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