PERSONAL FINANCIALPLANNING

When Should You Start?

M. PiczakJanuary 2006

WHY A PERSONAL FINANCIAL PLAN?

• As an employer, no one else does it for you

• Need retirement income• Help choose your priorities

between home, vehicles, vacation property, children’s education, travel, early retirement

• Pay less income tax

THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN1. Evaluate your personal,

current financial situationi. Estimate current net worthii. Estimate income from all

sourcesiii. List all recurring expenses

2. Choose financial goals.i. Time frames are

importantii. Separate wants from

needs

THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN

3. Develop saving/investment strategy

i. For desired retirement incomeii. For goals between now &

retirementiii. Make assumptions regarding

income and expenditures over future years

iv. Identify alternative “action plans” (contingency planning)

THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN

4. Evaluate alternative action plans considering:

i. Economic & employment factorsii. Risk factors – financial & otheriii. Opportunity costsiv. Lifestyle choicesv. Your valuesvi. Family situation

THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN

5. Develop your plan by:i. Choosing from alternativesii. Using professional adviceiii. Remember the family life

cycleiv. Ensure you have a wise

budgetv. Remember tax

considerations

THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN

6. Implement by:i. Evaluating periodicallyii. Changing your plans as

needs changeiii. Changing as external

factors changeiv. Focus on goals

THE STEPS TO DEVELOPING YOUR PERSONAL FINANCIAL PLAN

WEALTH CREATION IN OUR CAPITALISTIC SOCIETY

• Creation of wealth is encouraged so that individuals take care of themselves rather than by the state

• System is designed to “control” the rate of wealth creation to promote stability and induce hard work and risk taking

WHAT YOU CAN DO WITH YOUR $

• 4 options exist:– Spend it – it’s gone forever– Give it away – you feel better but

it’s also gone for good– Bury it – you’ve outsmarted the tax

man but lowered your worth because of inflation

– Invest it – participating in the power of the time value of money (interest and capital appreciation)

THE TIME VALUE OF MONEY• Money grows according to the force of

interest• Future Value = P(1 + i)n

• Interest is paid on interest resulting in a power function

• Consider that $1,000 invested annually into an RRSP accumulating beyond the reach of CCRA will grow to $1.5 million depending on the interest rate used

• Remember, that it will be taxable when drawn out at retirement although at a lower rate of tax

GETTING TO $1,000,000

• Contrary to easy jokes, $1 million is still some serious money

• How much money must be invested to get to the magic $1 million?

• The answer is:_________________

DEPENDS…

• Depends on:A. Investment return assumptionsB. Amount contributed C. Time involved

• Consider the following piece: Future Value Calculations: Getting to $1,000,000

INCOME SOURCES

• Salaries• Employment insurance benefits• Self employed income• Business income• Rental income• Pension income• Interest and investment earnings• Inheritances• Unexpected windfalls

ITEMIZE YOUR EXPENSES

• Food• Shelter• Car• Children• Medical care• Meals outside the home• Entertainment• Travel• Beer

WHEN TO START?

NOW!

EASY INVESTMENT OPTIONS• Starting an RRSP and making regular

contributions• Do what Esther Pauls did…get off your

lease, purchase the building reducing your present costs and owning the building after 7 years

• Starting up a mutual fund of your own• “Play” with stocks on e-trader sites

limiting yourself to a particular sum• Buy a house (appreciates tax free for

your principal residence)• Do “forced” savings using CSBs and

then investing it at the end of the year in some other investment instrument

DEVELOP MULTIPLE INCOME STREAMS

• Rent• Residual income streams• Having several activities that

generate income simultaneously

CONTROLLING YOUR SPENDING• Budget and stick to it• Learn to say no• Don’t have too many credit cards• Use a line of credit• Stop impulse buying• “do you really need it?”• Don’t go shopping• Control dining out• Don’t carry cash• Pay down debt ASAP so you can

do other things

CUT DOWN AND SAVE BIG OVER A LIFETIME

• How much money is generated by cutting down on:– Taking own lunch 3 days/week

= $95,000

– Buying bottled water $3/dozen bottles rather than at convenience store at $1/bottle

= $57,000

– Park car, take bus= $110,000

=SUM TOTAL > $260,000(See Spec article Jan. 27, 2006)

THAT’S ALL THERE IS TO IT…• Decide what you want• Look at where you are now• Establish your priorities• Cut down your spending• Make the investment/saving

commitment• Go relax in the sun

THE ANSWER TO OUR SKILL TESTING QUESTION: WHEN SHOULD YOU START?

START NOW WHEN YOU ARE YOUNG TO PUT TIME ON YOURSIDE

PERSONAL FINANCIALPLANNING

M. PiczakJanuary 2006

THE END