Get out of debt with the basic building blocks of financial planning
As a financial planner, I’m often asked, “What is the secret to financial success?”
Like the dieter looking for a magic pill, or the gambler looking for the next big payout; people are looking for the hot stock tip, a huge bonus, or perhaps a winning lottery ticket.
We are on the treadmill of life, making ends meet, and looking for the secret to attaining financial freedom.
While there are many complex, investment products and strategies to formulate an answer to this question, in my opinion, the best place to start is at the beginning with one of the basic building blocks of financial planning.
Never live to your means. It’s where you start. It’s not sexy. It does not make for riveting investment discussions. Nor is it a secret. If you need to spend all of your income to meet commitments, you are putting yourself at a greater financial risk. What’s more, simply getting out of debt these days is not enough.
Canadian Mortgage debt recently topped the $1-trillion threshold for the first time according to the Canadian Association of Mortgage Professionals. This represents mortgage debt alone. According to Patricia Lovett-Reid, CFP, Vice President of TD Waterhouse Canada Inc. “Canadians now owe $1.45 for every dollar of personal disposable income we’re earning.” As Canadians, it seems we are becoming ever more comfortable carrying high personal debt loads.
Not that debt itself is an evil thing. In many ways debt can work very effectively in a business or financial plan when approached properly. It is the amount and the type of debt that is most likely to get the average Canadian off track.
Are we too eager to buy the big house with a huge mortgage? Are we in such immediate need of big screen TV’s, and granite countertops? It’s become too easy to max our credit cards with retail purchases we have long ago forgotten. Have we forgotten the old fashioned wisdom to save first, buy second?
Retail purchases on credit cards not paid off immediately are one of the biggest culprits. The price paid for the item can nearly double after only a few years of minimum payments. Not such a great deal anymore.
Canadians need a wake up call. With fewer employers able to support large pension plans, a strained economy for employment, and Canada Pension Plan feeling the pressure of the baby boomers on the horizon, Canadians are in need of improving our money management skills and enhancing our financial literacy.
To answer this call, the Financial Planning Standards Council spearheads Financial Planning Week in Canada, falling in October, with financial literacy in mind. Similarly, the Canadian Institute of Financial Planners has launched an investment literacy series to help further educate Canadians.
Improving money management is attainable and within the reach for Canadians. Many simply haven’t made an active decision to get started. It’s something they’ve been meaning to do.
If this sounds like you, start now. Figure out how you can stop spending 100% of your income and start saving some money on a regular basis for your future and emergencies. This is the first step to moving your financial planning in the right direction.
If you are there already, I congratulate you. You’ve done the first thing right.
The next part becomes much more interesting, where investment strategies begin. Speak to your financial planner for help, and if you don’t have one, find one. Time spent with your financial planner is a valuable investment.
Column appeared in Elgin This Month December 2010
Stephanie Farrow, B.A., CFP., Stephanie has over 20 years experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning, and Certified Financial Planner designation. Stephanie has been writing a financial planning column for the local business magazine Elgin This Month since 2010 and hosts our Farrow Financial Blog and Twitter @farrowfinancial. Stephanie and her husband Ken Farrow own Farrow Financial Services Inc., are busy raising three young children and actively involved in the community. Our Financial Services Team.