Five Components of a Strong Financial Plan
A good financial plan considers your present situation and helps develop a road map to get you to where you want to be. It also provides a step by step process for you to follow. The following are five components that should be included in a good financial plan.
- Budget properly
When you put a budget together, you are showing what sources of income you have and where your money is being spent each month. Income sources can include salary from a job, investment income, government income like CPP and OAS and property income.
Knowing where your money is going each month is very important to help you understand if you are spending more than you are bringing in. If you have money left over after the end of the month you are in a surplus situation and can either save, spend or pay off debt. If you are in a deficit situation and would like to get to a surplus you either have to reduce your spending or find an extra source of income, or do a combination of both.
- Pay yourself first
One of the golden rules for creating wealth, is “pay yourself first”. Ideally you want to be saving 10% of you earnings and locking them away into long-term investments. Once the money is moved from your account into an investment account, it is out of sight and therefore you can’t spend it. This allows you to become disciplined in your spending while creating a strong retirement plan.
- Put aside a security fund
If you have very little in savings, you are creating undue stress in your life. Many financial experts recommend establishing a security fund worth at least 3 to 6 months expenses. After you have created this fund you will find that you are in a better financial position to plan for a big vacation, the purchase of another car and retirement. And if you lost your job, the money from that security fund would help support you until you are back on your feet.
- Have the right coverage in place
Making sure you have the right amount of insurance coverage in place for your unique situation, to protect the financial security that you’ve worked so hard to achieve. A sudden unexpected illness or injury can create real financial hardship if you don’t have the necessary funds to pay the bills while you recover. Insurance products can offset this risk.
Life insurance can provide your family with much needed financial support in the event of your death; disability insurance protects your income should you become disabled and unable to work; while critical illness insurance provides you with a lump sum payment in the event of a serious illness like cancer, heart attack or stroke.
By sitting down with your financial advisor to develop a plan, you can determine what coverage is necessary to protect you and your family. They work with your budget and your needs to create a custom solution.
- Update your plan regularly
Once you have your financial plan in place – and in writing – it is wise to update it periodically. After all, life changes and so will your financial situation.
Life events like the sale of a business, the birth of a child, purchasing a home or getting a divorce can change your needs dramatically. Your plan should be reviewed at least once a year to see if it still meets your goals and objectives. Let the experts at MiLife help you create your financial plan. Once you do you will be more confident that you can handle whatever life throws at you.