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:
- Financial management
- Insurance and risk management
- Investment planning
- Retirement planning
- Tax planning
- Estate planning
- 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
So, you’ve managed to save some money for the future and now you must invest it. Do you buy stocks, bonds, real-estate? What about hedge funds or mutual funds?
The world of investments is a large and confusing place riddled with fraudsters and cheats. Choosing the right investments can make or break your plan. This is the area where professional help really does pay off but what type of professional help?
Below are some of my top tips for anyone looking to invest:
- Understand your investment: if you don’t understand the investment then don’t get into it. Hedge funds and private equity investments may sound exotic but if you don’t understand what the managers are doing with the money then they are not for you.
- Understand how your advisor is being compensated: The way your advisor is compensated can influence their advice. Is your advisor charging you fees for a written plan? A transparent commission on trades? Do they take commissions from a mutual fund company? The more direct the fees (i.e. fees billed directly to you) the more likely you and your advisor will be aligned.
- Understand your tolerance to risk and fluctuation: Stocks generally fluctuate more than bonds but over the long run can deliver higher overall returns. If you have a long-term investment horizon then stocks may be suitable for you, but you may have trouble dealing with temporary losses. You need to get a good handle on what sort of gains and losses you can tolerate and develop a portfolio based on this risk tolerance.
- Understand your time horizon: Are you temporarily saving to put a down payment on your first home or are you saving for a retirement 30 year in the future. The former would warrant a conservative strategy while the latter will allow for substantially more risk.
Retirement planning focuses on your financial situation in your post-work years. You must compare your current lifestyle to your planned lifestyle in retirement and balance this planned lifestyle with your current and anticipated savings, sources of revenue, and anticipated government assistance programs. The overall goal is to ensure your retirement lifestyle is both realistic and appropriately funded. Major areas of concern:
- What is your expected life-span: lifespan can be difficult to predict but you may live well into your 90s which means you must be adequately funded to meet that need.
- What is your expected health-span: You may live long, but will all those years be blessed with good health? The chronic diseases of ageing (cancer, heart disease, diabetes, dementia) can have a significant impact on your quality of life and strain your finances.
- What will your retirement lifestyle require? Will you retire early in good health? Will you work part-time? Will you travel frequently? Will you keep your current home or downsize? You must manage your anticipated financial expectations in retirement to properly address them in your current plan.
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.