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A beginner’s guide to creating a realistic financial plan

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We’ve talked about tips for creating a budget in the past, but what about taking it a step further and creating a complete, encompassing financial plan that includes investments and savings?

Below is a beginner’s guide to creating an original, personal financial plan!

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1. Be realistic about your income

To create a financial plan for yourself, knowing what your income is essential. Too many people make a bad habit of spending above their means. Your financial plan should include plans for the money you make, no more. Creating a budget that exceeds your income is only setting yourself up for failure and potential debt.

Calculate how much net income your family is bringing in (that’s the total income after taxes, employment insurance (EI), Canada Pension Plan (CPP) and other deductions). This will be the maximum amount of money that you’ll build your financial plan around.

2. Calculate your fixed expenses

Before you start making grand plans to open a tax-free savings account or acquire mutual funds, make sure that your essentials are budgeted for first. This includes living basics like your mortgage payments or rent, groceries, child care, insurance premiums, your utility bill, and other expenses that reoccur on a monthly basis.

Calculate the total of your fixed expenses. Ideally, keep a spreadsheet or some other form of budget that details the breakdown of your expenses. This will help ensure you stay on budget.

3. Add a little wiggle room to your budget

Once you’ve calculated your fixed expenses, we recommend that you create a little extra room for unforeseen expenses. This can include everything from buying seasonal clothes, to home repairs, to purchasing gifts. These capricious expenses pop up from time to time, but aren’t necessarily a fixed part of your budget.

4. Create a savings and investment plan

After all your regular, and not-so-regular expenses have been accounted for in your budget, whatever is left over should be set aside for savings and investment. This is one of the best moves you can make with stagnant funds; rather than having them vegetate in your bank account, you may as well have your money create money.

Depending on your personal goals, here are a few options to consider:

  • Create an emergency fund – If you don’t already have one set up, this should be your first priority. Create a savings account where you can keep the equivalent of 3 to 6 months’ income.
  • Open a high-interest savings account – Most banks in Canada have high-interest savings accounts you can open for free. Given the incredibly low interest rates, your savings won’t grow much, but it’s better than nothing.
  • Create a RRSP or TFSA – In Canada, two of the most popular long-term savings accounts include the Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). Speak with a representative from your bank about the best way to open an account, and how to invest the money stored in these accounts. Depending on when you plan to use the money, you can opt for aggressive, balanced, or conservative investments of your money. Just be wary that these accounts have annual deposit limits. Your tax return should include your limits for the year.
  • Consider other investments – If you’ve maxed out your TFSA or RRSP, the next step is to consider alternative investments like GICs, mutual funds, and stocks. The most practical course of action is to set up a consultation with a financial professional at your bank. They’ll help you decide which investments make the most sense for your finances.

5. Set up automatic withdrawals

The easiest way to ensure you stick to the savings and investment goals you set for yourself is to set up automatic withdrawals, ideally on the same schedule as you’re paid. If your savings are set aside immediately after you get paid, there’s less temptation to spend it. After all, if you never see the money in your account, you can’t miss it!

6. Set financial goals

Followed all the steps above? Congratulations, you’ve done it! You created your first financial plan. The last step is to create goals for your savings and financial future.

Just ensure that they’re achievable – if your yearly income is $50,000, a million dollars in savings is probably a long shot. Re-evaluate your financial goals frequently, and confirm they reflect your income and life plans.

Need a cash loan to get past an emergency expense that’s popped up?

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