October 1971 — VOL. 52, NO. 10 —
Building An Estate
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A few people have the short-sighted
and selfish attitude that what they earn they should enjoy
by spending here and now.
Most people are not spendthrifts like that. They know that
pleasure enjoyed at the expense of their own or another's
pain is not something to delight in. But not all of them know
how to go about striking a balance between immediate enjoyment
and future comfort.
The secret is to build an estate. Everyone has an estate
of some sort, even if it consists only of the clothes he stands
up in, but the estate that counts toward happiness and security
and serenity is the one deliberately set up and developed.
The worry may not show itself, but every man is aware subconsciously
of a yearning toward a feeling of financial security, and
though they may stifle all signs of it, wives and children
who are in the dark about the future live under a cloud of
foreboding.
While a man lives, he shares with his family the advantages
of his life. Upon his death, these advantages are replaced
in part by a monetary benefit he has had the foresight to
provide.
In its sentimental aspect a human life may be altogether
priceless, but there is no denying that there are hard financial
facts to be faced.
The bread-winner of the family has economic value. As long
as he stays in the picture, earning money, all is serene.
The family enjoys the essentials of life, food, clothing and
shelter, plus as many of the "extras" as are permitted by
his earning capacity. When the bread-winner is taken out of
the picture his income stops, but the needs of his family
continue.
Not only sentiment
This rational concept disposes of the long-held thought
that it was somehow awful to attach a dollar value to a human
life. The emotional upset caused by death is terrible, and
the loss of affection irreparable, but the fact cannot be
ignored that life must go on for those who are left. How free
it is from hardship will have been decided in large part by
the provision made by the affectionate bread-winner.
He will have gone about this in a business-like way, estimating
the need, accumulating and conserving his resources, investing
intelligently, and using all the other facilities which the
modern economic and social structure has to offer for meeting
the emergencies arising out of the uncertainties of life.
Doing this has a bonus value in that it makes his lifetime
more secure and his retirement more free from worry. As C.
Elliott Smith says in Personal Finances (Alexander
Hamilton Institute, New York, 1956): "Building up an estate
creates a sense of security in the builder himself and give
him the satisfaction of having something to show for his years
of effort".
To plan an estate requires that you study your own and your
family's needs thoughtfully and imaginatively; that you plan
practically and economically to meet those needs, and that
you make sure, by consulting people who know about such things,
that you are moving in the right direction.
The money value of a man
We must fail in any attempt to estimate the value of a man
to his family on the basis of affection and the psychological
satisfaction derived from the fact of living together as a
family, but his money value is a real, tangible thing.
In fact, the practice of estimating a man's money value
reaches far back into antiquity. Before the reign of Alfred
the Great, which began in 871, Anglo-Saxon law set a value
on men's lives, called the were. Since all men's lives
were not of equal value, the were varied according
to the rank of the individual, so that more compensation for
the death of one man was decreed than for another.
About forty years ago it occurred to Dr. Louis I. Dublin
and Dr. Alfred J. Lotka, statisticians of international repute,
that the tabulation should be brought up to date, and they
published their book called The Money Value of a Man (Ronald
Press, 1946).
A man's money value is individual. You cannot find it by
taking the earnings of the whole male population and dividing
that by the number of men in the labour force. You must do
your own arithmetic on the data applying to you personally.
If you are a man of 30 years of age you may, according to
a Canadian table of life expectancy, anticipate about 42 more
years of life. If you average $6,000 a year during that time,
your anticipated earnings are $252,000. If you earn that $6,000
by working 244 eight-hour days a year, every hour is worth
$3.07, and if you put aside the earnings of one hour every
working day for a year you will have added $749 to your estate.
In 30 years' time this annual saving, invested at 5 per cent
a year, would add to your estate roughly $50,000.
To contrast the practicality of this way of figuring and
the loose sentimental way, consider the fine-sounding phrase
"you are worth your weight in gold". If you weigh 150 pounds
avoirdupois then your value in gold, at the rate of $35 per
troy ounce, is $76,500; if you add weight as you grow older
then as a heavyweight of 200 pounds your gold value will be
$102,000.
