Financial planning should not be difficult. It is basically a plan to save for your retirement, education of your children or buying a house. You should clarify your goals and set a realistic time frame to achieve these goals. You might have to make few sacrifices to your current life style for achieving these goals.
Taxes in Canada are the biggest obstacle in creation and preservation of independent wealth. It makes tax planning to be the major factor in making a financial plan.
Your first step in financial planning requires that you write down your plan defining what are your wants and what are your needs? Married couples should compile their plan together and both should be committed to same objectives.
Clearly define your short term and long term goals. Be sure to include items like vacation home, major renovations, luxury cars or swimming pool.
Once your list is complete divide it into two parts. A list of short term goals and a list of long term goals. Set up a time frame for meeting your goal. Estimate the cost of achieving your goal and do not forget to account for inflation. You may also seek an advice from a financial advisor.
The list you prepared will become a guide for you. Since your personal and financial circumstances change, you might need to revise your list at different times.
After you have prepared your list your first step is to figure your net worth. When you subtract your liabilities from your net assets it gives you your net worth.
Always separate your assets by ownership. Make three different lists.
ü Assets owned by you.
ü Assets owned by your spouse.
ü Assets owned jointly by both of you.
This can help in different strategies for income splitting and estate planning.
A list of your investment assets will help determine if your investments are diversified enough to balance expected rate of return and risk. A closer look at your liabilities will indicate if your insurance coverage is adequate and also how your debts are affecting your situation.
Your mortgage interest, interest on credit cards and consumer loans are not deductible for income tax purposes. This may cost you more than the return you are getting on your investments. So your first step should be to get rid of high interest consumer loans immediately.
You should look for improving the rate of return on your investments. You should also try investing more income by spending less on discretionary items.
The best way to start building wealth is to save and invest on regular basis. More savings you have and longer they are invested, your net worth will increase compounding on regular basis.
You should always make a budget and try following it strictly. This will help you control your cash flow and give you more opportunities for investing.
Always review your budget on regular basis and compare your spending against it.
Setting a budget can definitely help you reduce your discretionary expenses. Such as travel, entertainment and gifts.
Get into a habit of saving a fixed amount each month. You should save at least 10% of your income each month. The most important factor over here is discipline. This discipline will help you to save systematically and you will be able to control your impulsive purchases. Make sure you instruct your financial institute to automatically transfer this fixed saving to your investment account on regular basis.
Your next step is to build an investment strategy that suits your circumstances. Asset allocation is a process of deciding how to invest in different kinds of assets. There are basically three main decisions for asset allocation:
Ø Asset classes = Cash, Fixed income and Equities.
Ø Market exposure and diversification = Global investments are available through many mutual funds and exchange traded funds.
Ø Currency Exposure = Investing in U.S funds while U.S currency is depreciation against Canadian Dollar may lead to a loss if you convert Canadian funds at higher rate than you purchased the U.S funds.
“Hedging” is an investment strategy that can help investors to manage this risk but these transactions require very sophisticated knowledge of global markets. A very good solution to this strategy is to invest in hedged funds.
Risk Tolerance
Always determine your objective and risk tolerance before making any investment decision. Your age, your personality and your family situation play a very big role in your risk tolerance. For example, if you have a defined pension plan, the amount of risk you will accept with your RRSP may differ from that of some one whose RRSP is the only retirement savings.
Similarly, a person with high net worth may be able to sustain a loss of $50,000 in the market. A same situation can be very devastating for an average retiree with a fixed pension.
Portfolio Considerations
One must consider his whole portfolio and determine the portion of each type of asset that needs to be allocated to his portfolio. Once it is determined you can decide, from a tax perspective, how to allocate these assets in RRSP, TFSA or outside these accounts.
Long Horizon
A usual market cycle is 5 - 7 years. Once you have determined your asset allocation you must plan to leave your investments to go through a full market cycle. A disciplined approach to long term asset allocation will most likely give you higher returns in the long run.
Fees
Always be aware of the fees and commissions. You can always control the fees and commissions you pay. If you are unaware, ask your advisor or financial institution.
Re-Balance
Regular re-balancing of your portfolio at least once a year will allow you to manage your investments for profit.
Monitor Performance
You should set benchmarks for measuring the performance of your portfolio. Your written investment policy would establish appropriate benchmarks that relate to your particular asset mix, such as market indices, to judge the performance of your investment portfolio.
Focus on getting the right asset mix. Make sure you are well diversified an be consistent in making your investments.
Disclaimer:
This information is for educational purposes only. It does not constitute any legal advice or opinion. Please do not use any of its contents without seeking a professional advice.
References:
Money Management for Canadians for Dummies
KPMG Tax Planning for you and your family 2014
Financial Planning Fundamentals by CCH
Mansoor Suhail (Mani)
Accountant
BSBA – EA – ICIA – RA
Tax for Canada and U.S.A
Web: www.theaccountingandtax.com and www.taxservicesguru.com
Blog: http://taxservicesguru.blogspot.ca
416 – 283 - 8774
The Accounting and Tax