I am sure that none of you reading this would think that building a house by beginning with the roof would be a great idea. In fact it would be impossible. The roof would need support. Let’s use the analogy of a house to see the elements of a financial plan and their priorities.
Every house starts with a foundation. The foundation of financial success is as follows:
A. Will, Income Protection, Emergency Fund
A will. Do you want a court to allocate your assets to your heirs? At the least do your assets have named beneficiaries? Your estate is not a named beneficiary. If you are married are your assets in joint names?
Who need to protect their income? Any breadwinner who has the two Ds, dependents or debts. Do you have financial responsibilities that will carry on after you pass away? It is becoming more common for people who thought they were in good health to discover they have serious medical conditions. Again that is true risk; to assume that tomorrow next week, next month or next year wil be the same as today.In that same line of thought a group coverage should only be considered as a supplement. How many people will have the same job five years from now as today? A person has control over private vs. group coverage. Having control over various aspects of persoanal finances greatly increases the opportunity for financial independence.
An emergency fund. Savings in case of the unexpected. The unexpected is usually a costly event. An emergency fund should not be a line of credit!! Contrary to popular opinion a line of credit as an emergency fund is real risk, far more risky that investing in equities. Income protection.
The foundation of the financial house ensures that you can answer YES to the question: Are you ready for anything? Once the foundation has been established, the next level of priority is:
B. Paying off your Debts, Invseting
Pay off debts which includes your mortgage. A good strategy for this room of the house is to take on a minimal amount of fixed debt. A person’s ability to manage this aspect of their finances will impact their whole financial future.
Investing for the future is also a priority, whether it is an RRSP, RESP, or other. By investing in an RRSP, a person is ensuring their financial future, at the same time as reducing their tax burden today. If you get a refund from your tax return, that money should be used for any of the purposes mentioned already. (In other words do some financial housekeeping or home renovations!)
A small note. Do you know people who have their employer take more tax off that necessary each paycheque? Come tax time they won’t have a tax bill. They need to ask themselves this question: Who would I rather pay myself or the government? That same money could be going into their RRSP thus building equity in their future.
C. Other Goals and Dreams.
The last part of the financial home is the roof, or other goals and dreams. We might find it amusing to think of a house being built roof first. Yet how many people sacrifice future financial independence for today’s pleasure? In a future issue we will see how time can be an ally not an enemy and that ensuring financial independence does not mean a person can’t have fun today.
This newsletter is for the privileged use of Cindy Nagassar’s clients. Any reproduction is permitted only with the permission of the author or authors. Copyright January 2003.