A Financial Plan is Your Roadmap to Financial Success

There is no financial GPS that will guide you to reaching your financial goals. Putting a plan together isn’t that difficult. Although, I hate my wife’s to-do-list, the job doesn’t get done unless it is recorded somewhere.

STEP ONE – Define your goal

Some common short term goals are:

– Debt reduction/elimination
– Vacation planning
– Planning a wedding
– Home ownership
– Family planning
– Post graduate degree
– Job retraining programs

The most common long term goals are:

– Saving for your children’s education
– Paying off your mortgage
– Saving for retirement

Write down you goal and put it in a place you can see it – on your fridge, in your phone, even a sticky note on the bathroom mirror. Have it handy to remind yourself.

STEP TWO – Analysing your net worth and income statements

Take a good look at where your hard earned money goes. Where could you cut back on your spending? You should have a bare minimum of 10% of your gross income left over after paying all your expenses. If not, then you don’t have enough income, have a spending problem or have too much debt. Taking a look at your goal, determine how much you need to save each month in order to achieve it.

STEP THREE – Avoid pitfalls

Peer pressure and “keeping up with the Jones,” make it difficult to stay on track. Comparing your life style to your family & friends is a common mistake. Spending money that you don’t have on a winter vacation because that is what your friends are doing can be a big financial setback. A common expression used for people who spend money that they done have is “They have champagne tastes on a beer budget.”

STEP FOUR – Stay focused

Keeping your focus on long term goals can be difficult. The benefits are so far in the future, it’s easy to take a detour. It is easy to put off saving for your child’s education because it is so far away. It is much more fun to take the whole family to Disneyland! You don’t have to be a math genius to figure out that saving a little money each month for your new born child’s education will add up to a sizable sum at age 18. The longer you wait to start saving, the more you have to save per year to meet your long term goals.

STEP FIVE – Reassess

It’s helpful to take a look at your plan every few months to ensure you’re on track. Is the goal still realistic or attainable? If not, what adjustments can you make?

It takes time, commitment and sacrifice to increase your wealth. Plan your route and stay on course! One of my favourite financial planning quotes is “People don’t plan to fail but fail to plan.”

Keeping Financial Score

Are you winning or losing the money game? It doesn’t matter if you are just starting your career, half way through or near the end; you need to keep score. Once a year you should calculate your net worth. A simple list of all your assets, liquid and fixed, minus all your liabilities, equals what you are worth. Redo the list every year at the same time to see if you are gaining wealth or losing it.

There is no big mystery or secret in winning the money game. It isn’t about how much you make but how much you keep. It does help if you make a lot but I am sure that you have heard about athletes or movie stars who have made millions during their careers and are now broke. If not, google “lottery winners who lost everything.”

The next score card you will need is the dreaded income or cash flow statement. It measures how much you make, how much you spend and what you keep. Keeping track of what you spend can be daunting. Everyone hates budgeting. It’s boring and time consuming. Plus it is impossible to predict future prices of items like the price of gasoline or imported food. Your method of tracking your spending should be as simple as possible so that you don’t get frustrated and quit.

The recurring bills like rent, mortgage, cell phone and utilities are easy. Keep these bills in an accordion file or enter them on a spreadsheet. The hard part is keeping track of other items like groceries, clothing, transportation, gifts and entertainment. Most people pay for these items using credit or debit cards. I would suggest one cash back credit card with no annual fee for groceries, drugs and gasoline. Use another credit card with no annual fee for everything else. Carry a small amount of cash for small purchases. Gift cards are a good way to keep track of the cost of your morning coffee. Making many small purchases with your credit or debit card will make it more difficult to analyze your spending habits.

Internet banking can save you a lot of time and effort in keeping track of your spending. I suggest that you learn how to use spreadsheets. By increasing the column width, you can copy & paste items from your bank account right onto your spreadsheet. The auto sum key will even add up the columns for you. It is never too early or too late to learn something new.

Regrettably, while not all your bills are due for payment every month, you can have a separate savings account to store funds for paying upcoming bills like insurance, property taxes and car maintenance. I would also put money aside monthly for birthday and Christmas gifts. Over-spending at Christmas time is a common problem and leads to making minimum payments on your credit cards. The majority of your money will go to shelter, groceries and if you own a car, transportation.

A guideline that I used to like as financial advisor to analyze expenses was the 28 /36 rule. It recommends that households should spend no more than 28 percent of their gross income on shelter (including mortgage payments, property taxes & heating) and less than 36 percent including all debt (car payments, student loans, credit cards & lines of credit).

If you want to win the money game, you need to learn how to keep score.

Let me introduce myself

I graduated from university with a degree in Economics. I started my own business when I was in my late twenties. Owning your own business requires a wide variety of skills but I really excelled in financial management. I then enhanced my Economics degree by completing several courses in order to become a financial advisor. I have enjoyed a very long, successful career as an entrepreneur. I am now in my early 60’s and retired.

I decided to write a financial blog because I am concerned about the economic future of Canadians. The financial crisis of 2008 was a warning sign of too much debt in world economies. The banking system almost collapsed and the problem has been kicked down the road by printing more money. Keeping interest rates below normal historical levels enables both consumers and government from defaulting on their debt. The problem of too much debt in world economies hasn’t been resolved. Closer to home, headlines like “City of Detroit files for bankruptcy” and “Consumer debt hits record $1.4-trillion”in Canada, should scare you. I live in Ontario and I am petrified!

Ontario’s growing debt problem has been estimated to reach $282 billion dollars by the end of 2014! That means to pay it off, the government would have to collect more than $28,000 in extra taxes from every man, woman and child living in Ontario. Yes, I said living not working. Keep in mind, the Ontario government’s annual budget deficit hasn’t been balanced yet so this debt keeps growing.

I believe that the lack of financial literacy among Canadians has caused this debt spiral to continue. We have allowed governments to buy our votes to pay with promises that are becoming unaffordable. Easy credit and a buy now, pay later attitude of Canadian consumers have reduced our savings rates. I still can’t believe that 30% of Canadians carry credit card debt and pay almost 20% in interest charges on their outstanding balance. Raising consumer debt has turned the retirement slogan of freedom 55, to freedom 75 because of the lack of savings. Unfortunately, I find that money and financial matters take a back seat to other priorities in the lives of both the young and old. It doesn’t help that the vocabulary and acronyms used by the financial industry are really confusing.

My goals are to encourage you to take control of your finances and to provide you with information that will improve your financial knowledge and hopefully overtime increase your personal wealth. I will also offer my views on possible financial trends that could affect your financial well-being. Money can’t buy happiness but it can give you the freedom to do what you love.