Financial planning is a topic that can be fraught with frequent misunderstandings and incorrect assumptions. As financial planning has become more prevalent, the view of why a financial plan should be created has evolved, the events that might trigger creating one or updating an existing plan have changed, and the best methods for keeping these plans up to date have improved. Should you be setting up or updating your financial plan? 

Best time to create a financial plan.

                The subject of timing is often the first obstacle when it comes to planning for the future. One common misconception is that financial plans are only for those people at extreme decisive points in their lives. Alternatively, the belief a financial plan equates to a budgeting tool to help young people just starting out or guide soon to be retirees in using their retirement savings to fund their lives. While both circumstances are fantastic opportunities to put together a plan, we should not wait around for such an Inflection point to occur before we decide to make a plan.

                Getting a first job, retiring, being laid off, or selling a business are all stressful events that can sway our opinions about the future for better or worse. Equally, investment markets being at an all-time high or during a market downturn can spur people to rush to create a financial plan. Again, this can be a hazardous trap to fall into, if markets surge ahead and put account values at an all-time high it will provide a false sense of security that promising investment markets will never end. On the other hand, only thinking about the future from the depths of a market correction can give an overly pessimistic view of the future.

                In our experience, the best time to prepare your first financial plan is today. Whether markets are up or down, whether you are about to make key decisions in your life or not. Do not wait for the perfect opportunity to create a plan, you can always go back and update an existing plan when your situation changes.

Why create a financial plan?

                I mentioned previously, financial plans are often viewed as a budgeting tool. This can be true, especially for people just starting out who need guidance on how much they should save to reach their goals, but more often a financial plan is a high-level overarching view of a person or family’s entire circumstances. Taking this “30,000 foot” view means that the financial planner can account for everything that might impact the financial circumstances of the financial plan-ee. Illustrations of this include reaching savings goals, finding a responsible spending level, paying off debt, planning for major expenses, providing gifts to children, legacy plans for family or charities.

                The point of creating a financial plan is to establish a decision-making tool. A financial plan helps by taking all the information we have available to us today, applying an assumed growth rate, rate of inflation, and other assumptions, and then providing us with a rough sketch of what the future might hold. A financial plan is not a crystal ball through which we gaze into the future. For example, with a financial plan already prepared receiving a financial windfall or a bonus from work becomes an opportunity to easily allocate those extra funds as per your future goals. Without a blueprint this new money might be allocated to the whims of the moment. Instead, we can examine the plan and quickly discover that the best use of these funds might be paying off outstanding debt or contributing to a long-term goal.

                Additionally, a financial plan can function as a rubric we can compare ourselves against. For example, if we imagine that a financial plan was created a year ago and in it, we planned to spend $75,000 on after tax lifestyle expenses, but instead we spent $100,000 we can go back and examine what happened that we did not anticipate. Perhaps, it was the first year of retirement and we overspent on travel. Is this to say that we should revert to our plan and decrease our spending to $50,000 next year? It depends! What we know is that with this latest information available we can now update our plan with better data and determine what, if anything, needs to change in the future.

How often should an existing financial plan be updated?

                The above examples point out an important fact. A financial plan is only a snapshot in time of an individual’s situation. Of course, life comes at you fast and there are any number of unexpected surprises right around the corner. As such, a financial plan should be viewed not as a static immoveable object, but instead as a “living document.”  As circumstances change the plan should be updated accordingly. This could mean we update with new events and/or regularly to account for ongoing changes. This is a matter of personal style. If you are at a critical juncture and need help in determining how this change might impact your situation, you might plan to reach out to your advisor right away to get the plan updated/adjusted.

Some potential life events that could trigger a new plan are:

• Retirement
• Career change
• Lay off
• A financial windfall
• Sale of a business
• Having a child
• Giving a gift to charity or family
• Tax planning

It should be noted that not all the above events are out of our control. Updating a financial plan does not have to be done when something unexpected happens. Retiring, selling a business, giving a gift to charity or family, are all examples of things that we might have control over the timing. This means you could be updating the plan in advance of the change happening. Other events that land outside of our control would mean updating our plans retroactively. The point being that we do not need to wait around until life happens to us, instead we can proactively get ahead of coming changes and set up expectations based on what we believe will happen in the near term.

If you have not set up a financial plan previously, we would highly recommend it. There is no time like the present to get started, and the sooner you have a plan in place the sooner you have a living document that you can refer to or update as needed. If you are interested engaging our holistic team for your investments and would like a financial plan set up, get in touch with us at www.kozakfinancialgroup.ca or by calling 403-260-0568.