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Financial planning tips

August 12, 2014

Three types of plans you need for your money

If finances were simple, it might take only a calculator to handle them. But they’re not simple, so it’s important to have plans as well.

Let’s talk about three kinds of plans:

  • Investment plans
  • Financial plans
  • Retirement plans

What’s an investment plan?

Beginning investors often simply plunk their money into a mutual fund registered retirement savings plan (RRSP) or a tax-free savings account (TFSA), with no hint of strategy or discipline. After a few hot tips gone cold — or a market downturn that reveals you have more bravado than risk-tolerance — you may begin to see the value of a plan.

So what’s an investment plan? It’s created with a financial advisor and starts with a know-your-client questionnaire that establishes your appetite for risk, your knowledge level and when you will need to access the money. It introduces the “not-all-your-eggs-in-one-basket” principle of asset allocation. With a well-crafted investment plan, you’ll have appropriate portions of your money in appropriate types of investments.

Back in 1999 and 2000, I was in love with biotech stocks. The more exciting the stories about them, the more I bought. I filled my wife’s RRSP with the things and 14 years later, her RRSP still hasn’t regained its size. Stupid, stupid, stupid! I should have had an investment plan or something even better — a financial plan.

If your idea of financial success is having a nice bunch of investments, an investment plan sounds like it will serve your purpose. I’ll caution you, however, that it’s probably not broad enough.

What’s a financial plan? 

A financial plan does everything an investment plan does ... and more. With the help of your advisor, it also addresses:

  • Your goals and dreams. The plan prioritizes your finances with those goals in mind.
  • Your long-term priorities. How will you prioritize saving for retirement vs. saving for kids’ education vs. buying a bigger home?
  • The rest of your money. Because it’s not just about investments, a financial plan can also address important financial matters such as day-to-day cash flow, credit card or other debt, rainy-day savings, budgeting, minimizing taxes, and using insurance to protect your family’s finances from catastrophes like accidents, poor health or death.

What’s a retirement plan? 

A retirement plan is a financial plan with two key differences:

  • It’s life-stage-specific, to help you transition into retirement or to make the most of your money while you’re retired.
  • It’s also a lifestyle plan, addressing how you’ll spend your time, grow as a person, pursue your interests, be as healthy as you can and leave a legacy.

In fact, some of the most important parts of my retirement plan have nothing to do with my finances:

  • “I’m going to go for a vigorous walk five times a week.”
  • “I’m going to volunteer at the local crisis hotline.”
  • “I’m going to learn to cook." (My wife has been waiting 32 years for me to cook a decent meal, so I think I owe her one or two.)

Having these three types of plans is valuable whether your income is big or small, your debts huge or non-existent, your dreams grandiose or modest, your investments impressive or puny — and whether you’re young or old.

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