Your money value, based upon your earning power, provides
a rational basis for planning your estate so as to meet the
responsibilities you owe to yourself and to your family.
A family partnership
The family should be regarded as a business partnership
in addition to the values it has socially. It should learn
about the facts of economic life so as to be able to manage
money matters with a minimum of anxiety. The more minor crises
your family learns to solve with your help, the easier will
be the solving of major crises when it is on its own.
The perplexity which faces a woman whose husband has just
died may be lightened by his thoughtful arrangement of his
estate during his lifetime.
Some men neglect to take their wives into the secret of
managing finances. They labour under the delusion that the
hand that rocks the cradle will not appear so appealing and
charming if it helps him to count the cash income and the
outgo. That is not a reasonable attitude. Every man is aware
of his own desire to know about his future: let him think,
then, of his wife's even more imperative need to know where
she stands.
A man sometimes finds it hard to keep his financial balance:
how, then, unless he allows her to participate in handling
family finances, is his wife to learn how to do it on her
own? The days of widowhood are strange, mournful and difficult
days, which may be made easier if the family has been shown
the financial foundation built for them and instructed in
how to erect a new way of life on it.
Some men, fewer now than a couple of generations ago, are
so situated that they cannot hope to do more than provide
their families with a decent living, carry enough life insurance
to tide over a transition period, and build up a small savings
account. But even a moderate income, if wisely managed, will
provide something for the future.
An affectionate man, one, that is, with more than surface
affection, will go to great lengths of planning so as to continue
to care for his family during the time when he is not there
to see to it personally.
Some men take advantage of the New Year or Income Tax time
to prepare an annual "statement of affairs." This is done
with two purposes in mind: for their own information and to
give help should someone else have to take over management.
The statement need only list assets and liabilities. The assets
include real estate, amounts in savings deposits, investments,"
insurance policies. The liabilities include mortgages, taxes
owing, other debts and obligations.
An estate
In Canada there is a very healthy and widespread feeling
of responsibility for the welfare of dependents. It is accepted
as just a normal part of a successful life. Those who are
to benefit by the estate start to attain security from the
moment an estate programme is put into action. The builder
profits also through peace of mind and the consciousness of
having a purpose in life.
Building an estate does not involve higher mathematics or
use of a slide rule. It can be done with the aid of simple
arithmetic, plus a determination to sort out the things that
matter and give them priority.
Your first task is to find out as nearly as you can exactly
where you are now and how far it is to where you want to go.
Check the facts as they are today, weigh your responsibilities,
estimate the factors you can in some measure control, take
account of factors you cannot control, forecast needs, and
plot a course.
After defining your target area in this way you will set
interim goals, making a note of dates when you will check
your progress and also make sure that you have not lost sight
of the essentials. Chance or good fortune may be expected
to cover up some shortcomings, but it is just as well not
to leave loose ends.
It is possible for the head of a family, in consultation
with his wife, to make up a more or less detailed estimate
of the income his family would require year after year, with
a view to providing them with a sufficient estate to yield
that income.
A good planning chart will have three divisions: What you
own; What you owe; Reconciliation. The first will list real
estate, furniture, savings, stocks, automobile, and other
property; the second will cover amounts owing on mortgage,
car, other instalment purchases, and loans; the third will
tabulate what life insurance policies, social security benefits,
savings, retirement benefits and all other assets, are needed
and can be acquired to bring the first and second columns
into balance.
Another method is to make a triple list covering the present
time, the time of retirement and the time when you are no
longer there to manage things.
List every expense under such main headings as: shelter
(including rent, mortgage payments, taxes, property insurance,
repairs, heat, light, telephone); food (including working
day lunches); clothing (purchase, cleaning, laundry); transportation
(car, parking, licenses, bus, commuter train and subway);
vacation; medical (drugs, dental and eye care, group and medicare
payments); income tax; charitable donations; church contributions;
life and other personal insurance premiums; gifts.
