Don't rely on luck! Build a financial plan

Just the mere thought of financial planning is enough to send many people into a tailspin. But it can be a truly empowering exercise. You just have to break it down into small enough steps so it’s not so overwhelming.

Whether financial planning is something you do regularly or have never done before, consider approaching it from the perspective of each of the steps below. You may be amazed by the clarity you find and the stress you shed, and how quickly you begin moving toward your financial objectives.

Step 1: Set financial goals

If you’re just starting out, we typically recommend focusing on four specific and highly targeted goals:

  1. Emergency saving
  2. Reducing debt
  3. Planning for retirement
  4. Personal saving objective

Emergency saving

According to MNP’s Consumer Debt Index, fewer than a third of Canadians can afford an unexpected expense such as a home or automotive repair, job loss, or sudden illness without relying on debt. Having between three and nine months of living expenses set aside in a separate account can provide incredible peace of mind. But even a few hundred dollars can be a lifesaver when life catches you off guard.

Reducing debt

Carrying a balance on your credit card, loans, or lines of credit does nothing but cost you money. The sooner you can eliminate your debt, the sooner you can accelerate your other financial goals. At the very least commit to paying more than the minimum. You may be amazed by how an extra $50 per month can help pay down your balances. Use this free calculator from the Financial Consumer Agency of Canada to find out.

Planning for retirement

Unfortunately, government programs like Canada Pension Plan and Old Age Security simply won’t be enough for most people to retire on. The earlier you can begin contributing to an RRSP or TFSA, the more you can take advantage of compounding to grow your nest egg. Use this free calculator from the Financial Consumer Agency of Canada to estimate your required retirement income and how much you need to save.

Personal savings objectives

What kinds of major purchases do you want to make over the near, medium, and long term? This could be anything from such a mortgage down payment, a newer vehicle, your children’s education, or travel. How much do you need to save and when do you need to save it by? Getting this all on paper can really help to clarify your thinking and planning

Step 2: Start a budget

Budgeting alone won’t fix your financial challenges, but it gives you the perspective you need to adjust and optimize your spending. That alone makes it more than worth the effort.

Before you proceed with creating your first budget (or your first budget in awhile), it’s worth acknowledging that you may not like what you see. Many people are hesitant to come face to face with a significant cash shortfall, the cost of their debts, or the extent of their spending. But once you can see it, you can begin to change it.

Choose a method

MNP has a free Budget Tracker Spreadsheet on our website that’s easy to use and takes care of all the math for you. You can also download one of several available apps or use good old pen and paper. Select a method that works for you and that you’ll stick with over the long haul.

Review your income and spending

For a realistic estimate of your monthly income and expense categories, we recommend reviewing at least your last six bank statements and using an average of your spending on things like utilities, fuel, groceries, and other expenses — as well as your income if you’re paid hourly.

Does it balance?

Here’s where many people become discouraged. If the number at the bottom of your budget is less than zero, that means your spending more than you earn and will need to take on more debt to afford everything. Are there any costs you can cut back on (e.g. dining out, entertainment, etc.)? Is it reasonable to take on a part time job to increase your income?

If the number is zero or higher, congratulations, you’re well on your way to achieving your goals! But don’t stop there, what can you optimize to support one of the four goals above?

Track

Your budget is a living document that you need to interact with throughout the month to be most effective. Record every transaction in and out of your accounts throughout the month to monitor (a) whether your estimates are accurate, (b) how much you can still spend in each category, and (c) any non-budgeted spending that you need to either control or account for next month.

Step 3: Will and estate planning

Most people put off estate planning because it forces them to face their own mortality. But death is a part of life, whether we like to think about it or not. And you want to know your loved ones will be cared for when you’re gone. A Will also streamlines the estate process for your executor and provides mental space for those working through the grieving process.

You need not have be wealthy, old, married, or have children to have an estate plan. Everyone needs one to make sure financial and / or healthcare decisions align with your wishes when you are unable to make them yourself.

Step 4: Review

Your financial situation and objectives are constantly changing. If you’re sticking to your plan, hopefully for the better. But the only way to know for sure you’re on the right track is to review your plan often.

Financial goals and budget

Consider doing this monthly. How is your debt reduction progressing? Your savings and retirement objectives? Once you achieve one of your goals (e.g. saved for a vacation), consider increasing your contribution to other goals like your emergency fund before immediately taking on another objective.

Other moments to review and adjust your financial and budgetary goals include:

  • New job or change in income (up or down)
  • Change in marital status
  • Unexpected expense or sudden increase in debt
  • Change in living arrangements (larger / smaller home, rental / mortgage, etc.)

Wills and estate planning

Typically changes to these documents are required less frequently, but it’s advisable to review them at at least every five years or if one of the following occurs:

  • Change is marital status
  • Change in family dynamic (children, grandchildren)
  • Buying or selling of home / property
  • Received an unexpected windfall (inheritance)

What gets measured gets done

It may take time to find a method for financial planning that works best for you — but whatever happens, don’t stop trying to work on these steps. No one is perfect, there may be some hiccups along the way, and it will take time to see the benefits of your planning. But money is very measurable, and it’s immensely rewarding to see it grow.

There won’t a big pot gold at the end of the rainbow immediately. But the pot will slowly fill up and the benefits of developing financial goals, budgeting, and estate planning will eventually pay off.