Finance Management: Why Canadians Need Personal Financial Planning? 

Managing personal finance is becoming some kind of a vital skill for people all over the world. For Canadians in particular. The recent surveys show that only half of the population of the country is secure about how they are going to pay bills next month. 

Every 1 in 6 Canadians admits that the monthly spendings are exceeding his incomes, while every 1 in 4 or 27% says that has to borrow money for buying food and covering daily expenses – and that is almost a third of the population of the country. If you do feel that it becomes more and more difficult for you to make ends meet, this is the right time to learn more about financial planning and managing your budget properly.

What is a personal financial plan and why is it important? 

If you want to manage your finances well you need an explicit and comprehensive financial picture of your life, which will include: 

  • details about your incomes and cash flows
  • your savings
  • your wealth estimation 
  • your spendings 
  • debts including mortgages and credit cards 
  • investments 
  • insurances  
  • your long and short term goals

After you have a clear picture of your financial situation you can start financial planning. It is an ongoing process of putting order into your financial life where the cash flows can be redirected in the right way towards the achievement of your financial goals. 

Setting your list of personal financial goals

Want a car? A house? Or save up some money for a vacation? The goals will be exactly the main points of your plan. At the end of the day all your spendings and savings, as well as other financial activities, should be subordinated to the achievement of your financial aims. All of the above no matter how much time it takes to reach it can be your strategic financial goals for the future and may be included in your financial plan. 

Usually, you have to spend some time accumulating the necessary sum for such high-cost purchases. Strategic planning of your financial life and activity for years ahead can guarantee that mainly your cash flows will be directed towards reaching your financial aims. 

Plan your budget 

Before you start to move towards achieving your goals make a clear idea of what your sources of income are and develop a budget plan. Divide all your income into three parts in the proportion of 50-30-20. The biggest part – i.e. 50% of your budget is better to be spent on your needs like paying for housing, utilities, transport, and others. The 30% can be directed to your wishes like dining out, clothing, entertainment, and the last part of 20% – towards savings. Such a division of your budget will let you put control on your spendings and make sure that you are not buying a morning coffee from the money you are suggested to pay as monthly rent for your apartment. 

Build up an emergency fund 

For anyone who starts conscious financial planning, it is highly recommended to build up an emergency fund. You can start with a small sum and increase it depending on your life conditions. The last ones will have a direct link to the amount of the fund you need in case of necessity. And vice versa – your lifestyle conditions and common personal wealth balance will dictate the necessary amount of your emergency fund. 

For example, if you do not own a car there is no need to make extra savings for an urgent repair. However, if you have it and especially if your work highly depends on your transport mobility you should critically estimate the condition of your vehicle and ensure a good sum for its repair. Otherwise, you can find yourself in a situation where a broken car could lead to more disruptions in your financial activity. 

You can start with a small or minimum sum like 500$ or 1000$ and increase it in the future according to the changes in your life. As mentioned, the conditions of your lifestyle are crucially important at this point. Some financial advisers recommend keeping as an emergency fund up to three of your monthly salaries in case of job loss. However, it also depends on the kind of job you have and how long upon your personal estimations the search for a new one can take. Usually, the more highly skilled your job is, the more time you have to foresee finding another place of work. 

Tackle the high-interest debts 

If you have any debts paying them down accurately should be one of the first points of building wealthy budget management. However, some of the debts can require imminent control and keeping a close eye on how accurately you are paying them down. It’s about high-interest debts. Student loans, car loans, mortgages, or credit cards typically have high-interest rates. Though there are some credit cards with low-interest rates, in Canada it is mainly around 20% for different types of financial operations.

At the end of the billing period, you will receive your credit card statement with the sum of the purchases you’ve made with your credit card during the past month. Then you will have a grace period of three weeks to pay it down. If you are not able to cover the sum in full when the grace period comes to the end you will have to pay interest rates. If you miss the interest payments twice during a certain period of time (mainly a year) most credit cards will apply a penalty fee, as a result, your interest rates will increase and your expenses will become even bigger. 

The main advice to manage your credit card debt correctly would be to always pay it on time and in full. However, we can all find ourselves in a difficult situation where we have to come across some extra spendings. In this case, try to make at least the minimum required payment each month. This amount is required by your bank you will find in your credit card statement. Paying down the minimum sum will be also considered as fulfilling the conditions of the bank and will help you not to spoil your credit history and avoid increased interest rates. 

Can you foresee your risks? 