You will have three columns. Under "Present" you will list
the amounts currently expended; under "Retirement" leave out
the items which will not apply (like travel to business, lunches);
under "Estate" leave out the items which do not apply (e.g.
life insurance) and reduce those for which the cost will be
lower (vacation, laundry, medical). The result will be a realistic
three-sided picture of your money value and the demands upon
it.
Some persons may feel that making an estimate of this kind
is too troublesome, but the fact is that it is a trouble-saver
and a mind-saver.
The more complete your plan is to start with, the easier
it will be to operate and the fewer adjustments you will have
to make in it. Also, and this is important, the planning you
do now for your own and your family's future is the expression
of your personality.
On making a will
To dispose of our property in the way we wish is one of
the privileges of the democratic way of life. We should not
reject this freedom by leaving the job to an austere government
department.
Your will is the instrument by which you express your well-considered
wishes regarding distribution of your property. To shrink
from will-making is to endanger the comfort and the well-being
of your family.
This age prides itself on facing realities starkly, but
there is one reality some people refuse to look at ( that
of death. Emotions become mixed up with practicalities.
Sir James Barrie, author of Peter Pan, wrote a play
called The Will. In it, a husband and wife go to a
lawyer to draw up a will. She is so tearful that her husband
and the lawyer try to prepare the will without ever mentioning
the words "death" or "widow", or anything to suggest that
the husband might not live forever.
Vital persons face facts and plan their goals. They take
all the measures necessary to influence and ensure the fulfilment
of their aims and desires. They know that a will is a necessary
and unique instrument. When it takes effect they will no longer
be on hand to give testimony or explain their desires.
What they want to do in the way of giving protection and
care to their families must be clearly set forth in the will
so as to satisfy legal requirements.
No generalization can be made about making a will except
one: everybody should make one. An extreme example is given
in Changing Times, the Kiplinger Magazine. Suppose
you had no money put aside, and lived in a furnished apartment
with only your clothes to call your own. Suppose that the
bus on which you rode to work one morning was in an accident
in which you were killed. Someone ( your widow, mother, children,
sister ( should be able to collect enough damages from the
negligent party to at least pay your funeral expenses. But
if you left no will naming a beneficiary and an executor there
would be difficulty in establishing a legal right to put in
a claim.
Consider a more common occurrence: a man who owns real estate
dies without making a will. His widow will be greatly hampered.
She cannot sell the real estate to support herself and her
children without an order from a court.
Some people think that the settlement of an estate is more
expensive under a will than when there is none. The reverse
is almost always true. The lawyer, notary, or other expert
who draws up your will is aware of the ways in which to conserve
money. There are exemptions from succession duties of which
to-take advantage: for children, certain gift bequests, property
bequeathed for religious, charitable or educational purposes,
and others.
As Lawrence Washington says in his book How to Plan Your
Financial Security: "Everyone is taxed in one way or another
from the cradle to the grave, but the man who saves is also
taxed after he reaches it." Death creates an immediate tax
liability; the thing to do is to have the liability as small
as the law allows, and this is a job for people who know the
ropes.
Building an estate
When you start building an estate for your future years
or for your family you need to be first of all a realist.
Things are not always what they seem. For example, your real
income is far below the dollar amount opposite your name
in the pay-roll record. The cost of living index ( or, as
it is now called, the consumer price index ( enables you to
get a closer approximation of your purchasing power, because
real income means the sum of the things you can buy with your
money.
Here is how to find out. The Federal Government publishes
every month a figure which is an index of the cost of essential
living needs in terms of the base year 1961 equalling 100.
You divide your annual income (after deducting income taxes)
by the consumer price index and multiply by 100. For example:
your income after tax is $4,860; divide that by the current
consumer price index, say 130, and multiply by 100, which
gives you $3,738. That is your true buying power. Thus, you
have $1,122 less buying power than if prices were stabilized
at the 1961 figure. (It is also true that if prices were as
they were in 1961 your dollar income might be less, but that
does not affect the reality of your present purchasing power.)
Besides the level of living, which is largely determined
by the cost of things, you need to pay attention to the standard
of living. This is not merely a matter of maintaining
life through providing shelter, food and clothing: it has
also something to do with social customs and individual tastes.
