Island Savings

6 Questions A Financial Plan Will Help You Answer

According to research by the Financial Planning Standards Council (FPSC), 42% of Canadians rank finances as the greatest source of stress in their lives. That's as much as personal health and work combined.

For a lot of us, it’s not just a stat, it’s our reality. Financial questions keep us up at night: will the rent cheque clear this month? Will we ever be able to afford a down payment? Are my student loan payments keeping me from hitting the financial milestones I should be hitting? Do I have enough put away for retirement?

Yes, the questions we have about our finances seem never-ending. But it doesn’t have to be that way.

The first step is to create a financial plan.

A financial plan will give you clarity and peace of mind. Here are some common questions our members come to us with and how a financial plan can make all the difference.

How do I create a budget that fits my life circumstances?

Creating a budget that works for you is at the heart of your financial plan and learning to manage it is the cornerstone to thriving financially.

Budgeting is not about cutting out Starbucks. It’s about getting clarity on where your money is going on a regular basis. That way, if you’re in a crisis or trying to reach the next big milestone, you’re able to use your budget to determine the best course of action.

Once you’ve laid the foundation with budgeting, you’ll also better understand your patterns and behaviours so you can start taking control of them. You can choose to go to Starbucks because you know you’ve budgeted for it.

A lot of our members want to know how much they should be spending in each category. Because your budget is geared towards helping you overcome your obstacles to reach your financial goals, it really is going to be tailored to you. However there are various rules of thumb that can provide a basis to get started, like the 50-30-20 rule:

  • 50% of your after-tax income covers your needs (groceries, housing, bills, loans, etc.)
  • 30% covers your wants (shopping, hobbies, dining out, etc.)
  • 20% is what you save

There are a lot of tools that can help you create a budget and help you track your spending. These are some of the most popular ones:

If you feel like building a budget is a little daunting, don’t worry, you’re not alone. If this is you, we encourage you to meet with our financial planner. They’re here to share their expertise and provide you with resources so that you can reach your financial goals. And best of all, meeting with an advisor is completely free.

Here’s a quick way to make your own budget

The Takeaway: Creating a budget is an important step in financial success. It gives you the ability to choose where your money is going, rather than let your money choose where you are going.

How do I make sure I am financially secure in retirement?

Based on survey results from Franklin Templeton Investments, 80% of Canadians are concerned about retirement expenses.

Data from Franklin Templeton Investment’s Retirement Income Strategies and Expectations (RISE) survey, conducted January 2018

  • Will Canada’s Pension Plan (CPP) and Old Age Security (OAS) be a dependable source of income?
  • How do you save for retirement when prices are rising faster than your income?
  • How do you prepare for additional or emergency expenses?

These are some of the most common questions Canadians face. Whether you’re twenty years or five years away from retiring, the answers hinge on what you want your retirement to look like.

Can you depend on CPP and OAS?

If you’re happy to live a minimalist lifestyle in a town where the cost of living is minimal, you might be able to live mostly on CPP and OAS if you qualify for the maximum amount, which right now is $1,100 a month for CPP and $600 for OAS.

But if you want to travel, or continue to live in your family home, then you’ll want to make sure you have a retirement plan in place that takes those wishes into account.

Having a good idea of what you want to do in your retirement years is the key to crafting a plan that provides you with the income you’ll need to enjoy your retirement.

Prepare for post-retirement emergencies

Before you retire, you'll want to have an emergency fund in case unexpected expenses come up. Ideally, you don’t want to have to make additional withdrawals from your RRIF (Registered Retirement Income Fund) if you need a new roof on your house, new brakes on your car or to repair a burst water pipe.

The best retirement plans are the ones where you have taken into account surprise expenses or large ticket expenses.

One of the ways you can do this is by securing a line of credit before you retire. Whatever your strategy ends up being, it’s a good idea to have a couple of backup plans in place.

Pay yourself first

The best way to make sure that you have money saved for retirement is to pay yourself first, rather than save whatever is left over after your bills and expenses come out. Set up an automatic savings plan that runs in the background so you don’t have to do it manually.

After a few months, you won’t even miss that money anymore and you might even be in a position to increase your savings.

If you feel financially stretched, start with $25 biweekly. Every two weeks, $25 goes automatically into your RRSP or TFSA. When it’s an amount you’re not missing, bump it up to $50. That way, slowly and surely you are paving the road towards a financially secure retirement. It starts early and it starts small.

The Takeaway: It’s never too early to start planning for your retirement and it’s never too late to plan what it’s going to look like.

Not sure about the differences between an RRSP and a TFSA?

Do I prioritize paying off my debt or start saving early?

This is a question that comes up often, especially with university graduates who are fresh off the Commencement stage and laden with student debt. What’s the best strategy? Do you prioritize shedding that debt as fast as possible to the detriment of other goals you might have (saving for a trip, a car, a house, retirement)? Or do you split your goals and start saving early?

There are advantages to getting your savings started as soon as possible: the most important factor to growing your savings is time in market. There is one resource that you can’t get more of and that is time so it’s worth taking advantage of it while you still have it.

With our example above where you’re contributing just $25 biweekly, if you do that over 40 years with an annual rate of return of 5%, you’re going to end up with nearly $20,000 saved.

You bump that up to $50 biweekly and you’ve more than doubled your savings.

A TFSA calculator like the one above is a useful tool to see how your contributions can grow long-term.

