Eight easy steps toward a financial plan

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

While a financial adviser can help you set up 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.

One idea is to create a basic financial plan of your own. The process will help you 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 easy steps to help create your own financial plan: 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. 2. Determine your net worth: You must determine where you are now before planning where you want to go. 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. You goal is to improve upon your position each time you update. 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).

Enter monthly expenses in one column and annual expenses in another column. Add up 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 cash flow can offer a sense of control and confidence that makes it easier to implement financial changes in your life. 4. Match your goals to your spending: You’ve identified your goals and determined your cash flow. Now it’s time to compare spending to your goals and see how they match up.

If you have a cash flow deficit you won’t be able to meet your goals, so you’ll have to cut back spending in areas that are less important to you. If you have a cash surplus, you can start allocating money to meet your goals right away. 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 per cent of your after-tax income. 6. Reduce your taxes: 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. 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 equal amount of Canadian, U.S. and international equities, plus a percentage in Canadian bonds.

Any new money will be added to the lowest valued fund so that you’re guaranteed to “buy low.” 8. Create or update your will: Every adult who owns assets and has a spouse or children should have an accurate, up-todate will to avoid leaving the decision about your assets up to the courts. Putting it all together: While most people could benefit from working with a financial adviser, 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.

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.