Things which were looked upon only a few years ago as rare
luxuries are now regarded as essential to comfort and self-respect,
and combine with the essentials to make up a standard of living.
The ordinary home in Canada has comforts which were not available
even to kings a century ago.
Being budget-wise
The only sure way of providing that this standard shall
be maintained now and in the future is by planning.
The formula for proper administration of family finances
so as to get the best value out of life now while making provision
for later is not something you were born with. It is a matter
of combining mature common sense, experience, power of will,
and a few principles.
Away back in 1938, before women became so interested in
financial affairs, Ruth MacKay wrote a book she called Money
Without Men (Farrar & Rinehart). In it she tells about
the value of budgets and adds: "The best budgets are those
based on present expenditures, an estimate of one's income
and a little headwork to see that they come out even."
There is no budget that will suit every family. Statistics
that give the average amount spent on this and that are useful
only to statisticians. Your family is a unique entity, and
your budget must give expression to your aspirations.
A budget that has estate planning in mind need not be a
fearsome thing. It is an estimate of needs, a division of
income, and a method of keeping control of expenditures: that
is all.
There is no room in a happy family for skinflints ( people
who habitually examine the potato peelings to make sure they
have been pared as thin as tissue paper. What is needed is
a co-operative effort to get the most for your money, to establish
priorities, and to ensure that considering the resources available
your family members will get the greatest amount of satisfaction
over their lifetimes.
Three earlier Monthly Letters dealt with budgets
in some detail: "On Making Ends Meet ... Planning Personal
Financial Stability ... Planning Family Finances". These
are available through Royal Bank branches or direct from Head
Office.
Saving and investing
Interest is not paid on money, but on what money does. If
you hide your cash in a teapot it is idle, and you need not
expect to lift the lid and find some dollars of interest added
to your estate.
If you put your cash in the bank, or pay it in premiums
to a life insurance company, or invest it in stocks or bonds,
it is put to work, and it is the work it does that pays you
interest or dividends.
Life insurance is probably the most basic tool of estate
planning, and it is worthwhile to know about the principles
on which it works. Henry Clay points out in his book Economics
that some people profess to regard life insurance as a
form of gambling, whereas it is the very reverse. The gambler
converts a certainty into an uncertainty ( the certainty that
he has his money into the uncertainty whether he will have
more or less. The insurer converts an uncertainty that he
will be able to meet his obligations in the event of a possible
misfortune into the certainty that he will.
Deciding on the form of insurance to carry need not be a
bothersome problem. There are, pared to essentials, only three
basic types of life policies: term, whole life and endowment.
These are, of course, used by the estate planner in many combinations
to meet his individual requirements. He shows lively interest
in fitting his insurance into his present situation and needs
and the future of his dependents. He does not merely buy a
new policy from time to time as his income increases, but
makes a programme to fit his particular family needs and his
resources.
When to do it
Once you have decided to build an estate, using all the
aids suggested here and others that you will think of, there
is only one logical answer to the question "When should I
start?" The task is easier now than it will ever be again.
To start is not to say "This is it, once and forever." A properly
made plan is one that offers itself to change as time brings
new responsibilities and changed resources.
The act of starting provides a strong defence against worry,
insecurity, financial instability and gloom. It will not multiply
your income, but it certainly will help you to stop wasteful
and unrewarding leaks in your outgo. It will enable you to
concentrate your firepower on the decisive targets.
You will be helped in your planning if you make a mental
picture of the way you would like your family to live, and
then work toward that objective. Making intelligent, co-ordinated
sense out of your affairs in this way pays off in satisfaction
and leaves you free to enjoy life.
In doing all this planning you can be both clearheaded and
gentle-hearted. In fact, it is not being gentle with one's
dependents or kind to yourself to be cloudy about what life
now and in the future holds in store.
Published by RBC Financial Group. All editions from the RBC
Letter collection are available on our web site at www.rbc.com/responsibility/letter.
Our e-mail address is: rbcletter@rbc.com.
Publié aussi en francais.
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