Say you’re just starting off and you make $30,000 after tax ($2,500 a month) and you follow the 50-30-20 rule we talked about in budgeting. That’s $500 that you’re saving every month (in a tax-free registered account). Half of that goes towards your retirement in your RRSP and half of it in a TFSA towards that trip to Europe you want to make. With 40 years in the market at an annual interest rate of 5%, you’ll end up with nearly $400,000.

By the way, if you’re using your Tax-Free Savings Account like a regular ol’ savings account, check out our complete guide to your TFSA.

In the end, no one regrets saving early.

When it comes to your debt, not all debt is the same. A mortgage, a student loan and credit card debt are all very different. To determine how you prioritize paying off your debt, look at your interest rate.

Anything below 6% is good. A car loan, a student loan and a mortgage will all tend to have low interest rates. If you have the opportunity to pay them off faster, it’s not a bad idea, but you don’t have to do it at the expense of your savings.

Most consumer credit cards come with an interest rate of 19.90%. That is something that you want to prioritize paying off in full.

There are low-rate credit cards available, but even an interest rate of 9.90% is comparatively high, so it's worth prioritizing it before you get your savings started.

Of course, if you have other consumer debt (payday loans) with a higher interest rate, then make those the priority.

The Takeaway: Always put a little savings aside, unless it comes to credit card debt. In that case, pay it off as soon as you can.

How do I save for a down payment?

If you’re a first-time homebuyer, you’re probably looking at the housing market pulling your hair out by the tuft.

A lot of young people are crunching the numbers then packing up to leave the province. But not everybody wants to do that. So other than up and leaving to the much less green pastures of Alberta, how do you save for that first down payment?

Essentially there are two main ways you can go about it.

The first is you use your RRSP to save for your retirement and separately build up your down payment using your TFSA. This is a great option if you want to make sure that saving for a home doesn’t disrupt your retirement savings.

The second option is to save for your down payment by saving for your retirement. You can do this with the Home Buyers’ Plan (HBP). This federal program allows you to withdraw $25,000 ($50,000 per couple) from your RRSP tax-free for your down payment.

The advantages here are you don’t have to be saving in different buckets for different purposes. You also get a tax deduction for the RRSP contributions you make, which can be deposited right back into your RRSP.

Finally it is a loan, but a loan that you’re giving yourself. You don’t have to pay any interest on it, as long as you pay it back within 15 years. How do you pay it back? By making regular contributions to your RRSP, which you are probably doing anyways.

To use the HBP, you'll need to:

  • be a first-time homebuyer
  • be a Canadian resident
  • have had the money saved in your RRSP for at least 90 days
  • withdraw the money within 30 days of owning your home
  • have a written agreement to buy or build a home (eg. an offer)
  • intend to use your home as your primary residence (not as rental income)

The Takeaway: Your RRSP is a gift from the government that helps you not only save for retirement but for a down payment on your first home, as well. Start saving early and you’ll be able to use your RRSP for your down payment.

Find out more about the secrets that your RRSP holds.

How do I care for my kids and parents while saving for my own future?

If you’re caught between having to care for your children and your parents, those are priorities that are competing not just for your time and attention, but your money as well. There are several things that you can do if you’re in that situation. The first is to sit down and figure out what your financial goals are, aside from your sense of paternal or filial duty.

The second thing you can do is have an honest, open conversation with all the parties involved where you are able to set parameters together. This can be an opportunity for you to get your children and your parents to think about their goals and their priorities. Where do they want to be and how do you get there together?

When it comes to family, we often feel guilty if we can’t provide for everyone’s needs. If your financial wellbeing is under duress, it’s important to set up some ground rules because you are a unit and what affects you affects everyone in the household.

The third thing you can do is bring in your family members to meet with your financial advisor. If there’s someone who’s helping or hindering your finances, bring them with you. It’s helpful to have a third party involved in the discussion and providing resources so everyone can thrive.

The Takeaway: You are a family unit and you need a financial plan that reflects that unit. Involving all concerned parties is essential to achieving financial wellness, not just for you individually, but for everyone.

How do I invest in a way that matches my values?

These days, we are increasingly concerned about the footprint we leave. We're conscious of the effect our actions have on the environment. We’re much more aware about social inequities that we perpetuate consciously or unconsciously. We’re informed and we care about the way companies are managed.

A lot of us are actively changing our lifestyles to make a difference and one way that we can do that is through responsible investing.

Responsible investing is also known as socially responsible investing (SRI), ethical investing, sustainable investing, green investing and other such similar terms. All of these are broad umbrella terms that describe various ways to invest in socially conscious ways. Some are passive approaches (like negative screening) while others are quite proactive (such as community investing, impact investing and advocacy investing).

SRI funds are no less profitable than non-SRI funds, they’re not more difficult or expensive. All you have to do to get started is determine what your goals are, what your values are and how you’d like to see those support each other. Then talk to your financial advisor.

The Takeaway: You can invest in a way that reflects your values with responsible investing. Not only are you able to keep companies out of your portfolio, but you create pressure on companies to reach benchmarks and qualify for responsible investing.

Helping you sleep better at night

There are a lot of things in the world that can keep us up at night. A lot of them we have no control over, but some we do.

Regardless of age, income or lifestyle, finances are one of the top concerns for Canadians. We’re still worried about being able to pay our bills, afford retirement, manage our debt, buy a home, providing for our loved ones and making a positive impact on the world.

The thing is: all of these concerns are connected. They’re tied together and at the core is a lack of clarity. A financial plan gives you insight on your finances and a strategy to get you where you want to go, while helping you sleep better at night.

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We encourage you to visit an investment advisor at any of our branches for more advice on how to reach your goals!