Good insurance will significantly alleviate your financial life and will give you some sort of protection against extra spendings. If you know that you have a serious or chronic illness that can possibly require costly treatment, medical insurance will give you an option to decrease or eliminate in full the risk of unforeseen spendings for your health. The same applies to other types of insurance which will help you save on other urgent needs and feel financially secure in the case when, for example, you can not meet your monthly mortgage payments. 

Think about your retirement in advance 

Retirement is another key point of your strategic financial planning. It is time when you will be significantly cut in the incomes and will need to use the saved up amounts for your daily living spendings. Accumulating some sum by this time would mean that you will feel much more secure in terms of your financial well-being. The key point here is to estimate how much money you need when you retire. Some analytics suggest that it is approximately 60%-70% of your pre-retirement income. However it is not exactly the correct figure and in reality, it requires a much more complicated calculation which is really hard to make in advance. 

Here are some main positions you have to take in consideration when trying to calculate your retirement needs 

  • the age when you retire 
  • your lifestyle habits
  • what is the amount of your pension
  • if you have another income sources

Along with some other factors that will have a direct impact on how much money you would have in your wallet. 

In Canada, you have two types of government retirement benefits. Canada Pension Plan (or CPP) is the part we are paying during our working years and the Old Age Security (commonly known as OAS) – the monthly pension you can get once you are at the age of 65 and older. The maximum OAS amount is $642.25 cents and depends on how long you have been living in Canada or some other specific countries after the age of 18. 

Regarding the CPP you will see the deduction to CPP each time you receive a paycheck from your employer. When you retire the CPP will provide you with monthly taxable benefits till the rest of your life if you are of at least 60 years old and have made at least one valuable contribution to CPP. The amount of how much you will get can vary and will depend on how much your income was from the age between 18 and your retirement and whether you have made proper CPP contributions during those years. 

The maximum CPP is a bit higher than $1000. Simple calculations will give you an idea of how sharply it can contrast with your monthly income before retirement. 

There is a really significant pitfall in your retirement plan which will have an impact on your financial strategy years before you decide to stop working. It’s the age of your retirement. And you have to plan it in advance. 

As you can start to receive your retirement benefits from the age of 60 and till the age of 70 there is a direct link to the amount of CPP you will actually have and it is a pretty big difference in payments. 

The main rule here is the later you start the more money you will receive. However, in order to make the right decision, you have to take into account your personal living expectations. It can be hard to do, but these expectations will base your estimations regarding the best retirement age for you and as a consequence the amount of CPP you will be able to obtain.  

Unfortunately, if you make simple calculations of how big your retirement benefits are supposed to be and the amount of your monthly income you can find it far lower than your pre-retirement income. And taking into consideration inflation, you may need a way the bigger sum of money you actually are to receive.  Here is when you may think about some extra sources of income and investing. 

Invest in your future as early as you can

Retirement usually is not on the top of our minds. However, the principle here is to start to save up money for it as early as you can. The banks of Canada are offering you an option of opening savings accounts where you can deposit your money. For keeping your money in the bank you are receiving interest payments. With the compound interest, you will have your money growing exponentially. A compound interest rate means that you are earning interest both on your original savings and the accumulated interest income. And here is where there is a direct connection with the time you start to save up your money. The earlier you begin the bigger amount you will be able to accumulate by the time of your retirement. 

Track your expenses

This can be the most difficult part of controlling your budget, but it’s worth it. Calculate how much you are spending on your daily routine. Are all of those spendings planned? 

  • Impulse buying sometimes costs a lot. Make a habit of controlling all your spendings. Soon you will find out that there are fixed ones and variables. Fixed spendings will most likely not change from month to month. With variable ones you can start working first. 
  • Start grouping your expenses. Some credit cards do it automatically. That will help you to understand where mainly your money is going.
  • Check your monthly subscriptions. Do you really need all of them? 

Tracking your money sometimes is easier to do using expense-tracking apps like Mint and You Need a Budget. Those apps you need to pay for but sometimes they are worth the cost. Or consider as an option a free budget planner worksheets, which you can find online. 

Time and patience 

Probably the most difficult part of all financial planning is the time and the level of self-control it requires. The only way to start feeling better when you are strictly following your strategic planning is to focus on its benefits. The main advantage of it is probably the feeling that your money is not slipping through your fingers anymore. You will be tracking even the smallest spendings you have and step by step will be reducing your impulse buyings. 

Try to set a comfortable regime for yourself with your daily spendings. Probably you still have a need for impulse buying time up to time? Fix the sum for it. Make them less regular. And always keep in mind your long-term goals. 

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