Smart Money - Are You Financially Fit?

People spend a lot of time worrying about what they eat, how much they weigh, and how healthy their hearts are. According to Statistics Canada, life expectancy rose by almost 2 1/2 years for Canadian men and by almost 1 1/2 years for women between 1986 and 1996. But while we are all now living longer and healthier lives, for many people, financial fitness still isn't a reality.

Not doing the details can hurt.

Only 30% of Canadians follow a monthly budget while just 40% of us have a formal financial plan in place. Yikes! The fallout of all this inactivity (is it inattention or procrastination?) is that the realities of Canadians' lives are a long way off their expectations. The CIBC Financial Health Poll conducted by COMPAS Inc., shows that 37% of those who retired and then returned to work did so because they didn't have enough money. What would they have done differently if they could do it all over? Well, 60% say that in hindsight they would have started investing earlier and they would have saved more. Hmmm.

More than just having enough money, our level of financial fitness reflects our ability to bring our current and future needs into balance. The seven components of a sound financial plan include:

  1. Cash management
  2. Risk management
  3. Debt management
  4. Retirement planning
  5. Investment
  6. Tax planning
  7. Estate planning

Of course, you should talk to advisors and professionals when putting together a financial plan for your future. This article simply provides some general information and ideas to get you going in the right direction.

Set Some Goals So You Know Where You're Going

To have a balanced financial plan, you must set some realistic goals within each of these seven areas. Just as most athletes have specific goals towards which they consistently work, the key to financial fitness is to set achievable goals and consistently work towards them.

What weighs most heavily on your mind? Very likely there will be several issues competing for your limited financial resources. Do you want to accumulate a specific amount of money, eliminate your mortgage or pay off that new car? Weighing each of your goals against the others will help you to see which are the most important ones.

There are no right or wrong answers at this point. Right now, you're just laying the plan. Later, you can ask your financial advisor to look it over and see what's missing. Okay, it's time to pick up a pen and get to work.

  • Make a list of everything you want to achieve
  • Make sure you've covered each of the seven areas of a financial plan
  • Prioritize your list
  • Pick two goals
  • Make sure your goals are realistic
  • Set some dates
  • Write it all down
  • Check your progress every six months

Where are you now?

Having decided where you want to be, you need to determine where you are now so you can size up the gap. Complete a net worth statement to see just how balanced your finances are and update this statement annually. It is your scorecard of how much your efforts are paying off. Next, do a budget so you can see exactly where your money goes each month. Estimate how much you spend monthly , track your expenses for about three months, and revise your budget to reflect your actual expenditures. Don't cop out and say, "Well I had unusually high expenses this month because..." Emergencies always crop up, and part of being financially fit is having a plan for dealing with those nasty little surprises.

Now look at your income relative to your expenses. If your expenses seem too high, you can either cut back on what you're spending or increase your income.

  • Consider a part-time job to boost your earnings on a short-term basis.
  • Consolidate bank accounts to save on fees.
  • Brown-bag it for a few months to trim your waist and you budget.
  • Park the car and walk.

You've done your stretches; now it's time to sweat.

Having done your warm up exercises -- you've written your financial goals down in order of priority, completed a net worth statement and set up a budget - you now have to decide how to meet your goals. Let's say you plan to start an investment program. You want to save $25,000 over the next five years. If you're looking at your budget and thinking, "There's just no way!" maybe you need to adjust your time frame. Or perhaps you need to look at how you're investing your savings. One rule of financial planning is the longer you have to reach your goal, and the more your money earns during that time, the less you have to set aside each year.

If you haven't already done so, establishing an emergency fund for large, unforeseen expenses or temporary job loss should be a priority. Ideally, your emergency fund should be able to support you for three to six months. If someone in your household shares the expenses, consider how long it would take him or her to find another job.

Cash management: Take care of those pennies and watch your dollars grow.

Check over your accounts and make sure you're getting the most for the least. There's no point in paying for services that you'll use only once in a blue moon. Little things like choosing a passbook option rather than receiving a statement can save you money. If you can reduce or eliminate your fees by maintaining a specific minimum balance, consider consolidating your accounts to reduce your costs. If maintaining a monthly balance is a problem, then you'll have to compare individual service charges to choose the least expensive account for your purposes. Attracted to the "packaged" accounts? Take the time to compare the individual fees with the package costs to see if you come out ahead. The idea is to pay for only the services you'll use.

