Uncommon Cents: The four parts of planning your financial future

Life is not a smooth cruise on Saskatchewan highways; it is a rocky mountain road full of curves, bumps and bruises. No one can predict what will happen or where we will end up. 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 in life, 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 over time. That is why we call it a plan and not an accomplished fact. Also note that these four pieces usually are created simultaneously or overlap with one another.

Create a reserve 

This first element of a proper financial plan enables you to be ready for both opportunities and emergencies. Emergencies can be anything from having to return home for a family crisis to replacing a water tank in the home. However, a reserve can also be used for opportunities. These can be everything from a last-minute trip with friends to to charitable giving to the chance to invest money in a business you love and think will do well (vetted by good advice). If you have a reserve, you will not have to pay for such things through high-interest credit cards.

Make Short- to mid-term goals

The second element of a good financial plan is what we could call short- to mid-term goals. These might be buying a house, a condo or a cottage. They might include having and raising children and helping their future income needs by investing in a Registered Education Savings Plan (RESP) or a form of insurance that creates a cash value that can grow exponentially over time. Monies in this pot might also be used for activities such as travelling before career(s) and family responsibility curtail such activities. Mid-term goals can also include beginning to build the proverbial nest egg for one’s retirement. The sooner you start, no matter how small the contributions, the faster and longer you have for your nest egg to grow.

Make Long-term goals

Longer-term goals include planning for retirement and retiring with a reasonable level of comfort. Do you want to be as independent in retirement as you are now? What do you want to happen to your estate (all the assets you have at the end of your life)? Do you want to be entirely dependent upon government programs for your retirement?

Bear in mind that, in 2012, the average monthly Canadian Pension Plan (CPP) payment retirees received was $528.49 (with a maximum of $1 012.50 per month), and the average Old Age Security payment was $514.56 (with a maximum of $546.07 per month). Seniors whose monies are below a particular threshold might 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. This may not seem inconceivable if you are a student living on a tight budget, but imagine if you had to make payments on a house, faced expensive health problems and still had children to assist.

Invest in Income and asset protection

The fourth piece of a co-ordinated, proper 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.

That this element is one of the key pieces of financial planning can be demonstrated by asking one question and pointing out one or two statistics. Who would pay the bills if you were disabled or became critically ill?

According to the Manulife Financial survey — conducted by Research House in March 2011 — one in three people are injured for 90 days or more before the age of 65, and the average time one has to take off work due to illness or disability is 10 weeks. The risk of dying, getting a critical illness or becoming disabled before that age is a 50 per cent chance for 30-year-old non-smoking females and a 51 per cent chance for 30-year-old non-smoking males (the risk of dying is the lowest by far of the three).

These four elements of a proper financial plan are critical to life success. The earlier you start planning, the better off you will likely be.

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