When most people hear the term “financial planning”, they automatically think it has something to do with savings and investing. This is only part of the definition. Although saving and investing is an integral component of financial planning, there is a lot more to consider when developing your personal financial plan.
Typically here are four major considerations, often referred to as the four pillars, when developing your personal financial plan. These include cash flow, risk, debt and asset management. If any one of these pillars is weak then your financial well-being may be vulnerable.
Cash flow is the life blood of any financial plan. Throughout life one expects to earn an income, (this is your cash flow) and accumulate wealth to some degree. Income is needed to provide food, shelter and other basic necessities of life. The extra income that is not needed for necessities is either spent or saved. Discretionary spending is the money used for optional items like big screen TVs, vacations or any number of other life-enhancing products and services. It is your lifestyle. Controlling discretionary spending is crucial to your savings and investment plan.
Risk management is the insurance part of financial planning. This area protects you from hazards that could result in a catastrophic loss. There are needs for property and liability insurance to cover things like your house and car. Health and dental coverage, including travel insurance, are forms of cost containment from the high price of health care. There are also needs for income protection in the event of death or disability. More recently the need to cover a critical illness and long-term care has become a popular component of risk management. Needless to say this is an area that requires careful consideration and a critical eye to confirm that you are properly covered against the risks that you are exposed to on a daily basis.
Debt management is control over your loans to banks and other lenders. Debts include personal loans for things like a car and mortgages for your real estate. It also includes credit cards and lines of credit. This is an area where many people have difficulty. It’s really easy to apply for and obtain a loan or credit card. The trick is to have a plan in place to pay it off. You also want to be mindful of the interest rate to make sure you are receiving the best and most attractive interest cost and terms for repayment.
Asset, or money management, is really what most people think about when they want to develop a financial plan. What you do with the money you have left over after you have paid for your necessities of life can either be saved or spent. We already discussed how discretionary spending determines your lifestyle. If you’re a saver then you need to establish both short- and long-term goals. Set up different accounts that can meet both objectives. A short-term savings account allows you to deposit money and then withdraw it when needed. It tends to pay the least interest but it is safe and secure. It is ideal for things like a big screen TV or annual vacation. This approach allows you to pay for your “extras” without relying on loans or credit card debt. Long-term objectives, such as retirement or education funding, should be met with long-term investment vehicles. Retirement savings allow you to maintain your desired lifestyle once you have removed yourself from work and no longer receive an income. Typically one expects to receive a higher rate of return from long-term investment vehicles.
When you are building your personal financial plan, consider all four pillars. It’s not easy and you may need the advice of other professionals. Keep yourself flexible for any unexpected contingencies. Once you have built a strong financial foundation you will sleep better at night and realize most of your dreams and goals.
The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail email@example.com. Mutual Funds provided through FundEX Investments Inc.