Learn how to make a financial plan
What is a financial plan?
A financial plan is a comprehensive picture of your current financial situation, long-term financial goals, and any strategies to achieve those goals. A financial plan aims to identify, organize and prioritize your financial goals then outlines steps to achieving those goals as you go through life’s journey.
Who needs a financial plan?
Everyone needs a financial plan. Anyone who has an income and expenses needs a financial plan. It’s very common for people in the lower-income bracket to think they don’t need a financial plan which puts them and their families into a dangerous financial situation in the future.
Why is a financial plan important?
Provides a reality check
Financial planning helps you know where you stand financially. A financial plan provides a comprehensive picture of your current savings, debt, income streams, expenses, goals, then strategies on how to achieve your financial plans. This brings awareness to your current money habits and how they’re serving you.
Reduces stress around money
Not knowing where you currently stand with money can be stressful. Financial stress has been linked to poor mental wellness and as a result, negatively affects your physical health and your relationships. You can avoid this situation by creating a financial plan.
Read: Link between financial stress and mental health and how to fix it
Supports your current needs
Good money habits can mean you’re able to gain control of your finances, afford that vacation you’ve been dreaming of or even afford yourself and your family the kind of life you’ve always wanted. Creating a financial plan will help you organize and prioritize your financial goals.
Helps identify opportunities
Opportunities like savings, investment, or tax burden reduction can be reduced through financial planning. Knowing your current financial situation and goals, and depending on your life stage, can determine whether to invest in TFSA or RRSP.
Elements of a Financial Plan
Budgeting and cash flow management
A cash flow budget is a plan to make sure you have enough money to sustain your lifestyle without getting into debt. Take note of income sources and frequency, essential vs non-essential expenses, needs vs wants, and track them as frequently as you want to make sure you know where your money is going.
Debt Management
Managing debt well can feel like you’re getting control over your finances. Financial planning will give you a picture of where you are, how much you owe, and whether or not you have the ability to repay the debt.
Financing major purchases
Major purchases are big-ticket items that require some sort of planning before you purchase. Things like buying a home, renovating your home, upgrading appliances, expensive vacation, buying a car, etc. Your financial plan needs to incorporate these purchases and their timelines.
Retirement planning
Asking yourself questions like what kind of lifestyle do you see yourself living when you retire? How much do you have saved for retirement? How much do you think you need to sustain that lifestyle?
Your financial plan should be tailored to answer the above questions and meet your retirement goals.
Risk Management plan
Financial risk is the possibility of losing money on your investment which is why it’s very important to know what your risk appetite is before you invest. You’ve probably heard the higher the risk the higher the return and the lower the risk the lower the return. Finding the right balance will set you up for financial success.
If you’re struggling to identify your risk appetite, talk to a Topspin Finance coach.
Tax reduction strategy
Nobody enjoys paying high taxes, therefore, don’t feel guilty implementing a few strategies to reduce your tax payables. Things like contributing to a registered retirement account like RRSPs, donations to registered charities, investing and holding, claiming eligible expenses, and many more.
Estate planning
Deciding who will inherit your wealth when you’re gone may not be as fun as planning for a vacation or choosing a restaurant for your brunch with the girls. There is a misconception that estate planning is something only rich people do. You worked so hard for your money and you want to pass it to your loved ones with the smallest possible tax burden.
Steps to Financial Planning
Step 1: Determine your current financial situation.
Determine your net worth – how much are your assets (think cash, investments, personal savings, group RRSPs from employer, property, etc.) and how much are your liabilities (your loans, credit card debt, other debts, bills, etc.). To determine your net worth, subtract your liabilities from your assets.
Step 2: Develop your financial goals.
Financial goals can be short, medium, or long-term.
Short-term financial goals are an example of smaller steps towards the medium and long-term as they start helping you right away after you start working on them. Examples of short-term goals include setting a budget, building emergency funds, paying off smaller debts like a credit card, phone bill debts, etc.
Medium-term financial goals are aimed to bridge between short and long-term goals. They include things like paying off bigger loans (except mortgage) like student loans and getting life insurance and disability insurance, buying your first home, or upgrading your current one. This is a good time to visualize the future you want for you and your family and make sure your financial plan is taking you there.
Long-term financial goals include things like saving for retirement, paying off a mortgage, and saving for children’s education.
Step 3: Identify your problem areas or opportunities
What are your biggest pain points when it comes to personal financial management? Do you know how to budget, do you just not earn enough money to live the life you desire, does your money disappear from your account as soon as it comes in, or are you financially illiterate and would love to learn how to be money savvy?
Asking these questions and reflecting on them plays a big role in determining the success of your financial plan.
Step 4: Develop your financial plan
Develop and prepare a financial plan tailored to meet your goals and objectives, risk tolerance, including projection, and assumption. If you’re not sure if the plan will help you to achieve your financial goals this is when you speak with a financial coach. Your and your planner will review your goals and your current plan to ensure you are on the right track to your desired life.
Step 5: Implement your plan
Here is where the rubber meets the road. The key to a successful implementation of anything is to maintain consistency. This step is very individual and everyone’s implementation will look different as long as it matches what’s in your plan.
Starting is always harder but once you have the momentum, things get a lot easier. There is no shame in asking for help or investing in yourself by hiring a financial advisor. At Topspin Finance we’re always ready to help whether it’s a quick fix or need help with the whole thing. Don’t be shy.
Step 6: Review and revise the plan.
Financial planning is an ongoing, dynamic exercise. You will need to continuously monitor progress, review your actions and assess if your financial goals still serve your future aspirations.