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An earlier retirement? Make your own financial plan right here.
1. Talk to your spouse
Most couples never talk to each other about their financial goals. If you’re in a relationship, before you roll up your sleeves and dig into the numbers, talk to your spouse about what you want to accomplish. “Have a brief conversation about goals, values, and what kind of lifestyle you want,” says Karin Mizgala, chief executive officer of Money Coaches Canada, a national network of fee-only financial experts based in Vancouver. “That’s key to a good start.”
Action step #1: Click
here to find 10 worksheets in the “MoneySense financial plan kit.” There is a PDF version of each worksheet that you can download and print out if you want to fill in the sheets with a pencil or pen. There is also a Microsoft Word version you can fill out on your computer. Print out “Worksheet 1-Prioritize your goals” for this step. You and your spouse should fill this sheet out separately, then compare the results when you’re done.
2. Figure out where you’re at Before you start worrying about where you want to go, you first have to figure out where you are now. In this step you’ll create a net worth statement, which is essentially an honest measure of your current wealth. You do this by tallying up the value of what you own (your assets) and what you owe (your liabilities). When you subtract your liabilities from your assets, you get a number that represents your net worth. Your net worth statement is an important tool that charts your financial progress over the years. For instance, if your net worth is going down, you’re eroding your wealth and making it harder to achieve your goals. If it’s increasing, you’re on your way to getting richer and achieving your financial goals.
Action step #2: Determine your net worth. Print out “Worksheet 2-Gather your documents.” It’s a checklist to help you pull together what you’ll need before you start, including bank statements, credit card statements, and life insurance polices. Once you have all your documents in front of you, you’re ready to fill out “Worksheet 3-Your net worth statement.” First list the values of all of your assets, including your home, your cars, your cash and investments. Then list your liabilities, including credit card debts, your mortgage and any other outstanding loans. Tally both your assets and your liabilities and transfer those amounts to the following section, your simplified net worth statement.
Finally, subtract your liabilities from your assets to discover your true net worth. This shorter net worth statement gives a clear snapshot of exactly where you stand today.
3. Track your spending The key to building a strong financial plan for the future is to understand how much you spend and save right now. This is called tracking your cash flow, and it can give you a sense of control and confidence that makes it easier to make financial changes in your life.
Personally, I’ve kept a small journal tracking my spending for years because it helps me modify my behaviour if my spending gets out of control. It’s not always easy, but it works.
“The part most people dread is taking a really close look at their expenses,” says Mizgala. “But don’t put it off. Successfully managing cash flow is your key to financial control. It will give you an awareness that has more long-term value than anything you can invest in, buy or sell.”
The point of the exercise is to find out whether you finish each year with a cash surplus or a cash deficit. This number will tell you a lot about your general financial shape. A surplus means you’re living within your means, while a deficit shows you’re spending more than you make. If you have a deficit, you will have to cut your expenses (or increase your income) to achieve any financial goals.
What do most people find after doing this exercise? “They’re shocked,” says Mizgala. “It’s a very revealing exercise, mainly because if you have a family with two spouses with debit and credit cards, it’s hard to really see the complete financial picture unless you write it down. This awareness allows you to set up a system for the household.”
Action step #3: Record your cash flow. Fill out “Worksheet 4-Your spending and savings.” It shows what money is coming in (wages, interest, government benefits) and what’s flowing out (rent, debt payments, utility bills). Fill in all your monthly expenses in column 1 and your annual expenses in column 2. (You can leave column 3, the estimate for your future spending in retirement for a later date.)
Tally up your expenses in both columns and subtract them from total net income on both a monthly and yearly basis. The result is your cash flow deficit or surplus.
A good way to approach this exercise is to start with your regular monthly after-tax income and subtract the bills that don’t change month to month, such as rent or mortgage payments. If you don’t know the exact numbers, put in averages for things like groceries, gas or children’s activities. Then add in expenses that only come up a few times a year, such as travel, car repairs and gym fees. Estimate a total for these and divide it by 12, and put that figure in the monthly column of your worksheet. You may not pay the bills in 12 monthly installments but imagine you are setting money aside each month so that you have the total amount when the bill comes due.
4. Adjust your Look closer. Are your expenses higher than your income? If so, you’re living beyond your means. You’ll need to adjust your expenses accordingly so you don’t go further into debt.
This step is not about punishing yourself or laying blame. If you’d rather eat out four times a week than buy a cottage in 10 years, that’s your choice. But you owe it to yourself to be honest about what you’re doing so you’re not wondering why you can’t reach your financial goals.
If you decide to cut back, there are some less painful ways of doing it. Consider renegotiating your mortgage to a lower rate or cutting out one major expense completely. A close friend of mine cut the $5,000 annual family vacation and substituted a couple of long weekends of camping instead. It saves his family $4,000 annually.
If you have a cash surplus, congratulations. You can start allocating money to meet your goals right away.
Action step #4: Compare your spending to your goals. Take a second look at “Worksheet 1-Prioritize your goals” and “Worksheet 4-Your spending and savings.” The idea here is to look at how well your current spending habits mesh with your goals. If you have a cash flow deficit you won’t be able to meet your goals, so you’ll have to see if you can free up cash by cutting back your spending in areas that are less important to you.
For instance, if you have a $5,000 a year deficit on Worksheet 4 and one of your goals is to go on a $4,000 family vacation to Britain in four years, you need to figure out a way to cut $6,000 a year from your spending. You could try using only one car and taking public transit to work. Such a cut could save you $6,000 a year in vehicle costs, allowing you to both balance your budget and reach your travel goal.
5. Set your life goals Financial goals don’t just happen. You make them happen. This step requires you to assess where you want to be five, 10 and 20 years from now and answer some big questions, such as where you want to live in retirement and when you want to stop working.
One tip is to visualize what your life will be like 10 years from now if you do everything right. The truth is when they picture their future lives, very few people see themselves in a $10- million house in Hawaii. Most people’s goals are more realistic, such as keeping up their current standard of living in retirement (with maybe a few upgrades), preventing any financial disasters, and having the freedom to do the things they love, such as spending more time with friends and family.
“Think of what type of life you want in the future and how you are going to organize your life right now to get it,” says Mizgala. “Your job is to structure your finances so you can achieve your vision.”
