A good financial plan touches on the six pillars of financial planning. Putting it altogether is similar to baking a cake. You have to make sure that the ingredients are in line with the recipe and that proper instructions are used.
The same thing could be said when you’re crafting your financial plan. It’s important to take a bottom up approach by making sure that:
- You’re aware of your spending habits
- You understand the risks that you or your family might face
- You are aware of various tax savings opportunities that will increase your net worth
- You’ve incorporated your retirement benefits into your plan
- Your investment objectives are in line with your risk appetite
- You’ve covered your estate obligations and have put together your will, power of attorney, etc.
The above steps could be broken down into a more detailed approach below. Your financial plan should incorporate the six pillars of financial planning.
Cash Flow/Income Planning
Cash flow planning is all about budgeting. Knowing when your bills are due and having the cash on hand to pay them without getting into debt. This pillar of financial planning focuses on reducing expenses and maximizing your cash flow by teaching you how to budget.
Risk Management
Risk Management is simply Insurance. Transferring the risk of potential loss to someone else – usually an insurance company. Insurance is a great way to protect yourself against potential loss and financial hardship.
Tax Planning
In life there are two things certain, death and taxes. Tax planning involves taking advantage of tax-deferring investment vehicles and investment strategies in order to save on tax. There are various tax savings strategies that one could implement such as estate freezes, tax exempt life insurance, maximizing tax credits and more. Tax planning is one of the fundamentals pillars of financial planning as the less tax you pay, the higher your net worth will be come.
Retirement Planning
Have you thought about how much money you need to save for retirement? If so, what are some ways you can save for retirement. We know that you can take advantage of various government programs such as Canada Pension Plan (CPP), Old Age Security (OAS) and Guaranteed Income Supplement (GIS), but will they be enough?
Asset Management
Asset Management also known as Investment Management is the stage where you decide on your strategic asset allocation. Asset allocation is simply the process of spreading your money into different baskets – simply, not putting your eggs in one basket.
Estate Planning
Have you thought about leaving a legacy? How will your wealth be distributed when you die? One of the most important pillars of financial planning is estate planning which involves several elements such as last will and testament, power of attorney, estate trusts and much more.
Incorporating the Pillars of Financial Planning
Incorporation the six pillars of financial planning would allow you to create a comprehensive financial plan. This financial plan is presented in a one lengthy document. To start, the document should detail your cash flow or budgeting situation as well as remind you of your risk exposure and ways to mitigate it. The document should touch on your current tax situation and make you aware of your retirement income streams. In addition, it’s important to incorporate a portfolio that is in line with your risk appetite and will allow you to achieve your goals. Last, you should always incorporate estate planning in your decision making process such as having an updated will, keeping your beneficiaries up to date and creating power of attorneys.
By following the steps above, you will create a financial plan that will give you a peace of mind. One thing to remember is that a financial plan is a living document and is recommended to be reviewed every year by a financial planner, at a minimum, to ensure that your goals are still on track.
