Create Your Own Financial Plan With These Eight Steps

Create Your Own Financial Plan With These Eight Steps

A financial plan is a road map to help guide you to a better future. Not just about budgeting or investing, a good financial plan will help you navigate your way through all of life’s major financial milestones.

On one hand, your financial plan acts as a set of rules or principles by which to live. Think of Harold Pollack’s famous ‘index card financial plan’ which lists nine rules such as; save 20 percent of your money, max out your retirement account each year, pay off your credit card balance in full each month, and pay attention to fees. It’s something you can carry with you all your life.

On the other hand, your own financial plan needs to be malleable and allow you to adjust course when life throws you a curveball. Sure, your core principles might stay the same, but finances can change in a hurry when you get married, have kids, buy a house, suffer an illness or disability, get divorced, move across the country, or gear up for retirement. Your financial plan should act as a compass to get you back on track.

While a financial advisor can help you set up with a plan, many are focused solely on product sales such as mortgages, investments, and insurance. They’re not likely to ask where you see yourself in five years, and might not truly understand your short-and-long-term money needs.

A better option might be to work with a fee-only financial planner who can take an objective look at your overall financial health and draw up a plan to help you reach your goals. The challenge is a lack of fee-only advisors in Canada, plus a comprehensive plan could set you back several thousand dollars.

One idea is to create a basic financial plan of your own. The process alone will allow you to think about money in ways you never have before. If in the end you have more questions than answers, by all means reach out for professional guidance.

Here are eight steps to help create your own financial plan:

Create Your Own Financial Plan

Step 1: Identify your goals

Sit down with your spouse and have a frank conversation about your short-and-long-term goals. That could mean paying down credit card debt, saving up for a new car, or continuing to max-out your TFSA or RRSP so you can retire early.

Agree on the top three or four goals and then rank them in order of priority. We’ll come back to these later.

Step 2: Determine your net worth

You have to figure out where you are now before worrying about where you want to go in the future. Take a snapshot of your current financial situation by creating a net worth statement.

Add up all of your assets and subtract your liabilities. What’s left over is your current net worth.

Step 3: Check your cash flow

One of the keys to building a strong financial plan is to understand how much you spend and save. Use a spreadsheet or app to track what money is coming in (wages, interest, government benefits) and what’s flowing out (rent, debt payments, utility bills).

Fill in all your monthly expenses in one column and your annual expenses in another column. Add up your expenses in both columns and subtract them from total net income on both a monthly and yearly basis. The result is your cash flow deficit or surplus.

Tracking your cash flow can give you a sense of control and confidence that makes it easier to implement financial changes in your life.

Step 4: Match your goals to your spending

You’ve already identified your goals and determined your cash flow. Now it’s time to compare spending to your goals and see how they match-up. The idea here is to look at how well your current spending habits mesh with your goals.

If you have a cash flow deficit you won’t be able to meet your goals, so you’ll have to see if you can free up cash by cutting back your spending in areas that are less important to you. If you have a cash surplus, that’s great! You can start allocating money to meet your goals right away.

Step 5: Review your insurance coverage

Most employer group plans offer minimal life insurance coverage. With some basic calculations you can determine whether you have enough. A good rule of thumb for life insurance is to get enough to pay off any debts owing, plus cover 10 times your income if you have kids under 10 years old, and five times your income if you have kids over 10.

Your workplace coverage should also include disability insurance, but if it doesn’t, get enough to replace at least 60% of your after-tax income.

Step 6: Reduce your taxes

Tax planning can be fairly straightforward for most families and you’re likely already taking advantage of the best tax shelters if you own your home and contribute to your RRSP, RESP and TFSA.

However, if you are self-employed or rely on commission income, rental income, or significant investment income, consider hiring an accountant to help with income tax planning.

Step 7: Create an investing policy

Every financial plan should include an investment policy statement that advises how your portfolio should be invested. An investing policy written down on paper can help you to stay the course with your investments whenever markets get volatile.

The policy can be as simple as stating that you want to invest in low cost, broadly diversified index funds or ETFs that you will rebalance annually to maintain an allocation of 25% Canadian equities, 25% U.S. equities, 25% international equities, and 25% Canadian bonds. Any new money will be added to the lowest valued fund so that you’re guaranteed to ‘buy low’.

Step 8: Create or update your will

Every adult who owns assets and has a spouse or children should have a will. An accurate and up-to-date will is the only way to ensure your assets will be distributed the way you want them to be, and not left up to the courts to decide.

56 percent of Canadian adults do not have a legal will. Now you can create a legal will online in 20 minutes for as little as $99 thanks to Willful Wills.

Final thoughts

While most people could benefit from working with a financial advisor, anyone can go through these eight steps and create their own financial plan.

At the very least, it’s a good idea to take stock of your own finances from time-to-time to see where you stand. Open up the dialogue with your spouse and even with your kids. Talk about your financial goals and get all of your money concerns out in the open.

What you’ll end up with at worst is a basic idea of your financial position and where you want to go. At best, you’ll have a set of guiding principles to lead you to a better financial future.

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  1. Steve Oliver on June 10, 2021 at 10:57 am

    Great advice Robb. Forwarding to my adult kids.

  2. Pam on June 11, 2021 at 8:58 am

    Most of my plan is under control. I don’t have a lot of life insurance but not married and no kids so no real need. I have an AWESOME disability plan and if I ever left my employer I’d have to see if I could port it to an individual plan. Or find some sort of replacement.
    Great tips overall.

  3. Paul on June 13, 2021 at 4:05 am

    Same old narrow minded comments. First, fee only planners do not always give great advice, and they charge a high amount despite no guarantee they will deliver great advice. Second, you assume all people who sell financial products lack integrity, and would not put the interest of the client first. For the average Canadian, they “can not” afford the fee only advisor. The key, is find an advisor with a good reputation, tell him your goals and advise him upfront the minimum expectation every 3 years. If they do not deliver, warn them they will be replaced. The main problem for most people is they do not start and stick with a plan. Pay yourself first!

  4. Bob on June 27, 2021 at 8:23 am

    Hi Robb

    As usual great common sense advice…great for our adult children…now for our adult parents many of us have 75 or even over 80 year old parents we try to help with technology, navigating online finances etc etc most have small pensions of 25-40 thousand many are single and if they are female they oftern lack financial savvy.

    Most are fiercely independent and fear scammers and the online world, Covid has upset their rooutines many worked hard all their lives and are generous with their grandchildren and others, most own their own homes but may be scared of downsizing. Most have their health, and their mind but the memory is overloaded, they often have used the same bank, insurance company etc for over 60 years. They do not like change and they get overwhelmed easily. Their travel plans are prettymuch reduced to day trips.

    I would love to see in some of your case scenarios some strategies and ideas for us early retirees to help our parents with their finances and planning their futures. I am talking about those with meger savings of 80 grand to 100K with little investment assets other than their home, and vehicle and no real debt so not the 1.5 million dollar senior citizen, just the avergae Canadian please.

    I struggle to help my parents and my in-laws, I do ok with our own finances and I dispense advice to the adult kids and lately I have been helping siblings and siblings-in-law…your blog is a great resource but the average Canadin senior seems to be missing from your scenarios.

    Many thanks, sincerely


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