Basics of Long-Term Planning

In my last post, I discussed the need for a financial plan, and stressed the importance of having one prepared as early as possible. In this article, I will discuss what some of the components of a financial plan are.

First, you will need to provide the planner with some information about your current state of affairs:

  • Your income
  • Your expenses
  • Your debt
  • Your credit

Then, you will need to provide the planner with information about your goals:

  • Short term (e.g. vacations)
  • Medium term (e.g. own a house)
  • Long term (e.g. retire and live in Aruba)

The planner will ask you some questions:

  • Do you have life insurance? What kind? How much are you paying? How much is it worth?
  • Do you have a will? Is it up to date?
  • Are you saving for retirement? How much are you saving? Do you have RRSP contribution room?

The planner will go and crunch the numbers, and produce a plan for you that tries to do a combination of the following:

  1. Reduce your debt and increase your cash flow by consolidating your debt to a single, lower interest rate, debt.
  2. Arrange for protection by ensuring that you have an appropriate amount of life insurance. This needs to reflect your style of living, and any outstanding debt.
  3. Put together a saving plan to help you reach your goals. This will be in the form of a certain amount of money put away on a regular basis toward each of your goals. For example, bi-weekly, put $100 toward vacation, and $100 toward retirement, and $150 toward a down payment for a house. The numbers, of course, are adjusted to fit with your budget (which you prepared earlier).

What happens next, now that you have a plan, is that the planner will try to sell you some products that will help you meet your goals. They may sell life insurance. They may sell mutual funds. They may be in the lending business. Or, if you work with certain groups, they may be connected to all 3 areas.

A good planner will give you the information, and then give you time to decide if this is what you want. They will not try to pressure you into any of it. They will inform you on how to do some background research into alternative products. It is then your responsibility to follow up and do the research, and then decide on a course of action. If the planner throws some terms your way that you don’t understand, ask them to explain. Or write down the terms, and then go to Wikipedia or just Google the term later. In the age of information sharing, it is not difficult to locate explanations of any financial concept.

A last piece of advice is as follows. Before embarking on a saving plan, talk to your accountant. There may be tax benefits for you to invest in certain ways over others, and make sure that your plan takes this into consideration. This could save you even more money in the long run.