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What is a Financial Plan and do I Need One?

A financial plan at its core is a map to reach your goals. It is not just your “financial goals” as everyone wants to make more money, but a financial plan goes further than that. Do you want to retire early, travel the world, or are you focusing on paying off debt? These are the life goals and with a financial plan, you can achieve them. Money is just a tool to help you reach those life goals; a financial plan helps you understand where you are today and where you want to be in the future.

Where to Start

Before you create a financial plan, you need to take note of where you are today. To do this, you need to look at two things: your net worth and your cash flow.

  1. Your net worth is a listing of your assets (such as bank accounts, house, and furniture) minus your liabilities (for example, your mortgage, personal debt and loans).
  2. Your cash flow is about understanding when your money comes in and when it goes out. This will give you a realistic idea of where and how you spend your money and how much you are able to set aside to reach your goals.

What are your Goals

The next piece is to list and prioritize your life goals. The timeframe of when you want to reach the goal and its priority level will help shape the plan, as each goal will have different considerations and investment requirements.  When investing, there are specific risks associated with each goal and the cash flow available. With longer time frame goals, your investment risk can be higher as you have time to wait out the ups and downs in the market. With shorter time frames, your investment risk will be lower as you may not have time to wait out a downturn in the market. One additional risk that is overlooked is your own personal health and the impact it plays with your life goals. Being diagnosed with a critical illness, injured and unable to work, or passing away all have significant impacts. Using some of the investment money to pay for these types of insurance will help lower your risk and ensure you can still meet your life goals.

Just the beginning

Each piece together builds your map to reach your goals. This is just the start of the journey, as monitoring and making changes annually is just as important as having all the pieces. Having a financial advisor adds value by acting as an additional ‘check point’ to help keep you on track and accountable. A financial plan is important at any stage in your life, so speak to your financial advisor today to help create your financial plan and reach your life goals.

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