What is financial planning anyway?

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Piggy bankEverywhere one turns these days, there is someone or something offering financial planning.  The problem for the consumer is how to differentiate between someone dressing up a product sale as a financial plan versus doing proper financial planning.

In my view, financial planning involves a holistic approach to everything that has to do with the money of individuals.  I believe that there are five primary areas that need to be spoken about and addressed in a proper plan.  They are: (a) Cash Flow Management; (b) Insurance; (c) Tax Planning; (d) Investment Planning; and (e) Estate Planning.  If one area is left out, then the plan is a precarious one.

Let’s take a brief look at the five areas.  The first area is Cash Flow Management which is the area that an advisor should investigate first in order to determine if you have a positive monthly cash flow.  It is also the area that determines if you are aware of how you spend money.  This area should investigate how you go about setting aside money for emergencies, retirement etc.  From there, your advisor can look at how you’re banking, is your mortgage properly arranged, etc.


Once an advisor learns what your cash flow looks like, then you can progress to the second area – namely the protection of the cash flow against emergencies and catastrophes.  This area is the dreaded insurance area and is integral to any financial plan.  It does not necessitate you purchasing insurance but it does mean that you should learn what your potential exposure is to issues of life and how best to accommodate them if not through insurance.  Many people have their homes insured and their cars insured because they ‘have’ to.  Unfortunately not as many have properly protected themselves.  Insurance is not simply a life insurance plan that pays out when you are dead, but also insurance for everything from protection of your TV to protection of your income.  In many instances, insurance is the most cost effective way of protection against loss, independent of whether it is loss of life, loss of ability to earn an income, loss of financial choice or loss of a place to plug your cable into.

Then we jump along to the area of Tax Planning.  Very few people spend more than a quick second discussing tax planning with prospective clients.  I am not sure why, but many people I have met, who have a pension plan, are still maximizing their RRSPs.  What is baffling is that they have a spouse but no spousal RRSP or have never put a penny into a TFSA.  That is one of the simplest ideas to tax planning – making sure that there is income splitting being done in a familial situation and minimizing the amount of tax a person pays.  All I can say is tsk tsk to the financial people who ignore offering some simple tax planning advice that can benefit you immensely by saving you many thousands of dollars.  It also behooves any financial person to know a few accountants that they can refer you to for any in-depth planning.  I find it incredibly unfortunate that so many advisors do not even speak to the idea of tax planning other than you get to deduct your RRSP contribution from your income.

Speaking of RRSP contributions, the next area is that of Investment Planning.  In this area, you find an inordinate number of ‘salespeople’ referring to themselves as financial planners only to put money into a mutual fund.  Whether you use a fee only advisor, a bank rep or a commissioned sales person, or any permutation of these, dealing with your investments only does not equal financial planning.  Is that emphatic enough?  Investments may be a large part of your ability to reach your financial dreams and goals you have set, but there is far more to a proper plan.  When it comes to investment planning, too often advisors/salespeople will focus their attention on one side of the balance sheet only – namely the asset side – at the expense of the other side and your best interest.  When you figure into the equation the impact of taxation; It is not always sensible to put your ‘safe’ money into a daily interest plan that advertises a higher than average interest rate.  Rather, it is wiser to apply the same money against an outstanding line of credit or other debt which you can then re-borrow against at a later time if you need to.  In the meantime, however, the rate of return on the money in question is far greater.  So make sure your advisor speak to both sides of the balance sheet as there are many clients who are ‘mortgage free’ but have a line of credit that is ‘mortgage size’.


Once you have looked at the previous four areas, you must also look at the issues I refer to as Estate Planning.  This can be as simple as ensuring that you have a Will and Powers of Attorney in place so that in the event that you cannot speak for yourself, a legal document appoints the person(s) that can.  If one were to add up all of the money that the various levels of government, the courts and lawyers make each year because someone has failed to implement the simplest of legal documents, then that ‘one’ person could live out their lives very comfortably.

Unfortunately the financial industry in Canada today allows for advisors, of all walks of life, to use the title financial advisor or financial planner without there being any consistency from one to the next.  So make sure you get a professional who looks at all areas of your financial well-being.

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