Title: The importance of financial planning
Sub-title blurb: They say that those who fail to plan, plan to fail. That applies to finances too. Start the New Year by writing up or revising your financial plan.
The approaching March 1rst RRSP contribution deadline has many Canadians are scrambling to come up with the cash to access to one of the last remaining tax deduction opportunities for 2009. The funny (or sad) thing though, is that many of these same people also scramble to pay their municipal taxes, vacation bills and other large, though sporadic expenses.
Although most of us muddle through these challenges, the savvier among us set up annual budgets, so that they have enough cash lying around when the time comes to write those large checks. However in many cases, an annual budget is not enough. Canadian families also live through many larger “once in a lifetime” milestone events, such as a child’s wedding, that require significant capital outlays. One good way to meet those challenges is to make an ongoing commitment to planning your financial moves.
“Too many people are winging it when it comes to making financial decisions,” says Tamara Smith, vice-president of the Financial Planning Standards Council, which represents Canada’s 17,500 certified financial planners. “Making RRSP decisions, (or any other financial decisions) in isolation, can be short sighted. “(The start of the year) is a good time to consider the bigger picture of your life goals, needs and circumstances and to get a better financial plan in place to support these goals.”
Why do financial planning?
Think about it: it’s hard enough to come up with a couple of thousand dollars to make an RRSP contribution. But other, though sporadic, expenses can make those payments like chicken feed. For example although many Canadians with good credit can buy a home with little, and sometimes no money down, conservative financial managers advise buyers to come up with at least a 20 percent deposit, when buying a new home. This reduces your monthly payment, lowers the interest rate you’ll pay and provides a cushion should anything go wrong. The only problem is that a 20 percent down payment on an average Canadian home (which costs about $340,000) is $68.000. It takes a lot of scrambling to come up with that kind of cash.
Other expenses can also potentially break your bank. For example York University estimates that the average cost of sending your kid to its famed Osgood Hall Law School for three years will run you to close to $90,000. But even that is small potatoes compared to what it will cost you to retire – if that is, you want to live the life style that you have become accustomed to. In short, dealing with these and other macro milestone events is not easy. But those that plan their finances well in advance will have a strong leg up.
What to include in an effective financial plan
Although producing annual and multi-year budgets, and revising them regularly is the obvious place to start, choosing other elements to include in your financial planning regime is hard. And for good reason. That’s because many of the people that you would normally turn to for advice will have their hands out.
There is an old expression that if you give a guy a hammer, every problem he sees will look like a nail. So it is with financial planning. For example the Financial Planning Standards Council recommends that you “consider engaging the services of those who have the proven competence, knowledge, experience and ethics,” (such as one of their Certified Financial Planner members).
Certified Financial Planners are not a alone in insisting that their services matter most. Talk to an investment advisor at one of the bank-owned brokerages, and he will almost certainly tell you that your first step should be to save money - and to invest it with him. Your accountant will tell you that you need a cash-flow budget and professional help with your tax returns – just the services he provides. And your lawyer will tell you that you need a legal will - his specialty of course.
The hardest thing tough is that they are all probably right. To do effective financial planning you do need accounting, legal and planning advice. However none of that advice is cheap, and none of those professionals is sure to put your interests first.
That means that to do financial planning properly on an ongoing basis, you pretty much need to make a personal commitment to overseeing your financial planning and to become what the FPSC calls “a more informed consumer of financial advice and products.” That is unless of course you’d prefer to continue scrambling to come up with those last minute RRSP contributions, or worse – to leave your kid with a $90,000 debt when he graduates from Osgood Hall Law School.
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Peter Diekmeyer Communications Inc.