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   | FINANCIAL PLANNINGWhat exactly is Financial Planning? How do I determine if I am takingall of the necessary steps to ensure I have a secure and comfortableretirement?There are 5 basic steps to the Financial Planning Process:1 - Establishing financial objectives and goals 2 - Gathering all relevant information 3 - Developing appropriate strategies 4 - Implementing the plan 5 - Monitoring and modifying the plan over time The Process: Developing a financial plan is not a one-time event - it is a lifelong process of creating good habits, increasing assets, reducing risk and sticking to a defined plan to achieve your desired results. In a nutshell, financial planning comes down to 2 things; net worth and cash flow. Because in the end, all that really matters as far as your finances are concerned; is your bottom line (net worth). The most effective way to increase that number over time is to properly and efficiently manage cash flow. This means sticking to a plan, and eliminating any bad financial habits.
Changes are certain to occur in your life, therefore an annual review of your entire financial picture is a wise practice. You should meet with your advisor once or twice a year at minimum. Here is a very easy to implement 4-part process that I encourage my clients to do: #1: SaveSet-up an automatic $100 transfer, every week into a Tax Free Savings Account (TFSA). Allocate the $5,200 into a portfolio that matches your objectives, throughout the year. At year end, put the funds into an RRSP and realize a potent $400/month deduction come tax time. By far the easiest way to accumulate savings is to “Pay Yourself First”. This example is also a highly effective way to dramatically reduce your income tax burden. Easily accomplish more than $5,000 per year in savings, by simply cutting a $20/day expense out of your life. Save money, build for retirement, save taxes: Win, Win, Win.
#2: ReduceDon’t take on any new commercial debt. Stop bringing your credit cards with you unless you plan a purchase in advance. Don’t finance any more consumer products such as electronics, furniture or vehicles. If you have ‘bad’ debt, focus primarily on eliminating it. Don’t worry too much about saving money if you owe money; the return on the savings probably won’t beat the amount of interest you’re paying on the debt. If you have multiple debts, consider consolidating them all into one low-interest loan. Then put an extra $100 per week towards that debt. You would be amazed at how fast you can pay it down to zero, when extra payments are used. Let’s not forget that every dollar of debt paid is another dollar added to your net worth.
#3: ProtectYour number one asset is your ability to earn an income. You have to protect that ability with disability and critical illness insurance should something happen to you. We insure almost all of our possessions that make us no money, but seem to forget to insure the one asset that makes us our income; our ability to work. If you had a machine in your basement that printed out $50,000 a year in income - would you insure it? Disability and critical illness insurance is essentially peace of mind insurance, providing you reassurance that some time off work won’t have major financial implications for you or your loved ones. A serious illness could potentially wipe you out financially. Your bills and expenses don't stop just because you got sick or stopped working. You have to mitigate that risk with disability and critical illness insurance. Picture an injury or illness tomorrow; you’re now off work for a minimum of 90 days; can you comfortably afford that? Same thing with death; should you pass on, who is left paying your liabilities? Are you covered? If you have any dependants, a spouse, or any final expenses that will pass on to your family at death; you need life insurance – plain and simple. The last thing a family needs while dealing with the loss of a loved one is a financial burden. General rule of thumb for coverage amount is 7-10 times your annual earnings and some insurance is better than no insurance. Insurance is always a good investment.
#4: HabitsThere’s an old saying; “The only difference between a rich man and a poor man; is that the rich man spends less than he earns, and the poor man spends more than he earns”.How true. If you want to accumulate any sort of real wealth in this lifetime, you’re going to need to put out less cash than you take in. It really is that straight-forward. Your spending habits are CRITICAL to your financial well-being. Focus on your bottom line. Everything else is just a ‘widget’. Every dollar you save or use to pay down a debt, is a dollar increase to your net worth. Know what you’re worth, and work on improving it; monitor it bi-annually. Treat your net worth like your credit score and monitor it quarterly. Know what it is at all times, know how it works and know how to increase it. If you stop focusing on all the moving parts, and focus more on your bottom line, it becomes much easier to accumulate wealth. Don’t worry so much about the mechanics of it all and spend more time identifying good and bad spending habits. Track your spending and watch how you’ll shift from bad financial habits to good ones.
I am always looking for new clients who want to be engaged in the financial planning process and increase their net worth over time. Contact me today for an appointment. Brayden Sutton is a dually licensed Investment and Insurance Advisor in Chilliwack, BC, specializing in investment management, retirement planning, insurance and tax planning. He does everything from RESPs to RRSPs, TFSAs and non-registered investments to wills, estate planning, insurance, and tax preparation. He is with Money Concepts Chilliwack which has been going above-and-beyond for Fraser Valley clients since 1993. Money Concepts 106 – 8645 Young Road, Chilliwack, BC V2P 4P3 P: 604-495-4505 F: 604-795-4816 © 2010 Brayden R. Sutton | |||||||||||
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