We believe everybody should have a financial plan (they’re not just for the ultra-wealthy). They can look very different and that’s perfectly normal. Whether yours comes in the form of a booklet, a web app, a set of conversations, a one-page manifesto, or is simply non-existent, you should look out for these common mistakes which our experts have seen over the years. Read on to make sure your plan is rock-solid!
Not understanding the actual cost of the plan
Financial plans are usually provided either as a stand alone service or as a value add to an overall investment plan.
As a stand alone service, the provider charges you a flat fee or an hourly charge as they work with you to build your financial plan.
Alternatively, the provider may offer a “free financial plan” and not get paid on the plan they create for you, but rather earn money on the investments they help you make, including any investment accounts like TFSAs and RRSPs. The financial plan is therefore called a “value-add” service and is often done to help you identify the amount you are able to invest.
It’s important to remember that whenever you are paying for a service, you should evaluate your relationship with your advisor or planner, identify the value they add to your financial life, and understand how your service provider is being compensated. Click here to learn more about how financial advisors are compensated.
Putting too much faith in “assumptions”
In order to formulate a financial plan, one has to make certain assumptions. These include your future earnings, future interest rates, your expected investment returns, and how much money you will need when you retire. While it is necessary to include these when building a plan, you should make sure that you understand the basis of each assumption, and ensure that your plan is somewhat resilient to potential incorrect assumptions.
Step one is to understand each of the assumptions, and why your planner has set them up that way. For example, if your financial plan says that you will have a 6% increase in your earnings over the next three years, ask why they picked that number.
Step two is to “stress-test” these assumptions so your plan is resilient. Instead of assuming a 6% increase, try alternatives, like 4% and 8% and see how these numbers affect the end results.
Taking these steps will help you manage your expectations. Your plan is a roadmap and it will change over time.
Forgetting that real life happens
Just like you need to stress-test the assumptions, you also need to stress-test your life. Your financial plan will base the goals and planning on where you are in life right now. But we all know that life unfolds in ways we don’t expect. A rigid and inflexible financial plans can go off course and become obsolete simply because of a layoff, a failed marriage, an early retirement, aging parents, spousal debt, fertility treatments, and so much more. This is why you must have a financial plan that allows for life to happen – a plan that is built to be flexible.
One way to create flexibility is to have easily accessible emergency funds in case of a major life event. A resilient plan is one that outlines some of these scenarios and makes sure you know the steps you need to take if they happen – it’s the “what if” section of your plan. Make sure to ask for some scenarios of the life events you see as most likely. Review your plan regularly and update it when major life events occur.
Not sharing your full story
Anyone who helps you make a financial plan must go through a process called “Know Your Client” – it’s a requirement. The idea is to protect you, the client, by ensuring the planner knows your life and circumstances. They will ask a set of standard questions about your money, debt, earnings, investments and age. They ask some personal questions too, like your goals, how much risk you can tolerate and what your timelines are. Asking these questions is a minimum that meets the regulatory requirements (aka: the law!), but It’s not enough information for any planner to really understand your life circumstance. We also know that many people aren’t comfortable sharing their full life story in an initial meeting, the trust isn’t built yet. Our advice is to be as forthcoming and honest as possible. Share lots of details about your life, your future plans, the different characters in your story and all of the bad money and life habits you might be ashamed of. Don’t fear judgement, just know that the plan that comes out of that will be much better suited to you. There are strict codes of confidentiality of client information, and you can always ask your advisor or planner about theirs. The more honest you are, the better the process will be. Think of it as financial therapy!
Not doing your homework
Just like school, you will get out of your financial plan what you are willing to put into it. A great financial plan should include steps that you need to take in order to see it through. This could include organizing your documents, creating, monitoring and sticking to a budget, speaking to family members about different areas, or seeing other professionals for tasks like insurance, consolidating your debt, wills/estate planning, and more.
Assume that the first step in the homework process is reading and understanding your financial plan. A good financial plan should take this further and have additional steps you are working toward in order to get your full financial life in order.
A special note about automating your finances: A great financial plan should include homework steps where you consider automating some aspects of your financial life, such as switching to online billing, setting up automatic payments for bills and credit cards, and organizing your financial documents in an accessible online system. Additionally, you can create automated savings contributions, use app-based budgets and research if robo-advisors are right for you.
Ignoring your family
Most financial planning software is set up for individuals or couples. When there is a couple, it is commonly referred to as a “household” which allows you to also name legal dependents – ie: your children. This is a very limited, nuclear family view of financial planning. Today, the modern family includes step children, ex-spouses, aging parents, best friends, uncles, siblings, grandparents, grandkids, roommates, business partners and romantic partners. Each of these individuals are involved in your financial planning, whether you want to admit it or not. What happens in their lives will affect your financial plan. Most financial plans go off course when a life event happens to someone around us, so it’s best to include as many of them as possible from the beginning. Many of us believe that finances should be kept secret, but the more you can talk about them with your trusted circle, the more prepared you will be.
Separating good debt from bad debt
In the world of financial planning, debt is often cast as the villain. In reality, debt can be the hero too. Debt is a tool that can help us reach goals. It’s only a problem when it’s abused. A good financial plan will identify your total debt, the cost of that debt, separate the good from the bad, and help you understand how to pay off the bad debt in a smart way while benefiting from the good debt. Check out this article to learn more about good debt and bad debt.
Forgetting important elements
Clients tend to focus too closely on the performance of their investments. They will have a good or bad day depending if their investment account went up or down that day, but it’s important to remember that there is more to the financial picture!
A complete financial plan should always include the following topics:
Life insurance for all family members
Living benefits (including critical illness insurance, disability insurance, health insurance)
Employee matching for retirement savings
Employee stock options
Emergency plans and savings
Applying for benefits
Plans for mortgage renewals
Maternity leaves, starting new businesses
And so much more depending on your circumstances
Finances are complicated and emotional. Most of us would rather never have to think about them at all. That’s why we look to professionals and experts for help. That being said, if you have worked with a professional to have a financial plan created for you, then don’t hesitate to ask as many questions as you need to understand the plan inside and out.
Start by taking the time to actually read the financial plan. Go through all of the graphs, make sure you can confidently state the different assumptions, conclusions and outcomes. It takes time, but it’s important. Highlight the areas where you are unsure of what is being said and then find your answers. It’s an asset you have paid for and that you own, so it’s worth taking the time to understand it and make it work for you.