Debt Management - Don't strain your financial plan with interest charges.

Begin by eliminating credit card balances and consumer loans. Often people pay only the minimum required without realizing how much interest costs work against their overall plan. If you have several credit cards with high balances, consider a consolidation loan to reduce your interest costs. Does your credit card charge a high rate of interest? Consider transferring your balance to lower cost card. If you have only a small amount to work off, put your cards away until the debt is cleared. Once you're debt free, by all means take advantage of the convenience credit cards offer, but keep tight control of them.

Risk Management: Prepare for the risks of everyday life.

The risks we seem to deal with quite easily are property insurance, car insurance and contents insurance. The risks we tend to overlook are those associated with our economic earning power. If you or your partner were to die or become ill or disabled and unable to work, would your family have the resources to meet their day-to-day needs? It's a tough question to face, but the consequences of not facing it can be even tougher on your family.

  • Life insurance can protect your family's standard of living if you die.
  • Disability insurance can provide you with an income if you cannot work due to illness or injury.
  • Critical illness insurance can pay you a lump sum if you are diagnosed with a specific illness.
  • Long-term care insurance can help pay the bills if you (or other members of your family) need in-home or facility care.

Retirement: The only one you can count on is YOU.

Through means testing of pension and age tax credits, and reduction in senior's benefits, the government is saying loudly and clearly "You are responsible for providing for yourself." Thankfully, we still have Registered Retirement Savings Plans (RRSPs). Any money contributed to an RRSP remains tax-deferred until the funds are withdrawn.

Investment Strategies: Make sure your money works at least as hard as you do.

When you buy a fixed income investment such as a guaranteed investment certificate, Canada Savings Bond, or treasury bill, you will receive a fixed rate of income. When you buy equity investments -- an equity mutual fund or individual stock -- you typically do not receive any guarantee of payment, but you may share in the profits of the company whose shares you bought in two ways. First, you may receive dividend income, which is paid from the profits earned by the company. Second, when you decide to sell your shares, if you do so at a profit, you'll realize a capital gain. Both dividends and capital gains receive special tax treatment.

So, why would you choose an equity investment when, with a fixed-income investment you are guaranteed a fixed rate of income on your investment? Why would you choose the uncertainty of equity ownership. There may be two good reasons.

  • First, historically, the rate of return paid on equity investments has generally exceeded the rate of interest paid on fixed-income investments. So, over the long term (10 years or more), you can generally expect your money to earn a higher rate of return on equity investments.
  • Second, since dividend and capital gains receive special tax treatment, you may be able to keep a greater portion of the return you earn on equity investments.

Estate Planning: Have a will and a power of attorney.

Some think their wishes will be carried out by a family member or that they do not have enough money to justify the cost of making a will. Others avoid making a will because their personal circumstances -- marriages, divorces, and accumulated children and stepchildren -- just seem too complex to unravel. However, if you die without a will, trying to figure out who gets what, and when, can be a mess. And your estate may end up paying more in fees and taxes than it should, leaving less for your loved ones.

Married? Have your wills drawn up together so that they reflect an integrated estate plan. Review and update your will regularly, especially when family circumstances change (weddings, divorces, births, and deaths all result in changes in family structure), your financial circumstances change, new legislation is implemented, or you change your province or country of residence.

Achieving Financial Fitness

Consult with advisors and professionals to help put together a financial plan that's right for you.

  • Financial fitness isn't achieved overnight.
  • It takes time, a sound plan, and a strong commitment.
  • Believe in yourself and in your own ability to take charge. Then just do it!

More Articles

A basic budget: Draw a chart. Down the left hand side, list your income and expenses (i.e. rent, clothing, food, etc). Allow for a subtotal for both. Along the top, draw 3 columns and name them Planned, Actual, and Difference.

Tools and Related Links

INTERAC® e-TransferTM2

A faster, easier way to send someone money. Find out more

Learn more