Financial Planning for Today ... and Tomorrow
One of the toughest challenges for anyone under age 40 is fitting important, but not urgent, retirement planning into their hectic schedules. Everybody is well aware that retirement planning will eventually be important, but when does it make sense to begin? Unfortunately, most retirement information is presented by companies who sell investments. It is no wonder their message always seems to suggest you need to save every penny and scrimp today to enjoy a great life in some distant future. For most of us however, it becomes a matter of making choices for our immediate needs, and a far-off retirement is not likely to be a top priority. Financial planning, as opposed to retirement planning, is designed to help you make the right choices today between spending, investing and reducing debt. Not all these activities are of equal importance at every stage of your life.
Most people would benefit by creating a simple financial plan. It will assist you in setting priorities and provide better understanding of the choices you control. Update your plan every few years and you will find yourself making the right choices for you and your family for both short term and long term decisions. Along the way, a good plan will guide you to take the steps necessary to build a solid retirement when the time and priority are right for you.
The majority of people would be better served by developing a sound financial plan and a conservative investment strategy, rather than by engaging a salesperson to construct an expensive mutual fund portfolio that has little or no regard for personal financial circumstances or lifestyle objectives!
Tips for Developing Your Financial Plan:
- Your financial success will very likely be based upon saving continuously over a long period. The best saving vehicle for most people is a company pension plan and you benefit from joining a plan regardless of how long you think you might work at your current firm.
- Saving a small amount (5-10%) of your paycheque via automatic withdrawal from your bank on payday allows you to “pay yourself first” and makes saving money a little less stressful.
- Early in life, you need flexibility more than tax benefits so you might decide to build an emergency fund in the new Tax Free Savings Account before you worry about RRSPs.
- Fees (particularly mutual fund fees) will siphon off a large portion of your investment returns. Keep fees low and you will generally have better results. As an example, you might look at ETF index funds as a great alternative to conventional mutual funds.
- During the early years of our working lives, we will likely use debt to help us fund our lifestyle. Keeping total monthly obligations under 40% of your income will help you avoid a debt crunch. Focus on eliminating credit card, consumer and student debts as quickly as possible.
- Have a plan for your money and update it every year to ensure you are comfortable with where your money is going.
Once you start growing your savings, you will begin to focus on how your money is invested. The biggest challenge in investing money is getting unbiased investment advice. Regardless of whether you hire an advisor or do-it-yourself, the best person to monitor your investments is you! Having a simple easy-to-execute plan and investment strategy allows you to maintain control of your finances at all times.
In short, what you do today will have a significant impact on the quality of your retirement years, but we have different priorities at each stage of life. Financial planning puts these priorities into perspective, providing useful guidance over a long life, to ensure the last one third is as great as the first two thirds.
November 21th, 2009
