The Reminder is making its archives back to 2003 available on our website. Please note that, due to technical limitations, archive articles are presented without the usual formatting.
Today's topic is about the components of a Financial Plan. Personal financial management is a learnable lifeskill which, if executed well, gives us financial flexibility for the future. Some people achieve financial independence through luck (e.g., lottery winners), but most folks who have no money worries have consciously made trade-offs, such as: cook at home instead of eat out; build a business instead of relaxing; enjoy a public beach instead of purchasing a cottage; buy things on sale instead of paying full price; buy used autos instead of buying new. "The Millionaire Next Door" is an interesting book on this topic. Similar books or videos may be available at your public library. In this article, I continue with basics on personal financial planning by reviewing for you the six common components of a financial plan: 1. List your unique financial Goals or Objectives (and your family's, if applicable). This custom design is fun because it encourages your vision that helps to sustain you during trying days. Next, assign an estimated dollar cost to your goals, in today's dollars, and a date as to when you want to achieve the goal. For material things, it's easy to assign a dollar value. For some other goals that will span a period of future years, such as education of children or grandchildren, or "a comfortable retirement", increases in the cost of "living" will impact on the savings needed. Major bank and credit union websites offer simple goal calculators. Check out my firm's website www.biebersecurities.com which offers a link to Mackenzie Financial goal calculators. See 'Setting' P.# Con't from P.# Decide if your goals are realistic within your lifetime expected income. Once your goals are on paper, the longer-term task of building the plan, or charting the steps, begins. You may hire a financial planner to help you, but it isn't essential if you are interested enough to do the basic math yourself. 2. Compile your Net Worth Statement (Personal Balance Sheet), snapshot view of your current financial status. This is the dollar value of what you own (the market value if you were to sell it today), minus what you owe (or, assets minus liabilities). Each year, your net worth should be recalculated, and it should increase if you have these factors working in your favour: the value of the assets increase; the principal amount of your debt decreases, and; you are able to save money for the future in an investment or RRSP. 3. Itemize your monthly or annual Cash Flow: income, minus expenses. If you are to achieve personal financial independence, it is imperative that you employ the discipline to live within your "means". I have found that many families' best intentions become derailed by the "unplanned" expenses. Rule of Thumb: Emergency fund should equal 3-6 months' expenses if your sources of income are secure, or 6-12 months' expenses if income is insecure. Your emergency "fund" may be your own cash, or be funded by available (unused) Personal Line of Credit (PLC). Irregular foreseeable expenses may include vacations, replacing autos, property taxes, gifts, replacing home appliances, home repair or upgrades. Work these into your "budget", and also leave yourself a cushion for the unforeseeable. 4. Look to the Future: Capital Goal Projections. This portion of your financial plan incorporates all of your goals. It assumes growth on your income and pensions (if applicable), as well as continued savings, while also projecting increases of the cost of living on your expected expenses. Investment and tax planning should be considered in preparation of these projections. 5. Risk Management Analysis. As you plan for the future, you must be a realist, if only for a short time. Part of life is recognizing that we will all encounter an income-altering event someday, and it could happen sooner rather than later. See 'Roadmap' P.# Con't from P.# To be able to say that you believe your financial plan to be "in good order", you must insure for the risks that are affordably sharable (transfer the risk to an insurance company), and prepare your personal records to minimize the tasks of your loved ones after you pass on. 6. The Action Plan. This is the timeline and duty roster. It is a checklist, and breaks up the larger tasks into smaller steps. I urge you to start today to build your personal financial plan for the future. It can be rudimentary or detailed. Any roadmap is better than none. Have fun, and engage your family and friends in your plan. Alter the course as need be, but never lose sight of your personal Vision! Julie Leefe is a Certified Financial Planner and Investment Advisor with Bieber Securities Inc. in Winnipeg (website www.biebersecurities.com, toll free 1-800-205-9070).
