensive financial plan, which basically always involves some measure of tax planning. There is a lot more involved with the creation of the complete plan (we analyze what we call the Seven Pillars of Financial Planning) so that may not be the right solution for someone who just wants some tax advice. We do charge an hourly rate as an alternative, which will range from $200-500/hour depending on the seniority of the planner. This cost pays for it self immediately, in my mind, as the tax saved inevitably is greater than the cost of the advice.

Another option to establish a tax plan would be to consult a Chartered Professional Accountant (CPA). The cost of those services varies widely also, anywhere from $100-500/hour perhaps. Sole practitioners will tend to be the cheapest rates, with small-to-mid-size firms ramping up the cost until we eventually land at the Big Four accounting firms (EY, KPMG, PWC, Deloitte) which are really best built for different services in my opinion, like auditing public corporations for compliance purposes among other very important and valuable services they provide. Tax advice at the big is a bit of a throwaway, they don’t make much money on it because they have a LOT of overhead to cover. You can ask me how I know this over a beer some time…

It is possible to obtain tax advice from investment professionals who can perform a basic level of planning with no direct cost to the consumer. These folks tend to work at investment houses and bank branches and often are paid via commission on investments they manage. The tax advice is thus paid indirectly and is part of a package of services rendered, perhaps including other financial planning services. In my experience having spent about a decade in the field, the sophistication of tax planning you can expect from a bank branch advisor, for example, is not going to be at the level of a CPA or a boutique firm specializing in that work. This might be a time that you get what you pay for.

I should mention that even tax preparation services like H&R Block may be able to provide some advice at minimal cost. They advertise these services, but I can’t really speak to the quality of the advice. A lot of tax reporting tools like the monolithic TurboTax, or the new-kid-on-the-block SimpleTax (my current weapon of choice, it’s free! And actually very slick, you can file your taxes on your phone with this bad boy.) purport to offer advice on tax reduction strategies but the landscape is too complex and they don’t know enough about their clients to really capture most of the opportunities that exist. The cost is very low for these services, if any. You can count on spending less than $100 for a single tax return, which is how these “advisory” services will bill you.

At all the major banks, there are higher service tiers for clients who have a minimum level of investments. This can vary greatly between institutions and has been increasing in recent years as the landscape has become more competitive and fees charged to manage investments have been squeezed. There are typically a few ranges, say $100,000-500,000 for a second tier of planning support and $500,000+ for a third tier planner. Each level might unlock access to a broader set of financial products and strategies based on the licensing and expertise of the planner and the business strategy of the institution.

Then You Subtract

I mean, the math isn’t super complicated is it? If you are in the range of $5,000 or less of income tax I can probably get you most of that back but it may not be worth our collective time and effort. It’s good to contribute to society a bit, right?

In the $5,000-15,000 range there is some solid opportunity to get those expenses DOWN.

$15,000 and up, you’re a little silly not to get some advice. But hey, what do I know, I just get up in the morning and do this every day.

What if I Run a Business?

I wasn’t focusing on this demographic because these folks tend to have some accounting support already.

What I’ll say to readers in this situation is that 1) not all accountants are created equal. Do yourself a favour and get a second opinion. And 2) your Business Executive team should include a coordination of efforts between legal, accounting, and financial planning. We like to position ourselves (the financial planner) as the metaphorical Quarterback, throwing plays out to the other professionals as needed to execute sound, comprehensive tax (and other) planning.


Income Tax planning should be proactive and sophisticated. If you are paying significant sums, it can be immediately profitable to obtain sound tax advice.

Check out more of what we do and how we do it.
Contact us at contact@howlettfinancial.com

Book your free consultation with a HFP Partner here.