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Creating a Financial Plan

Author Mohita Jaidka

What is a Financial Plan and Do I Need One? 

“If you fail to plan, you are planning to fail’ – Benjamin Franklin  

 

Many people who are just making ends meet don’t have a financial plan because they think it’s only for people with a lot of money, or they might think of financial planning as investments, retirement, and estate planning. But that’s not true. A financial plan is for everyone – because everyone has a financial life, a financial future and financial hopes and dreams.  

 

What is a Financial Plan?

Think of a financial plan as a map of your finances. Your present situation is your starting point, the goals you set are stops on the way toward a desired destination. The map will change along your journey based on your circumstances. Life events such as starting a new job, getting married, having a baby, buying a house, suffering a loss, or nearing retirement age, will change the route you choose. A financial plan is a living document that can be done on your own with help from online resources, or you can go with a financial planner. 

Just like any good journey a financial plan is not a one-size-fits-all strategy.

 

7 Things to Consider When Starting Your Financial Plan

  1. Goal setting. Think about what you want from life and how you might get there. You can think of short-term goals, such as paying off an existing credit-card balance, or longer-term goals, such as getting out of debt entirely. Goals are important because they inspire you to make a plan and guide you to get there. What will make you happy, what will make you feel more safe and secure financially? 
  1. Budget setting and spending plan. You want to have a sense of what money you have now and how you’re spending it, so that you can see what you have toward financial goals. Getting a handle on that starts with a budget. You might want to assess your job and work life – do you have to look at a higher paying job or something part-time to reach the goals that are important to you? When you know what you need, it’s easier to look for ways to get there.  
  1. Emergency preparedness and building savings. The cornerstone of a good financial plan is to have cash available for unexpected expenses, so that you don’t go into debt when they arise. Sock away as much as you can afford. A good tip is to have an amount taken right off your paycheque and put into a separate account, so you don’t feel like you miss it. Another way to shock-proof your budget is to have a good credit score – in case you do have to tap into loans, you want to get the best rates.  
  1. Employer sponsored retirement plan. If you have the means to tap into this at all if it’s offered, it’s important to do so – because if an employer matches your contributions, that is FREE money. It’s something to at least investigate, if not now then hopefully down the road. 
  1. Debt reduction. This is key to having solid financial footing. If you have a plan to get out of debt, you can redirect that toward your big financial goals.  
  1. Having insurance. Some insurance is mandatory – if you have a car or house, you must have insurance. But some policies are optional, and you might want to consider them – such as tenant insurance if you’re renting. If something happens to your building, your landlord is likely protected, but if you have your belongings stolen or ruined in a fire, for instance, you won’t be protected. You may also want to consider life insurance. These policies vary widely based on your needs. Whether you are simply looking to cover the cost of burial or to protect your family’s finances in the absence of your income, you can find a policy amount that works for you.  
  1. Tax planning. To quote Benjamin Franklin once more, there are only two things certain in life: death and taxes. Unfortunately, depending on your income and a variety of factors the amount of tax you pay can be overwhelming. Protect yourself from a surprise expense by making sure your employer is deducting enough off each pay. Take advantage of tax credits whenever possible, and if you are still concerned set up a savings account dedicated to paying taxes. Remember, if you are lucky enough to get a rebate spend it wisely. Apply it to paying down any existing debt or add it to your savings or RRSP contributions.

 

Other Considerations for Financial Planning

Other aspects of financial planning that might not be relevant to you, at least not right now, are investments for building wealth and full retirement planning. But especially if you’re young, you might seriously want to consider the magic of compound interest – our compound interest calculator can show you a very small amount can turn into a large amount over time. And if you do have children, you do want a will (Remember death and taxes?) – even if you don’t have any assets to pass on, if something happens to you, you’ll want to assign someone as a guardian to your children.  

 

Revisit Your Financial Plan Regularly

Review your plan often. At least once or twice a year you should look at your financial plan and see if you’re on track or if your circumstances and/or goals have changed. Also, it is a good way to see how you’re doing over time – if you’ve made mistakes, you can learn from them. If you’ve had some wins, celebrate them. And having a financial plan can even make you happier! A recent survey found 9 out of 10 adults say nothing makes them happier than getting their finances under control.