The Foundation of Personal Finance

June 24, 2019 | Eddy Mejlholm


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I am often asked to provide help with personal finance matters by people I know. Often they don’t need advanced financial planning assistance or portfolio construction, but they just need to be pointed in the right direction.

I am often asked to provide help with personal finance matters by people I know.  Often they don’t need advanced financial planning assistance or portfolio construction, which I do through my practice, but they just need to be pointed in the right direction and told where to start.  This is my 6 step guide I use to help these folks.  Usually, my practice will come in to assist someone who is at step 4, 5 or 6 as the complexity grows and the need for customized advice and portfolio construction grows.

 

  1. Know What’s Going On – You should always be able to answer these questions.
    1. Create a Net Worth Statement
      1. What do you own?  Assets
      2. What do you owe?  Liabilities
    2. Create an Income Statement
      1. What comes in?  Income
      2. What goes out? Expenses
  2. Do the Basics
    1. Develop a monthly cash flow surplus –Cut, cut, cut and work, work, work.  Increasing income is just as important as decreasing expenses.
    2. Have at least $1,000 on hand for emergencies – sell things if necessary
    3. Give to charity regularly and proportionally – automate if possible
    4. Start paying off non-mortgage debts with surplus
      1. Debt Snowball – smallest to biggest – suggested because it is the most motivating
      2. Debt Avalanche – highest interest rate to lowest – most effective but can be discouraging if you have a lot of debts
  3. Expand on the Basics
    1. Paid off non-mortgage debts.  No new debts.
    2. Grow the emergency fund to 3-6 months living expenses
    3. Make sure your life insurance is adequate
    4. Make sure you have a valid will
    5. Save at least 10% of your total income for retirement
      1. RRSP if income is over $53,000 / year
      2. TFSA if income is under $48,000 / year, especially if you have a pension
  4. Save for the Long Term
    1. Now that you are debt free and you are saving for long term goals it’s time to accelerate payments to pay off your mortgage.
    2. Retirement Plan – savings increased from 10% to whatever is required to meet retirement goals.  You’ll need to do some math! 
    3. Education Plan – savings for children’s education – the RESP offers matching grants and other incentives which can substantially increase the amount saved
    4. Medium Term – savings for car purchases, home renovations, etc. 
  5. Financial Freedom
    1. Debt free – no mortgage and no other debts
    2. Enough assets and passive income to meet needs if not working
    3. Business succession plan is in place if a business owner
  6. Complete a Legacy
    1. All conceivable needs are accounted for
    2. Family is cared for financially, emotionally, intellectually and spiritually
    3. Building a charitable legacy – involving others
    4. Have a solid estate plan to provide well for the people and causes you care about