The prospect of financial planning may sound daunting—it includes budgeting, retirement planning, and debt management. However, it is more than just a subject for money experts. It is also a strategic game plan for everyone to achieve future objectives across all areas of their financial life. This guide will give you insight into how to organize your financial life for maximum sustainability.

What is financial plan?

A financial plan is a document that shows you how to take a big-picture view of your financial situation and come up with strategies designed to help you maximize your potential for reaching your financial goals. The plan can help you to identify and plan for essential needs, such as managing life's risks (e.g., those involving health or disability), income and spending, and debt reduction. It can provide financial guidance so that you're prepared to meet your obligations and objectives. It can also help you track your progress throughout the years toward financial well-being. The sooner you start planning for your financial goals, the better prepared you’ll be to reach those goals.

Why planning is essential?

There are many reasons why financial plan is a worthwhile investment. It increases your ability to manage your cash flow(your income and spending), so that you can better handle daily and occasional expenses without worry. With a better grip on cash flow often comes the availability of extra disposable income, allowing you to invest the money or use it in other ways that will improve your financial well-being. Here are some more detailed reasons.

A financial plan can help you:

• Balance short-term and long-term goals

• Live your life with a sense of direction and security

• Utilize your current financial resources

• Adapt to change in your circumstances and needs

• Prepare for retirement

• Manage your taxes

• Leave assets for your family

Planning means that you try to choose the future you want rather than falling into a future you did not choose. Besides, if you have a plan, you can adjust it when changes occur in your life. Because you know you are managing your future step by step, you will save more and worry less.

Who is financial plan for?

A financial plan is for everyone who wants to manage their money more effectively and work towards their financial goals, regardless of their income level or financial knowledge.

There are also situations where having a financial plan is a definitely necessity:

• If you are a recent graduate who is navigating through new financial responsibilities, then having a financial plan is crucial for building the foundation of your success.

• If you are a newly wedded couple, or are just starting a family, now is the time to make sure you build your plan and protect your family’s future.

• If you are mid-way through your career and nearing retirement, a financial plan can help you prepare by utilizing tax-advantaged accounts like RRSPs or TFSAs..

• If you’re already well into your retirement years, then you might aim to manage their retirement funds, minimize taxes, and leave a legacy for their children or charities.

What are the components of financial plan?

1. Assets and liabilities

The first component of your financial plan is your assets and liabilities.

• Assets (What you own)

• Include big items like your home, car, recreation vehicles, savings and investments.

• Look at documents like bank and investment statements, retirement savings, other pension papers, etc.

• Prepare for your emergency fund!

• Your emergency fund calculation will show you how much you currently have in liquid assets, along with the optimal amount of emergency savings you need to be working towards. Ideally, you will want to save up to 6 months as an adequate emergency fund. Take your gross monthly income, subtract estimated taxes (around 30% for many households) and then multiply that number by three or six to determine how much you should have to properly protect yourself for three to six months.

• Liabilities (What you owe)

• Include student loans, mortgages, car loans, consumer loans, credit cards and other loans or bills.

• Look at mortgage documents, loan papers and credit card bills.

There is an important key performance indicator to measure here: Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is the percentage of your monthly gross income that goes toward paying debts. This usually includes your housing cost, even if you rent. The lower this number, the less of a risk you are to banks and other lenders. Your plan will calculate your current DTI and will show you what you need to be aiming for. As you reduce your DTI, you can start saving more.

There are two great ways to keep our DTI number down:

1. Earn more income

2. Pay down your current debts to lower the amount owed

2. Risk management

One of the critical components of a comprehensive financial plan is risk management. This aspect of planning involves identifying potential risks that could impact one's financial health and implementing strategies to mitigate them. Risk management typically includes insurance policies such as life, health, disability, long-term care, property, and liability coverage, which serve to protect against unforeseen losses due to accidents, illnesses, or other liabilities.

3. Retirement outlook

The last component of a financial plan is the retirement outlook, which addresses an individual's vision and preparation for retirement. There are three important sub-areas to cover here:

• Current situation

Your current situation will provide a snapshot of whether or not you are on track to retire by your desired retirement age and even if you’re on track to retire early. This is determined and summarized by calculating your retirement income replacement as the one number indicator of how much money you will likely have to live on each year in retirement.

• Your financial goals

Here’s where you will determine and set your financial and retirement goals. This includes the age at which you would like to retire and the type of lifestyle you want in retirement, determined by the replacement income goal.

• Proposed track

Your proposed track is extremely important to pay attention to. This calculation works by focusing on achieving your desired retirement lifestyle goals by showing you what you need to do in order to reach this goal. For example, there are lots of people use different kinds of tax accounts(RRSP, RRSP, RRIF..) to achieve tax-deduction in Canada. In other words, how much you need to be saving to reach your retirement on time. In some cases, it may not be feasible to reach your exact goals, and in that case, a plan can help you recalibrate and come up with adjusted goals.

How to create your personal financial plan?

• Option 1: Create your financial plan by yourself

While not the most popular choice, self-managed financial planning is an option to consider, especially if you're experienced in finance. Beginners should be cautious, as it can be confusing and frustrating. Some experts prefer self-planning, either exclusively or alongside professional advice. Numerous personal finance books and the mentioned financial planning pillars can guide you in creating your plan. However, be aware that this approach is time-consuming and involves complex, scenario-based calculations.

• Option 2: Hire a traditional financial planner

The second option is hiring a traditional financial planning professional to create your personal financial plan. Hiring a traditional financial planner is a proven, effective option for those who can afford it. They'll assess your finances, set goals, and devise a plan. While popular and time-tested, the cost and time commitment make it less accessible to the wider public.

• Option 3: Building your financial plan with moomoo

The internet offers numerous resources for free financial planning and investing advice, including our website. It's crucial to critically assess these sources and remember that financial planning is personalized; what works for one may not suit another.

Moomoo offers up-to-date Canadian financial policies and expert advice to facilitate smart investing.