Financial Planning – Start Where You Are
Wealth exists on a continuum. Once we see ourselves on that continuum, we’re tempted to compare ourselves to others. Some of us started further along by virtue of birth and circumstances. It’s valuable to remember that we each started somewhere different, and we’re all going to get somewhere different.
Strength and Power Come from Acknowledging Reality and Moving Practically.
These five steps of financial planning can be applied at any stage of life; from your first job, through big life changes like marriage, divorce, or selling a business, all the way to retirement. The steps provide a robust architecture to help us stay on track, and cut out the distraction of worrying about where we are on the continuum compared to others.
1. Calculate Net Worth
Net worth is calculated by making a list of two columns. In the first column, list all the things that you own — like savings accounts, investments, RSPs, TFSAs, real estate — and the value of each. The items on this list must have liquidity, meaning they must be convertible to cash. In the second column, list everything that you owe — student loan, car loan, mortgage balance, credit card balance — and the debt value of each. Draw a line at the bottom of the columns, and add up what you own versus and subtract what you owe. This exercise provides your net worth and your starting point. Download the Sophia Net Worth Calculator to help you begin your financial planning today.
2. Map Out Cash Flow
Next, calculate how much money is coming in versus how much money is going out. At the end of each month, you want to know if you’re spending more than you’re bringing in, or if you have a surplus. To map out your cash flow, add up all of the sources of income from things like your job, rental income, and investments. Then look at your bank and credit card statements to see what you’re spending. Compare these two numbers. Are you spending more than you’re saving or do you have a surplus? Do you have any cash reserves for unexpected expenses or opportunities? Download the Sophia Cash Flow tracker today for a helpful and informative guideline.
3. Set Goals
Where do you want to go? While vision-boarding is fun and useful for dreaming, it’s not the right mindset here. Real-world, focused goals provide a foundation for the framework strategy you’ll build in step four. Set three or four concrete goals. Simplicity and clarity are key. Staying focused on a few essential goals allows you to put strategies in place and keep your progress on track. Of course, life happens, and goals can change. You can add to them or subtract from them as needed. The other essential piece is attaching a cost and timeframe to each of your goals. How much capital is required to achieve each goal, and when do you want or need to see that goal fulfilled?
4. Frame a Strategy
Strategies have to do with matching the investment solution with the timeframe of your goals. Money that you’re going to need or want within the next few years should be in a guaranteed-savings product like a high-interest savings account, a money market fund, or a short-term GIC. If the goal is, say, ten years out, then you’ve got time to cultivate more growth by investing in the stock markets, or in bonds. Let’s say you have $10,000 and want to invest it in stocks, but you may need the money in two or three years. The volatility inherent in the markets could decrease your investment, and you might not have time to recover before you need your capital back.
History and research show us that if you’re willing to keep the money invested longer than six years, your chances of having less than what you put in are virtually zero.
5. Review and Monitor
At least once a year, take stock of where you’re at and what progress you’ve made. Talk to your advice provider and tell them your goals all over again. Go through steps one to four and make sure your strategies still match your goals. Compare where you were a year ago with where you are now. Recalculate your net worth and cash flow, then check in with your goals. Refocus and recommit. Celebrate your successes, and over time, your net worth will start to increase. Knowing your net worth is key to measuring your progress.
The process of defining where we are on the wealth continuum can be emotional and daunting as well as satisfying and fulfilling.
Find an advisor you trust, or put together a mentorship group, or work with a coach that “gets you.” That person, or group, can help you see the things that are holding you back, and get you moving on your personal journey to, well, go wherever you want to go!
Listen to Wise Money Moves Podcast to hear Tracy and Kamal talk in further depth about the five steps of financial planning.