Importance of a Financial Plan

December 17, 2019

In the course of 35 years of experience in the financial service industry and having taken thousands of applications, I have observed that the vast majority of my clients did not even have a basic financial plan. Most clients had a collection of savings, investments and insurance products, but not a formal plan that is designed to reach specific financial goals in a specific time. In my experiences, each Financial Planner will differ on their approach to gathering information, assessments and recommendations. A simple financial plan will likely only focus on a single product such as investing in a mutual fund and/or an insurance policy. This plan is more focused on the sale of financial products than creating a co-ordinated financial plan. A comprehensive plan would include a cashflow statement and all relevant financial data and an outline of all financial products and services accompanied with a strategic plan to reach specific life goals including retirement and legacy issues. The latter is typical for high net worth clients and would include projected income models based on assumed compounding interest rates and estimated rates of inflation to ensure adequate income to cover an anticipated lifestyle and time frame. For the average “blue collar” individual or family, where do you begin to create a “Financial Plan”. First and foremost, the most important element of any “plan” is your Cashflow ~ aka: the BUDGET. In simple terms, it’s all sources of (net) income less all expenses and debt obligations. I would recommend you sit down with a financial professional who has extensive experience in discussing and reviewing budgets. It’s important to ask the right questions, in the right order. The Cashflow statement (budget) in itself tells a “detailed story” of your financial wellbeing. A comprehensive budget will outline your existing priorities, but more importantly, it can highlight where you can re-direct funds within the budget to higher priorities. This process includes an extensive dialogue with your financial advisor to clarify what your goals are and how can they be both measured and reached in a timely fashion. The budget helps clarify what you can afford and not afford! It allows all parties to ensure a common goal is being pursued. Secondly, the plan needs to be monitored on a monthly and later a quarterly basis once good habits on spending and savings have been established. Monitoring and accountability are key to a successful plan. The primary goal is to establish a “start” with the “end” in sight. The core of any financial plan is the cashflow/budget. It’s also important to look at a client’s financial data relating to their lending capacity, adequacy with savings, investments, insurance, etc. to determine a client’s financial strengths and more importantly their shortfalls. As with the latter, what needs to improve and what level of priority. The following are some key financial numbers that lenders and/or financial advisors will likely focus on:

Debt Servicing
Gross Debt Servicing Ratio (GDSR). Simply it’s your housing (rent or mortgage & property taxes) divided by the combined gross family income.

Only income recognized by CRA (bank requirement)
Can not exceed 30%

Total Debt Servicing Ratio (TDSR). Total housing plus all debt payments (estimate a 3% monthly payment on all “credit limit” on all charge cards, line of credits, overdrafts, etc.)

- Can not exceed 40%

Credit Score:

Two major Credit Bureaus in Canada (plus several secondary credit bureau scoring agencies:

Equifax ~ website: www.consumer.equifax.ca

TransUnion ~ website: www.transunion.ca

A cost of approx. $30, they will provide any overview of all of your credit information and your credit score.

Typically, a good credit score is above 680, with some financial institutions seeking higher scores of 700 or better for their preferred interest rates & services.
Higher the score the better.
You will qualify for less credit investigation, better interest rates, etc.

Net Worth: Value of all Assets less all Liabilities:
Creditors assessing the level of risk, availability of security, types of assets, type of evaluations on assets, etc.

Debt Profile:
List of all debts, balances, limits, interest rates, minimum payment required, etc.
Review terms and conditions.
Note: It’s very important to consider the total cost of borrowing on any lending contract. The terms and conditions will outline the interest rate, method of interest calculation, term, amortization, etc.
Most important is the “total cost of borrowing”. This will include the principal, accrued interest and any additional fees or charges. Further, depending on the purchase, it could include sales tax, etc.
Ensure you are fully aware of all of the total cost and the amount of time to repay debt (term) and if any renewals.
Read all of the fine print. In particular any Charge Card with high interest rates, etc.

In addition, a financial plan should assess the following financial products and services. A quick overview would include the basic question starting with adequate coverages for:

Life Insurance (in event of untimely death)

Disability Insurance (protecting your ability to earn an income)

(Enduring) Power of Attorney (ability to complete financial transactions for partner, spouse ~ if incapacitated)

Guardianship for Children (in event of catastrophic accident)

Will (Kit, Notary, Lawyer), etc.

The bottom line, it is very important to discuss your financial affairs with a qualified financial professional who will listen and provide an honest financial assessment, provide direction and create a financial plan that addresses Cashflow (Affordability), Debt Servicing Capacity (Qualifying) and existing Financial Products and Services (Safety and Security) and provide guidance on matching your priorities, objectives and goals with a realistic budget (monitored monthly). VL Financial Solutions is a business that focuses on creating a financial assessment for our clients and establishing a clear overview of their financial wellness. Through a collaborative process, we establish their financial goals. Our mission is to provide good, reliable advice only. We do not sell any financial products, we have ensured there is no conflict of interest, only advice that is in the best interests of the client. VL Financial Solutions Hendrik (Rick) van Lent AFCC, CPAC, RQIC www.vlfinancialsolutions.com Hendrik@vlfinancialsolutions.com

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Importance of a Financial Plan