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By Fabio Campanella CPA, CA, CFP, CIM

Any business worth its weight in salt has a plan. But what about your personal affairs? In a surprising poll conducted by CIBC in 2017 46% of respondents stated that they do not have a financial plan in place for personal matters.

Considering the recent increases in Canadian household debt coupled with the almost universal decline in defined benefit pension plans this is a worrying statistic. Failing to plan is truly planning to fail.

Fortunately, creating a basic financial plan is not rocket science. Most people can build their own basic plan, but of course, certain individuals (i.e. self-employed, small business owners, high income earning professionals, active real estate investors) would be best served by hiring a professional.

This three-part article will outline the basic components of a financial plan applicable to all people. In future posts I will write about the unique planning needs of small business owners, high income earning professionals, and active real estate investors.

What is a financial plan?

At its most basic level, a financial plan is a written report that assesses your current financial status, outlines your ultimate financial goals, and plots a measurable and realistic path to achieve those financial goals.

What are the components of a financial plan?

Most financial plans include the following components:

  1. Financial management
  2. Insurance and risk management
  3. Investment planning
  4. Retirement planning
  5. Tax planning
  6. Estate planning
  7. Legal considerations

In part 1 I cover items 1 and 2, in part 2 I cover items 3 and 4, in part 3
I cover items 5 through 7

Financial management:

What is your current financial position and where do you see yourself in the future? This section paints your current picture and goals by outlining the following:

  1. Your current net worth statement (your assets minus your liabilities)
  2. Your projected cash-flows (your expected inflows of cash and outflows over the next 1-5 years minimum)
  3. Your budget (spending limitations, savings goals etc.)

Understanding how your spending choices affect your projected cashflows via your budget gives you the ability to make the changes required to reach your stated goals.

Sticking to your budget is key to achieving your goals. Common problems that I see in my practice include the following:

  • Being unrealistic with expenses: life is short, you need to enjoy it! Yes, a bit of sacrifice now will lead to a better tomorrow, but I’ve seen people that have amassed a ton of wealth over their lifetime whilst foregoing all enjoyment in life during the journey.
  • Not planning for unexpected expenses: car accidents, leaky pipes, emergency trips abroad to visit sick relatives etc. Life will throw unexpected expenses your way, you need to factor these into your overall plan
  • Not planning for taxes, especially for the self-employed
  • Not planning for periods of low investment returns or temporary investment losses

Insurance and risk management:

Would your family be financially stable if you were to suddenly pass away? Do you have the savings to cover time off work if you were diagnosed with a serious illness? The world is full of risk and you need to be ready to deal with the unexpected.

Risk management flows directly from the financial management section but there are additional considerations. Addressing absolute financial catastrophes such as the death or disability of the family’s key bread-winner is key. Typical financial products that can address these risks are:

  • Life insurance
  • Critical illness insurance
  • Long-term disability insurance

Fabio Campanella CPA, CA, CFP, CIM is a tax specialist and financial planner at Campanella McDonald LLP and Praetorian Wealth Advisory. At Campanella McDonald LLP Fabio heads the tax and financial advisory departments helping small business owners, high income earning professionals, and real estate investors maximize their bottom lines. At Praetorian Wealth Advisory Fabio designs and implements fee for service personal financial plans and provides fee-based investment advisory services.

 
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