5 Times to Revisit Your Financial Plan
Imagine if you had to launch a rocket to the moon. No doubt you’d aim very carefully before hitting the go button, but if you were wrong by even a fraction of a degree at launch, you’d be a thousand miles off course by the time the rocket left the stratosphere.
Financial planning is similar. You can try your best to aim for a retirement date that might be 10, 20, 30 or more years away, but chances are you won’t get it exactly right the first time. Too much can happen along the way. That’s why it’s so important to update your plan and correct your course from time to time.
In a perfect world, you’d update your financial plan every six months or so. At a minimum, these five life events are definitely times you want to pause and recalibrate:
Career change
Early in your career, things can change quickly. In many professions, your salary can double in the five or 10 years it takes to go from being an intern, apprentice, or trainee to a full-fledged master of your domain.
This can have big implications for your financial plan, since you want your savings rate to grow along with your income. This is necessary to eventually have enough money put away to maintain your (nicer) lifestyle well into the future.
A fast-growing income can also have insurance implications. For example, you may want to increase your disability and critical illness insurance so that it can replace your higher income if you ever got sick or become injured. Same with life insurance if you have loved ones who depend on your income to pay the bills.
Marriage
A married couple are joined in body, spirit, and… money. How you decide to handle your matrimonial finances is a highly personal question. Some couples move everything into a joint account, and others keep things quite separate.
One aspect of your married money that must be an open discussion is how to reach joint savings goals. For example, if home ownership is in the future, who will contribute what? Will you use tools like Tax-Free Savings accounts? Do you have money in RRSPs that you can tap? And what about retirement? When do you each hope to retire, what do you want life to look like in retirement, and who will contribute what to reaching that goal?
You and your mate have some talking to do, then you should update your financial plan accordingly.
Home
Buying a home is a pretty major financial move. It’s generally a great thing to do, as you’ll be using a mortgage to amplify your financial power. All you need to do is come up with a down payment, and you can acquire a highly valuable piece of property that will grow in value over the long-term and create tax-free wealth for you.
What does this mean for your financial plan? For starters, you want to be smart about the mortgage you choose. Some of the major variables include negotiating a good rate, deciding between fixed or variable interest rates, and picking an amortization schedule.
Next, you’ll likely be offered mortgage insurance by your lender, and you’ll need to compare that option to just buying your own term life policy (hint: it’s almost always better to buy your own policy).
Once you own your home, it’s a new asset on your personal balance sheet, and it will likely form a significant chunk of your net worth when you retire. This has implications for your plan too, as you may wish to downsize when you retire, or stay in your home but tap into its value using a line of credit.
Baby
Now things are really getting serious – your financial plan is not just for you, or you and your partner anymore. When baby comes along, there are two major impacts on your financial plan.
The first is education savings. Canada has a really generous program that can add up to $7,500 in educations savings grants to your RESP, but in order to get it, you need to be contributing too (about $200/mo is enough to maximize your grants). You’ll need to balance this savings goal with the other goals in your life.
The second impact is the new need for life insurance. Imagine what would happen to your child if you were no longer there to provide for them. The emotional consequences are obvious and terrible to think about, but there is also a financial aspect to consider. Affordable term life insurance is a great way to make sure the bills will be paid and home life will remain relatively stable during a difficult time.
Loss
Sorry to end on a bit of a sour note here but, let’s face it, loss is part of life. It could be the loss of a job, the end of a relationship, or a death in the family.
When change takes place in our lives, there are often financial implications. We may not feel like dealing with practical financial matters when we’re in a challenging emotional state, but ironically, ignoring them can compound the problem.
A good practice is to be prepared for potential losses before they arise. This can include having an emergency fund set aside, having the right insurance policies in place, having a written Will, and proactively talking to your spouse, parents and other family members in advance about setting up powers of attorney, deciding on beneficiaries and estate executors, and other difficult but necessary topics.
Even if you’re just cruising along with no major changes in your life, the world is changing around you. Markets rise and fall, home values fluctuate, interest rates change and more. Perhaps the best reason to revisit your financial plan on a regular basis is because it enables you to make small changes on a regular basis, rather than finding out too late that you’re way off track.
Regularly updating your plan can mean the difference between being lost in space or sticking a perfect lunar landing.