Financial Planning Steps

Financial Planning

• Financial planning is the process of managing money to achieve personal economic satisfaction. It increases control over finances by mitigating debt and dependency on others.

Steps in Financial Planning

• Step 1: Develop Financial Goals: Analyze values, money attitudes, and family financial decision-making practices.
• Step 2: Understand Your Financial Situation: Assess income, savings, expenses, and debts. List assets and debts.
• Step 3: Identify Alternative Courses of Action: Consider maintaining the current path, expanding it, changing it, or taking a completely new approach.
• Step 4: Evaluate Alternatives: Weigh your life situation, personal values, and economic conditions.
• Step 5: Create and Implement a Financial Action Plan: Choose effective strategies, formulate a budget, establish accounts, and decide about investments.
• Step 6: Re-evaluate and Revise the Plan: Regularly track financial progress and adjust the plan as needed.

Developing Personal Financial Goals

• Factors Affecting Goals: Timing (short-term, intermediate, long-term), specific needs (consumer products, infrequently purchased items, intangible purchases).
• SMART Goals: Realistic goals aligned with income and life situation.

Influence of Economy

• Market Forces: Supply and demand, interest rates, inflation rates. High demand leads to higher interest rates.
• Bank of Canada: Canada's central bank. Sets the prime rate, aiming for stable money supply, interest rates, and consumer prices.
• CPI (Consumer Price Index): Measures inflation, influencing consumer spending and employment opportunities.

Financial Statements

• Personal Balance Sheet: A snapshot of financial position, calculating net worth (total assets minus total liabilities).
• Cash Flow Statement: Records cash inflows and outflows over time, aiding in spending habit analysis.
• Income Statement: Summarizes income and expenses over a defined period, showing profit or loss.

Evaluating Financial Progress: Ratios

• Debt Ratio: Liabilities divided by net worth, indicating the debt-to-worth relationship (lower is better).
• Savings Ratio: Monthly savings divided by gross income (10% is often recommended).
• Total Debt Service Ratio: Annual mortgage/rent + property tax divided by gross annual family income (ideally less than 40%).
• Gross Debt Service Ratio: Mortgage/rent + property tax + 50% condo fees divided by gross family income (a rough guide to creditworthiness).
• Debt Payments Ratio: Monthly credit payments divided by take-home pay (less than 20% is generally good).

Budgeting

• Budget: A financial plan outlining expected income and expenses over a specific period.
• Creating a Budget: Determine income, track expenses (recording for a month, categorizing expenses, differentiating needs and wants), set goals, allocate income, ensure total expenses don't exceed income, and regularly review/adjust.

Time Value of Money (TVM)

• Money available now is worth more than the same amount in the future due to potential earnings.
• Components: Present value (current worth of a future sum), future value (future worth of a current sum), and interest rates.
  • PV=FV/(ITR)^n
  • FV= PV(1+ITR)^n

Annuities

• Annuities: A series of equal payments made at regular intervals (ordinary or annuity due). Used in loans, savings, and insurance premiums.

Ethics in Financial Decision-Making

• Ethics guides financial decisions, promoting trust, fairness, and long-term stability.
• Key Principles: Honesty, integrity, fairness, responsibility, transparency.
• Ethical Dilemmas: Credit card use (overspending), loan payments, investments (risk/reward, environmental/social impacts).
• Navigating Ethical Challenges: Recognizing issues, gathering information, considering alternatives, making decisions, and reflecting on choices.

Income Sources and Financial Planning

• Income Sources: Employment, investments, rentals, others.
• Employment Income Types: Salary, wages, commissions, bonuses.
• Investment Income: Dividends, interest, capital gains.
• Gross vs Net Income: Gross is total income before taxes, net is after.
• Deductions: Income reductions, including CPP, EI, federal/provincial taxes.

Strategies to Increase Income

• Develop new skills.
• Pursue higher education.
• Negotiate salary.
• Start a side hustle.
• Invest for passive income.

Canadian Taxes

• Types: Taxes on purchases (HST), excise taxes, property taxes, capital gains tax, and taxes on earnings.
• Taxable Income: Portion of income subject to taxation.
• Deductions: Expenses reducing taxable income (e.g., RRSP/FHSA contributions, union dues, childcare, moving expenses).
• Tax Credits: Directly reduce taxes payable (non-refundable and refundable).
• Marginal Tax Rates: Progressive tax system based on increasing income brackets.
• Average Tax Rate: Total tax paid divided by taxable income.

Tax Planning Strategies (RRSP & FHSA)

• RRSP (Registered Retirement Savings Plan): Tax-deductible contribution, tax-free investment growth, helps lower current or future tax bracket.
• FHSA (First Home Savings Account): Tax-deductible contributions, tax-free growth, designed for first home purchases.
• TFSA (Tax-Free Savings Account): Tax-free growth, flexible withdrawals, without income restrictions.

Retirement Programs

• CPP (Canada Pension Plan): Mandatory contribution-based program for retirement income, designed to replace ~ 25% of pre-retirement earnings.
• OAS (Old Age Security): Non-contributory, tax-funded pension for seniors, with clawbacks for high-income individuals.
• EI (Employment Insurance): Temporary financial assistance for unemployed individuals, bridging the gap between jobs, based on previous earnings and regional unemployment.

