In recent years, financial planning has been reduced from a process to a product. The broader financial industry has offered financial plans, often on a one-time basis, and frequently as a prospecting tool. It is not enough to simply have a financial plan that gathers dust. Forward-looking financial planning can help you stay on track and achieve your long-term goals.
What kinds of goals should you be setting?
Many people have the goal of investing their money. But in order to invest, you have to spend less than you earn. Some people start investing too early. It probably makes sense to pay down non-mortgage consumer debt like credit cards first. It also generally makes sense to contribute to your savings (for example, to an emergency fund) before growing your wealth through investing.
If you are saving for retirement, you should try to figure out how much you should be saving. This is based on your expenses, now and in retirement, and trying to work backwards to figure out how much to put aside each month. If you do not work with a financial planner, online tools are better than nothing.
What type of account should you use to invest?
When you are starting out, the most important part of investing is figuring out which account to use. If your income is low or you are young, it should probably be a tax-free savings account (TFSA).
If your income is moderate to high, or if you have an employer matching contribution program at work, it should probably be a registered retirement savings plan (RRSP) or defined contribution (DC) pension plan. The tax-free first home savings account (FHSA) being introduced in 2023 presents another option for renters saving for a home.
Years like 2022 are unfortunate. Most investments have lost value. But 2021 was a great year. North American stocks were up about 25% and many real estate markets saw similar returns. Some years, you will make outsized gains. In other years, you will feel like you are going backwards. Try to focus on a medium-term time horizon, such as three years, to see how much progress you have made as opposed to worrying about month-to-month changes.
What should you do beyond save and invest?
If you have minor children or you and your spouse are still working, you should probably have life insurance. If you are not retired, whether you have a family or not, you should probably have disability insurance. The cost of insurance may increase your spending, but the cost of disability or death can really decrease your or your family’s standard of living.
If you are retiring or retired, you should try to determine a sustainable spending level to ensure your money outlasts you. If you want to spend more money early on in retirement, you run the risk that your investments perform poorly at a time when you are drawing them down heavily. This could compromise your ability to spend as you age.
How to stay on track with your goals
A good way to stay on track overall is to put pen to paper—or at least digital pen to digital paper. Quantify your goals and set timelines so you can look back and measure your progress.
A net worth statement is a good tracking tool to implement. If you summarize your assets and liabilities on a regular basis, you can monitor your progression. It also helps you visualize your financial life all one page and make decisions accordingly.
If you are checking your investments every day, it is probably too frequent. It is often said that investments are like bars of soap—the more you touch them, the smaller they get. Some would disagree with this statement, but most people should not be checking their investments frequently. Monthly, quarterly or semi-annually is probably a better frequency.
If you are depositing or withdrawing money, a simple plan for which accounts or investments to buy or sell can be set quarterly, semi-annually or even annually to take any second-guessing out of this process. Ideally, you should aim to maintain an asset allocation that is in line with your risk tolerance and time horizon, and this generally includes buying low and selling high. In other words, buying more of what is on sale and less of what is expensive.
Decumulation—or, drawing down the assets you’ve saved for retirement—can be a little trickier, because there may be tax implications related to withdrawals and which investments you choose. But again, establishing a rough game plan annually can make the monthly withdrawals or whatever you are taking easier to administer.
Revisit your goals and change course if necessary
There are bound to be times in your life when you need to tweak your goals. There can be little financial surprises, like car problems or home repairs, or a bonus at work or a gift from family. There can be big financial surprises, like a job loss or divorce or an unexpected inheritance.
Setbacks are bound to happen in your financial life, so it is OK to go backwards sometimes. The younger you are, the easier it is to recover. But even when you are older, being conservative enough with your spending and saving and anticipating these occasional setbacks can make it easier to handle them.
People often prepare budgets that include no car repairs or home maintenance costs. If you build an expectation of unexpected costs into your budget, it can be a more reasonable way to plan for the short and long term. If you want or need to monitor your spending, there is no shortage of budgeting apps available to suit your style.
Make a habit of checking in on your progress
Beyond that, set reminders in your calendar. Year-end is a good prompt for income planning for retirees, business owners and those with non-registered investments. The new year is a good time for TFSA and RRSP contributions. Spring is tax time and ideally you should aim to have your tax documents prepared by mid-to-late March so that you are not rushing at the end of April.
When school is out for the summer, parents of school age kids should be considering post-secondary planning and registered education savings plan (RESP) contributions and withdrawals. When school is back in the fall it is a reminder, whether you have kids or not, to focus on responsible stuff like insurance and estate planning. It is good to review your insurance coverage every few years. Wills and powers of attorney may not need to be updated for many years at a time, but preparing a summary of the key considerations in these estate documents can make it easier to review and validate that they are still applicable.
This is not an exhaustive financial planning summary, but some of these tips and practices might be worth adding to your to-do list to help set and stay on track of your financial goals.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.