The most important part of your finances entails creating a plan. A financial plan helps you organize and encourages you to keep track of your money, so you have less stress and more success. Your plan could be very detailed and incorporate the 6 Pillars of Financial Planning or it could be a simple plan as mentioned below.
To get started with a financial plan, you need to write down all the details of your financial situation such as cash flow, savings, debts, investments, insurance and other related financial information. We encourage that you follow these seven important steps in order to set the foundation for your financial plan which prioritizes your goals and maps out clear strategies to achieve them
1. Set Financial Goals
- Ask yourself – where do you see yourself in 5 years? What about in 10-20 years? Are you saving up to your that new car or buy a new home? Are kids in the picture. Determine how much savings you have right now and where you hope to grow the savings to. Keep in mind your time horizon and the risk/reward graph discussed in Understanding Risk. A specific goal could be, save $1,000,000 by 65.
2. Keep Track of Your Monthly Cash Flows
- Do you know how much you’re spending each month? What’s coming in and what’s going out? Keeping track of your cash flow allows you to find cash flow that you might not have had or encourage you to over-go certain impulse purchases. We recommend that famous 50/30/20 budget principles. Put 50% of your net pay towards staple payments such as housing, utilities, transportation and recurring payments, 30% toward wants (dining, out, clothing, entertainment) and 20% towards savings and debt. Each person is different so embrace the ratio that you’re most comfortable.
3. Pay off High-Interest Debt
- A crucial step to any financial plan is to pay down the high interest debt such as credit card balances, payday loans, title loans, rent to own payments. Interest rates on these debt obligations can be as high as 20%. It’s very rare to earn 20% a year on your investment unless you’re comfortable with speculative risk.
4. Be Aware of Risks
- Be aware of risks that you and your family might face. Common risks that Canadians face include morbidity, critical illness, death of a loved one, loss of income and more. Insurance is a way to mitigate this risk.
5. Establish an Emergency Fund
- One of the most important things of any financial plan is putting cash away for emergency expenses. Make sure you have enough cash put aside to cover 3-6 months of expenses. Money market funds, Canada Savings Bonds, cashable, GICs and even lines of credit are all suitable vehicles for emergency fund planning.
6. Determine Your Investment Strategy
- Determine an investment strategy that is in line with your risk tolerance and investment objectives but most importantly, one that is in line with your time horizon. If you have a goal that has a long time horizon, then you may choose to invest in a more aggressive high risk investments. If your goals are more short term in nature, then you may embrace a conservative or defensive portfolio.
7. Creating a Plan: Investment Policy Statement
- Creating an investment policy statement will help you follow your plan more closely. An investment policy statement will cover the following subjects
- Determine Your Investment Goals and Objectives
- Outline Strategies to Achieve Your Goals
- Determine Your Risk Appetite
- Determine Your Time Horizon and Return Expectations
- Determine Your Strategic Asset Allocation (how your money will be invested)
- How often your portfolio will be updated
The steps mentioned here are the blueprints of a creating a plan but you’ll be able to find a detailed step by step information of the financial planning process under the category of “Financial Planning”
