My thoughts on Financial Planning

Financial Planning

Financial planning is an in-depth analysis of an individual or family’s current and future financial position by using what is known now to predict the future basically.  These plans include how much to: spend, save, invest and retire effectively.  The first step in creating a financial plan is determining a person’s current financial position.  Take some time to calculate and really evaluate your own spending, saving and investing.  Sometimes just adding it all up is enough to motivate someone to get their finances in order, that motivation is healthy, embrace it.  Once your fully aware of your situation, it’s time to create a SMART goal for your finances.


SMART stands for :

S – Specific
M – Measurable
A – Attainable
R – Realistic
T – Time-Based

Example:  A person is 28 years old and their net worth is $150 000, they want to have $50 000 in annual investment income by the time their age 55.  Now let’s see if this statement passes the smart test.

Is this goal specific?  Yes, it states the exact amount of income required and the planned age of retirement.

Is this goal measurable? Yes, the progress of this goal can be measured at any time by calculating current investment income and comparing it to the end goal.

Is this goal attainable? Yes, someone who has a net worth of $150 000 at age 28 could attain an investment income of $50 000 in 27 years from now.

Is this goal realistic? Yes, it is realistic that a person could live off an income of $50000 annually in 27 years from now. Keeping in mind that 27 years from now $50 000 will be able to purchase much less than it can now due to inflation.

Is this goal time-based? Yes, the time frame for this goal is 27 years.

Now that we have a SMART goal, we need to figure out how to achieve it.  To do this we’ll determine the savings rate required to build that capital.

Savings Rate

This plan now has a starting point, $150 000 net worth at age 28 and a SMART goal which is to attain an investment income of $50 000 annually in retirement.  To achieve this goal we now need to determine a savings rate.  To determine a savings rate we have to work backwards from our goal to now.  The goal is $50 000 investment income annually, one way to achieve this is through dividend paying stocks or ETFs.  Safe, stable dividend paying stocks in Canada can yield a dividend from 2% up to 5%.

For ease of learning I’ll pretend all of the money is invested in stocks that pay 4% dividend yield.  To collect $50 000 annually from a 4% yield, a person would need $1250000 invested.  $1250000 is a lot of money and won’t create itself, it will be raised from savings and investment returns.  Using a compound interest calculator I determined the annual savings rate.  I assumed the $150 000 net worth was all in appreciating liquid assets such as stocks.  I assumed an average stock market return of 7% and used our final goal of $1250000.  To raise $1250000 in assets at a 7% growth rate over 27 years, a person would need to save and invest $4000 annually or $333 per month.  Now that we have a savings rate the next step is setting a budget.


These days budgeting can be very easy thanks to the many online tools available.  Whichever tool you use to budget, make sure to “pay yourself first”, this means saving and investing that $333 every month before paying anything else.  Yes, I mean even before your bills.  You can do this through pre-authorized contributions that automatically transfer from your bank account to your brokerage account.  There are exceptions however.  I believe that paying off all debt first is crucial prior to investing, many won’t agree but I firmly stand by being 100% debt free before investing.  Also if a person doesn’t have an emergency fund then they should build one first.  Below I go further into emergency funds.


Why have an emergency fund?

An emergency fund is widely considered by the financial community to be the best preparation for when situations arise and a person needs money quickly.  I agree.  It is a wise idea to have a nest egg set aside for when the inevitable occurs.  I’m talking about needing a new septic tank, a new well, medical emergencies, job losses etc.  Literally anything can happen so it’s best to be prepared.  So how much is required to be adequately prepared?

Three months.  Three months living expenses should be the minimum emergency savings that anyone has to be prepared for a bad scenario in my opinion.  For example, if a persons living expenses are $2500 per month, that person should have $7500 saved for an emergency situation.  I say three months as the minimum because it may be more for certain individuals, it really depends on how much a person feels they need to sleep well at night.

Where to put it

Now that a person has their three months living expenses saved, what do they do with it?  I recommend keeping it simple.  Cash is king and in this case, no one should be worried about missing out on a possible larger return for an emergency fund.  That is not the point of this fund, this fund is to hold easily accessible cash, not to fund retirement later in life.  This saved up capital will actually protect your retirement investments because you won’t have to draw from investment accounts when a problem arises.  In Canada there are now “high” interest savings accounts that pay around 0.5% interest on the balance.  It isn’t much at all but it’s at least something to slightly combat inflation.  Don’t keep it in literal cash money, stash it in an account somewhere gaining interest.  Emergency funds aren’t exciting and we all know it.  However, it can be one of the wisest financial tools of all.

Example scenario

I love examples.  Let’s say a person has a vehicle, house and investments.  Suddenly they lose their job (a very possible scenario at one point in a lifetime), what do they do?  They don’t want to sell appreciating assets such as there house and investments.  They need a vehicle to attend job interviews and to attend future employment.  This is a bad situation.  The person in this example needs money now to cover basic living expenses.  They don’t want to draw from their retirement or sell their house to do so.

Let’s analyze two ways this scenario could play out.  In the first scenario, with an emergency fund, this person would have 3 months to successfully find employment without their lifestyle suffering at all.  In the second scenario,  no emergency fund, that person sold their vehicle to pay for expenses but was then limited on employment options and had to take a lower paying job closer by.  Think of those repercussions for a second.  By not having an emergency fund this person now has no vehicle and a lower paying job.  This is of course just an example but it has been the reality for many people.  The same could go if they did draw from their retirement savings, now they are working later in life to replace those savings.  It’s lose-lose not having an emergency fund.

It was a reality for me in 2016 when I lost my career. I went six weeks with no income and the only money that came to my rescue was an emergency fund. I cringe thinking of where I’d be if I didn’t have one. Don’t get caught in an emergency scenario without a cash reserve to pull from.


Thoroughly assess your current financial situation, do this often.  Create SMART goals that will keep you focused on a target.  Create a budget using a budgeting tool and stick to it.  Pay off all debt and save an emergency fund before investing.  I think you must know yourself and how you are with your own money before you can trust another person with your money.

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