Earlier this year, a book arrived in my mailbox albeit a bit unexpectedly. Months ago, Dessa Karpardlov, a financial advisor and author, was kind enough to seek me out and send me her first book entitled The Fireman and the Waitress. This book is a story about Dessa’s clients, clients she feels are representative of many of her clients. Her book takes you through their financial situation and the process Dessa takes them through to get a handle on debt, build wealth, and lower their tax burden. This is Dessa’s trademark process called Dessanomics. I didn’t know much about Dessa or Dessanomics when her book arrived in my mailbox weeks ago, but I do now.
This blogpost will cover a few takeaways from The Fireman and the Waitress and include a few Dessanomics keys listed in Dessa’s book. My next blogpost will cover a few questions I had about Dessa’s book, all of them she answered during a recent phone call with My Own Advisor.
Dessanomics Principles in The Fireman and the Waitress
The book starts off describing Dessa’s clients, Mel and Molly. Mel (a skilled tradesman and volunteer fireman) and Molly (a part-time waitress) are in their late-40s, married for about 25 years and have a couple of university-aged kids. Mel and Molly have more than 15 years left on the mortgage, they have a personal line of credit, some credit card debt, some RRSPs and a few little understood life insurance policies. Right from the start, it was good to read about Dessa’s focus on a few objectives for our fireman and our waitress:
- Work to pay off the mortgage but focus on high-interest, consumer debt first; quickly.
- Insure yourself.
- Contribute more money to retirement accounts, focus on capital preservation where possible, and
- Be more tax efficient.
Dessa wrote “If I had to name a single factor that prevents Canadians from realizing their retirement dreams, it would be the way we use debt. Too many people just don’t know the difference between good debt and bad debt, and that simple misunderstanding keeps us much poorer than we need to be.”
Another Dessanomics key is this: When you incur debt to gain wealth (as in a mortgage) that’s a good thing. “When you incur debt to gain wealth and get a tax refund, that’s a really good thing. Borrowing to invest, commonly known as leveraging, is an example.” “When you incur debt just because you want a really special bottle of wine for your anniversary dinner, or for any purpose other than building wealth, that’s a bad thing.”
Later on in the book, Dessa discusses the downside of debt diversification. “Diversified investments are great. Diversified debts are expensive and inefficient. An all-in-one home equity line of credit (HELOC) allows you to pay less interest and pay debts faster.” The Dessanomics process suggests “most Canadian families would do a lot better if they managed their personal finances the same way a small business does. A small business secures a line of credit at the bank, and only draws on it when necessary.”
Beyond debt management, Dessanomics is also about ensuring or rather, insuring your greatest asset: you. Dessa wrote: “I believe that the biggest reason most Canadians are not looking to insurance as part of their personal finance package is because they believe they can’t afford yet another expense.” She’s probably right, but in most cases, Dessa thinks you really can’t afford NOT to insure yourself. Dessa recommends term policies and critical illness insurance, citing some scary facts: “according to the Canadian Cancer Society, 39% of Canadian women and 45% of Canadian men will suffer from cancer during their lifetimes.” Peace of mind, especially for those you love, is a precious thing.
The Dessanomics process is also about building wealth and tax efficiency. On the topic of wealth creation, “in order to outpace inflation, you need to include equities in your retirement plan, but you don’t have to put your savings at risk. With guarantees you can buy affordable insurance protection for your greatest asset – your future.” This is why Dessa recommends segregated funds over mutual funds for many of her clients. “Segregated funds are a mutual fund with an insurance wrapper around it” she writes. “With seg funds, you pay a premium to transfer the market risk to the insurance company.” Dessa believes these are good products for many clients, because these guaranteed products keep your emotions out of your investment decisions. Regarding tax efficiency, Dessa recommends for a few of her clients, a leveraged portfolio. She states “some of the best leverage candidates are those individuals who have pensions. These people (because of pension adjustments) have little RRSP room annually, so they have few options to reduce their tax burden. Leveraging gives them the perfect opportunity to gain superior wealth and reduce taxes, today and in the future.” Because the interest on borrowed money to earn income from a business or property is tax-deductible, Dessa feels some clients can make better use of their cash flow and keep their income more tax-efficient. She’s right. Income from a business or property can include interest income, dividends, rents and royalties but it’s certainly not without risks.
This last risk, and a few other principles I felt strongly about, compelled me to jot down a few questions for Dessa. Questions Dessa was kind enough to answer by the way, a few weeks ago, when she chatted with My Own Advisor. But that’s another post.
What do you think of the Dessanomics process overall: get a handle on debt, build wealth, and lower your tax burden?
What do you think of the few Dessanomics keys I listed above?
OK, now play prophet – can you think of a few questions I asked Dessa?
Send me your comments.