Saving Strategies

• Emergency Fund: Savings for unexpected expenses/emergencies (typically 3-6 months of living expenses).
• Strategies: Setting realistic goals, creating budgets, automating savings, using windfalls, considering side hustles.

Understanding Investing

• Investing: Allocating money to generate income/profit over time.
• Purpose: Long-term goals, wealth building, and beating inflation.
• Common Investment Types: Stocks, bonds, mutual funds, ETFs.
• Risk and Return Tradeoff: Lower risk typically means lower returns.

Understanding Stock Markets

• Stock Market: Marketplace for buying/selling company shares, facilitating capital flow.
• IPO (Initial Public Offering): Process for companies going public to raise capital.
• Investing in Stocks: Profit from capital gains and dividends.
• Stock Exchanges: Organized markets for stock trading, ensuring liquidity and fair prices.
• Stock Types: Common stock (ownership, voting rights, variable dividends), preferred stock (fixed dividends, no voting rights).
• Indicators: Price-to-earnings ratio, dividend yield, and market cap.

Credit Basics

• Credit Score: Numerical representation of creditworthiness (300-850).
• Credit Report: Detailed record of credit history (loans, payments).
• Factors Affecting Credit Score: Payment history, credit utilization, credit history length, types of credit used, and new credit inquiries.

Types of Credit and Uses

• Credit Cards: Convenient, rewards, flexibility but high interests if unpaid, used for daily purchases, emergencies.
• Personal Loans: Fixed payments, lower rates than credit cards; fees, less flexibility, useful for large purchases, debt consolidation.
• Lines of Credit: Flexible borrowing, lower rates than credit cards; risk of overspending, ongoing expenses, emergencies.

Debt Reduction Strategies

• Snowball Method: Pay off debts from smallest to largest.
• Avalanche Method: Pay off debts with highest interest rates first.

Mortgages and Consumer Protection

• Fixed-Rate Mortgage: Predictable payments.
• Variable-Rate Mortgage: Lower initial rates but payments adjust to interest rate changes.
• Refinancing: Securing a lower interest rate, reducing payments, or adjusting loan terms.
• Consumer Protection Rights: Rights in Ontario to clear credit terms, cancel contracts (e.g., payday loans), and access credit info.
• Predatory Lending: Exploiting borrowers with high interest rates, hidden fees

Risk Management and Insurance

• Risk Management: Identifying, assessing, and controlling risks to capital earnings.
• Insurable Interest: A stake in the value of an entity for which insurance can mitigate loss.
• Indemnity: Principle of restoring the insured to the pre-loss financial state.
• Pooling Risk: Combining risks from many to reduce individual costs.

Types of Insurance

• Life Insurance: Guarantees payment to beneficiaries upon death, covering funeral/debt.
• Health Insurance: Covers medical expenses associated with illness/injury, preventive care.
• Disability Insurance: Provides income replacement during disability from illness/injury.
• Auto Insurance: Protects against accidents, theft, and damage to vehicles (legally required).
• Home Insurance: Protects homeowners from losses related to home, property, or liability.
• Liability Insurance: Protects individuals/businesses from lawsuits arising from negligence.

Insurance Assessment and Comparing Policies

• Assessment Steps: Income evaluation, dependant analysis, asset analysis, liability analysis.
• Policy Comparison Factors: Premiums, deductibles, exclusions, and coverage types (e.g., term life vs. whole life).

Claim Disputes and Resolution

• Causes of disputes: Understanding of coverage, disagreement on claim value, policy exclusions, insufficient documentation, missing deadlines.
• Resolution strategies: Policy review, gathering evidence, formal review request, public adjuster, state insurance department complaint.

Estate Planning

• Wills: Legal documents outlining asset distribution after death.
• Power of Attorney: Legal documents empowering someone to make decisions on your behalf (property/personal care).
• Estate Taxes: Canada doesn't have a direct estate tax but capital gains tax may apply, with potential province probate fees.
• Estate Planning Strategies: Gifting, trusts, beneficiary designations on accounts.
• Importance: Ensures wishes, protects beneficiaries, minimizes taxes/fees, and prevents disputes.

Renting vs Buying

• Renting Pros/Cons: Lower upfront costs, flexibility but no equity building, less responsibility.
• Buying Pros/Cons: Equity building, potential appreciation, customization, higher upfront costs, less flexibility, responsibility for maintenance.
• Cost Comparison: Rent vs. mortgage payments, property taxes vs. utilities/insurance.
• Flexibility Comparison: Relocating, long-term commitment.
• Long-Term Impact: Wealth building, savings, and stability.

Home Buying: Navigating the Process

• Financial Preparation: Assess finances, improve credit score, save for down payment, get pre-approved for a mortgage.
• House Hunting: Determine needs/wants, neighborhood/school research, realtor assistance.
• Making an Offer: Fair price, contingencies (inspections, financing), negotiations.
• Home Inspection and Appraisal: Critical steps to understand property condition and value.

Real Estate Investment

• Types: Single-family homes, multi-family units, commercial properties, vacation rentals.
• REITs (Real Estate Investment Trusts): Professionally managed investment pool, offering real estate exposure without direct ownership.
• Returns: Rental income, property appreciation, tax benefits, equity building.
• Risks: Market fluctuations, maintenance, vacancy periods, interest rates, damage, tenant issues.