What is a Financial Plan?



Anne Hammond

Financial Advisor and Associate Portfolio Manager


What does it mean to create a financial plan? And why is it important to do so? 

For many, the first time they think about financial planning is when they are thinking ahead to retirement and considering what life might look like after that transition. But financial planning is about much more than saving for retirement.

Let’s consider the different areas that may be covered in a financial plan:
■ Retirement planning
■ Investment planning
■ Education planning
■ Needs in the event of death, and estate planning
■ Needs in the event of sickness, illness, or an accident
■ Other items that may be of importance to you (such as debt management
or charitable giving).

I like to think of retirement planning more as “financial independence” planning. Financial independence is the stage where working for compensation (rather than working in a volunteer capacity or retiring altogether) becomes optional. Reaching this stage – and knowing when you’ve reached it – requires setting future goals and then determining how best to fulfill them. Strategies might change over time, as the needs of today must regularly be weighed against the needs of tomorrow. Cash flow management may be addressed here as well, since you may have to decide how much of your income to allocate to each of your goals. That’s the first stage of retirement planning.

The second stage is the financial independence stage, when you no longer work for compensation; instead, you begin to rely on pensions, savings, and investments to fund your lifestyle.  This stage requires a slightly different approach, as you adjust to no longer having a set paycheque coming in. Often, tax planning plays a big role, as we seek to maximize the amount you can spend each year. 

Again, a balance must be struck between enjoying life today and ensuring that your funds last as long as you do. You might want to spend at a higher level in the first years of retirement, when your health is good and you finally have time to pursue some of your personal (non-work-related) goals.

Investment planning may seem like the most obvious part of a financial plan; after all, managing your investments appropriately is important for reaching your goals. You might need to invest some of your funds for shorter-term goals like building up an emergency fund, saving for a vacation, or preparing to purchase a new vehicle. Other funds may be allocated to longer-term goals like retirement, or perhaps for leaving an inheritance for the next generation. The purpose for each bucket of funds and your personal risk tolerance should be what drives the choices of investment products.

Education planning might be one of your priorities, as you consider the increasing costs of education and how best to help your children or grandchildren handle them. There are tools and benefits available in Canada, such as Registered Education Savings Plans and the Canada Education Savings Grant, which can help maximize the value of the funds you save. You can make the best use of them by incorporating education planning into your cash flow and investment planning.

When it comes to estate planning, there are a number of aspects to consider. This area of planning is not just for the wealthy; in fact, it’s just as critical for the surviving members of a young family just starting out as it is for older, well-established family members with adult children. Ensuring that the appropriate legal documents – such as wills, power of attorney documents, and representation agreements – are in place and up-to-date is the first step here.

Another part of estate planning may be determining how much money is required to provide for surviving family members in the desired fashion. This may require analysis and perhaps insurance coverage to be put in place to provide those funds, if they have not already been accumulated via other means. This might also be the area of your financial plan that addresses how to best to maximize funds you wish to leave for a charity.

Considering potential needs in the event of illness or an accident is critical, too. This can be the least exciting area of financial planning, in a sense, as it’s the area that ad-dresses the “What if something goes wrong?” question. This is where we consider the things that could go wrong along the way toward reaching your financial independence goals. And if something does go wrong, how we can ensure there are enough funds available to help deal with it.

The good news here is that medicine has advanced greatly. Being diagnosed with a serious illness is still frightening and emotionally draining, but the prognoses for recovery are much better than they once were. A disabling accident may not end a career, with good treatment and the proper support. But recovery still requires time, and it may not allow for full-time work. 

A financial plan cannot prevent such incidents from occurring, but – properly implemented, regularly reviewed and updated – it can help to ensure that families do not experience further stress due to financial difficulties.

As we see on a daily basis, life is full of the unexpected, and it is impossible to anticipate everything that could possibly happen. Creating and documenting your vision for your life via a financial plan can be the first step toward building the future you want. ■

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