What Is Financial Planning?

Financial planning is the act of defining your values, needs, and goals and designing a process to help you achieve them. A financial plan is essentially a roadmap for your money and your life.

The goal of financial planning is to reduce your stress about money by optimizing for the things you can control and minimizing the risk of the things you can’t. A financial plan makes sure that your money is working for you and your family for a long time to come. It’s especially useful if you have a complex tax or estate situation or if you have a high net worth.

Since the title “financial planner” is currently unregulated in every province outside of Quebec, it can be hard to know who to trust or what financial planning really is. Many investment advisors claim to do financial planning, but their service isn’t comprehensive enough. An investment proposal is not a financial plan.

FP Canada sets the financial planning standards in Canada and regulates the Certified Financial Planner (CFP) designation. According to this national professional body, a financial plan should include investment planning, insurance and risk management, financial management, retirement planning, tax planning, and estate planning and legal aspects.

Of these six components, you’re likely most familiar with investment planning and insurance. These are the services we’re frequently sold and see the most advertising for. However, effective financial planning should always focus on process over product. Products should only be introduced after your values, needs, and goals have been made clear. In fact, working with a planner and having a financial plan often helps you avoid overpaying for products and services.

Here are the six aspects of financial planning:

Investment Planning

The goal of investing is to preserve and grow your wealth. Investment planning helps you set specific, realistic goals and figure out how much you need to be saving to achieve them. Together with your advisor, you’ll establish an investment strategy that works for your risk tolerance, the length of time you’ll be investing for, and any values-based preferences you have (socially responsible investing, a focus on private equity, etc.). This will be formalized in your investment policy statement (IPS) which will serve as your investing roadmap going forward.

A good investment plan and investment advisor will help you avoid emotional investing. Investors who are unhappy with their returns often didn’t do poorly because of poor stock performance (fluctuations are always to be expected) but because they buy and sell too frequently or move their money around too much. This is often a result of not having a plan to guide you through turbulent times.

Having a plan and sticking to it is the best thing you can do to build wealth. Remember, investing is about time in the market not timing the market.

Insurance and Risk Management

If investment planning is about growing your wealth, insurance is about protecting it. Insurance has gotten a bad rap, but its fundamental purpose is to protect you and your family when things go wrong.

Having insurance means that when the unexpected happens—you get sick, die too soon, live too long, or need to take time off work to care for family—what you’ve worked so hard to build doesn’t go anywhere. If you get sick and need to take time off work, you shouldn’t have to drain your emergency fund or retirement accounts to do that. The beauty of insurance is that when the unexpected happens someone shows up with a cheque.

A good insurance advisor will work to understand your specific situation and will shop around to find the most cost and tax-efficient solution that meets your needs.

Insurance is simply a way of protecting your downside. When you’re dealing with or recovering from a crisis, the last thing you want to be worrying about is if you’ll be able to pay the bills next month. Insurance money can give you the time and ability to focus on what matters—you and your family’s wellbeing.

Financial Management

Financial management is all about managing your day-to-day needs. It’s about understanding what’s coming in and going out each month (your cash flow) and knowing what you have and what you owe at any given time (your net worth).

Cash flow planning helps you figure out much you need to set aside to reach your goals, how much you can afford to spend, and how best to manage your family’s day-to-day finances. A planner that specializes in cash flow planning will look for opportunities to lower your borrowing costs and find the right credit products to meet your short and medium-term needs (personal or home equity lines of credit, etc.).

Retirement Planning

Retirement planning is how you plan for and protect your cash flow into the future. It helps you figure out how much you need to save, when you can retire, and how much you can afford to spend in retirement.

Retirement planning starts by asking yourself how you imagine your retirement—what would you like to do, where would you like to live, and what kind of lifestyle do you want to have? This will dictate how much you need to save and when you can afford to retire.

A financial planner will look at all expected future income (pensions, investments, etc.), expenses, debt, and any other financial obligations or goals you may have to map out your cash flow in retirement. They’ll help you figure out the most tax-efficient way to draw down your investments in retirement.

A good retirement plan will leave you feeling confident that your money is going to outlast you.

Tax Planning

Taxes aren’t something you should only be thinking about in April. Tax planning goes far beyond preparing last year’s tax return and knowing what tax credits you’re eligible for, it’s a proactive way of minimizing the tax you’ll pay over your lifetime.

A financial planner will help you strategically map out your investments, income, and charitable giving to minimize next year’s tax bill, the tax you’ll pay over your lifetime, and the tax you’ll pay on your death. Strategic philanthropy, trusts, and insurance solutions can all be a part of tax planning.

Tax planning is especially important if you have a business because it will help you figure out the most efficient way to pay yourself, invest in your business, protect your business, and to sell it (or pass it on to the next generation).

Estate Planning and Legal Aspects

Estate planning is figuring out who gets what and how those assets will be transferred in the most tax-efficient way.

Your will outlines exactly what should happen when you die, and estate planning is the act of designing that roadmap. If you have a complex financial situation (a blended family, a business, multiple properties, etc.), you’ll want more than your lawyer to help you figure out your estate plan. A financial planner will have a comprehensive view of your financial situation, goals, and values and be able to work with your lawyer to help you make the most optimal decisions.

Estate planning is a critical part of generational wealth transfer and ensuring that the people and causes you care about are taken care of when you’re gone. It’s important to update your will and beneficiaries after any major life changes (marriage, divorce, inheritance, the sale of your business, etc.).

In closing, financial planning isn’t a one-time event. Your plan will evolve as you do, and it should be revisited each year to see if your financial situation or goals have changed.

If you have any questions or would like help creating your own financial plan, please contact us.