FINANCIAL PLANNING

There are a few investment basics that can help you build a financial plan that takes you where you want to go.

1 - RECOGNIZE THE IMPORTANCE OF FINANCIAL ADVICE

Working with a financial advisor can increase your returns. A 2001 survey from Financial Research Corp. found that investors who use financial advisors tend to experience slightly better returns than those who do not rely on professional advice.

What hurts Investors?
Most investors listen to their heart, and not their head. Investors tend to make financial decisions based on their emotions and then rationalize intellectually. A financial advisor can help you avoid this pitfall.
Understanding your financial needs is an important step to setting your future financial goals.

2 - UNDERSTAND YOUR PERSONAL PROFILE AND NEEDS

First, you should understand your financial Planning Needs and secondly, understand your Investor Profile.

Consider your responses to a few key questions:

1. How many different financial goals do you have?
2. How long do you expect your money to be invested before you will need it?
3. How do you feel about "risk"?
4. What are your current financial obligations?
5. What is your current financial situations?

Remember: Before you save for your RRSP, or build a portfolio of investments, you need to decide what your goals are for those investments. This should be an important discussion with your financial advisor -- and one which you revisit on a regular basis -- especially as your personal situation or financial needs change.

1. How many different financial goals do you have?
   Most working Canadians are thinking about their retirement savings, but you may have other, shorter-term, savings goals as well: a child's education, a new home, a special vacation. Make a list of your goals, and how much money you would like to save for each.
   
   
2. How long do you expect your money to be invested before you will need it?
   Again, you may have two or more different investment time horizons.
   
   
3. How do you feel about "risk": the possibility that your investment may drop in value (even if that drop is temporary)?
   Some investors -- especially those with a long-term investment time horizon -- find that they can live with the risk of market "ups and downs", and stay focused on their long-term goals. Others will lose sleep each time the market drops. Your ability to tolerate risk will be an important factor in building a portfolio of mutual fund investments that meets your personal investing profile.
   
   
4. What are your current financial obligations?
   Are you supporting a spouse or dependent children, or perhaps an aging parent? Are you supporting a mortgage, or perhaps a personal or business loan? Factor this in to your overall investment strategy.
   
   
5. What is your current financial situation?
   Is your current net worth below $50,000? Above $100,000? Or somewhere in between? Measured against your other financial commitments, this may help determine how resilient you may be to market ups and downs
   
   

Whatever your personal investing profile, remember that your investments should be diversified. Even very conservative investors can find an equity fund that suits their personal investing profile. And even the most aggressive investor should think about saving a little room in his or her portfolio for a bond or money market fund. Your financial advisor can help you sort through your choices.

The 6-Step Approach to Financial Planning

According to the Canadian Association of Financial Planners (CAFP), there are six key steps to the financial planning process:

1. Your Present Situation
   The financial planner clarifies the client’s present situation by collecting and assessing all relevant financial information, including: net worth and cash flow statements, insurance policies, tax returns, investment portfolios, pension plans, employee benefit statements etc. The planner will itemize all basic family information - name, age, marital status, employment history, details of the children’s birth dates and other qualitative data. Essentially this step summarizes where the client is today. An individual’s current situation is a result of the cumulative effects of all of the financial decisions and transactions that have occurred in the past up until the current time.
   
   
2. Identify Goals and Objectives
   The financial planner helps identify both financial and personal goals and objectives as well as clarify the client’s financial and personal values and attitudes. These may include providing for children’s education, supporting elderly parents or relieving immediate financial pressures which would help maintain the client’s current lifestyle and provide for retirement. These considerations are important in determining the best financial planning strategy.
   Any goals established should be:
   Specific. Otherwise they are not goals, they are merely dreams. “I require $500,000 by my 65th birthday” is an example of a specific goal. “I want to be rich when I retire” is a dream, not a goal.
   Measurable. Financial goals are easily measurable since dollars and cents can be counted.
   Realistic and attainable. In order for a goal to be achieved, it must be within the realm of reason. To accumulate $1 million by age 65, if one is currently age 64, and has no savings may be attainable by winning a lottery however; this is unrealistic. Conversely, for a 25-year-old to accumulate $1 million by age 65 through saving and investing is probably both attainable and realistic.
   Time bound. All goals should be time bound in order to track progress towards the goal’s completion and to provide feedback. Corrections should be made in the action plan therefore maximizing the probability of success.
   
   
3. Identify Problems
   The financial planner identifies financial obstacles to achieving financial independence. Problem areas can include too little or too much insurance coverage, or a high tax burden. The client’s cash flow may be inadequate, or the current investments may not be winning the battle with changing economic times. These possible problem areas must be identified before solutions can be found.
   
   
4. Design The Plan
   The financial planner provides written recommendations and alternative solutions. The length of the recommendations will vary with the complexity of one’s individual situation, but they should always be structured to meet the client’s needs without undue emphasis on purchasing certain investment products.
   
   
5. Implement The Plan
   A financial plan is only helpful if the recommendations are put into action. Implementing the right strategy will help to reach the desired goals and objectives. The financial planner should assist in either actually executing the recommendations, or in coordinating their execution with other knowledgeable professionals..
   
   
6. Periodic Review
   The financial planner provides periodic review and revision of the plan to assure that the goals are achieved. Your financial situation should be re-assessed at least once a year to account for changes in life and current goals. Making sure you are on the correct path assists in preventing any undue surprises within your planning process.