Life is not a smooth cruise on a straight highway; it is a rocky mountain road full of curves, bumps, bruises, and turns. No one can predict for certain how it all turns out. The best we can do is plan, knowing that a plan must be flexible enough to meet the reality of the unknown road ahead.
Often ignored or forgotten until late, financial planning is critical to a well-prepared life. There are at least four essential aspects of a plan to consider. Note that these four pieces of a good financial plan are developed continuously over time, not entirely at the start of your journey.
Create a reserve
Maintaining a stable reserve of money apart from your more active funds enables you to be ready for both opportunities and emergencies. Emergencies can be anything from having to take a plane to an ailing relative’s home, to repairing a damaged window after a storm. However, a reserve can also be used for opportunities. These could be anything from a last-minute proposal to go on a trip with friends, to an unexpected offer to invest in a business you love and think will do well. By having a reserve you will not have to pay for such items through high-interest credit cards and the like.
Short-term and mid-term goals
The second element of a good financial plan is short- to mid-term goals for growth. For example, you might want to buy a house or condo, or invest in RESPs or a form of insurance with cash value that grows exponentially over time. The fruits of these processes might also be used for activities such as travelling, during a period before career and family responsibility curtail such activities.
Longer-term goals are mostly related to retiring with a reasonable level of comfort. Most people would prefer not to have to rely on government programs for their retirement. The sooner you start, no matter how small the contributions, the more time your nest egg will have to grow. Do you want to be as independent in retirement as you are now? What do you want to do with your estate after your death?
Bear in mind that, in 2012, the average Canadian Pension Plan was $528.49 per month (maximum $1 012.50 per month) and the average Old Age Security was $514.56 per month (maximum $546.07 per month). Seniors whose resources are below a certain threshold may be eligible for a further two benefits, for a total of about $800. Imagine living on between $1 043.05 to $1 844 per month in 2012!
Protection and insurance
The fourth piece of a properly co-ordinated plan is income and asset protection. Usually called insurance, it includes life, disability, critical illness, and, increasingly, long-term-care insurance. If you are lucky enough to end up working for a company that has good group benefits, then those benefits will mitigate some of the concern over having one of these life events happen to you, but only by a small margin.
The reason this is a key piece of financial planning is easily demonstrated. Who would pay the bills if you were disabled or became critically ill? The chance of eventually having a disability that lasts for 90 days or more is one in three. The average time off work is 10 weeks. The risk of dying before age 65 is quite low; however, if getting a critical illness or becoming disabled is factored in, there is a 50 per cent chance for 30-year-old females and 51 per cent chance for 30-year-old males to become critically ill or disabled before age 65. For a 30-year-old couple, the chance of having one of these events happen to them before age 65 is 76 per cent. If anything like this happens, will you be able to pay the bills?
The four elements of a proper financial plan are critical to life success. The earlier you start, the better off you will be. Plan to plan—it’s the wisest choice.