Financial Planning in 4 Easy Steps

Most of us look for the road to riches but can never find it on any map! Instead, here are four easy steps to financial planning that will help you get started.

Step 1: Protect what you have.

Have an emergency fund. When unexpected expenses pop up—as they often do—you don’t want to put it on a credit card or dip into your RRSPs. Ensure you have insurance to protect your car, home, and your ability to earn an income.

Have a valid and updated will and powers of attorney to direct your assets in case of incapacity or passing away. If you don’t, the government will make these decisions on your behalf.

Step 2: Avoid high interest.

What exactly is high interest? Well, if you don’t clear your credit card balance every month, you’re probably already paying it. Consider a 40-year-old with a $5,000 balance on their credit card. By age 65, they would have paid almost $24,000 in just interest!

It gets worse. Since you pay credit cards with after-tax income, this person would have had to earn about $30,000 to pay the $24,000 in interest. And now it gets even worse! Had they instead invested and earned a six percent return per year, they would have almost $70,000 in savings. High interest debt is very expensive.

Step 3: Pay yourself first.

Add savings as an expense item in your budget rather than whatever is left over after everything else. Start with what you can afford. In no time, you’ll adjust to living with what you have left over. What matters most is that you set money aside for you every single month and live within your means on what’s left over.

Tip: Remember, a spending account is what you use for daily expenses while a savings account is used to save up for longer term goals.

Step 4: Start saving now.

Consider two people aged 20. One saves $1,000 a year for 10 years. The other waits until age 40 and then saves about $3,000 a year for 25 years. Who do you think has the most money?

Amazingly, they both have the same amount! Starting earlier has the same effect as saving seven times as much money! After all, time is money.

If you follow these four simple steps, you’ll be financially better off, have less stress, and be able to sleep better at night.