Financial Planning Basics

Financial Planning Basics

Financial Planning is as varied and perhaps as weird as the people who engage in it. Everyone who is engaged in the marketplace must organize their financial affairs to some degree. In the classic book, “Basic Economics”, economist and author, Thomas Sowell, asserts that “scarce resources have alternative uses”. Everyone that I have met lives with some sort of a budget. People spend their money in ways that make sense to them. To make this point, just look at your banking transactions over the last six months. You will see patterns of inputs (income) and patterns of outlays (spending). These financial patterns are your budget.

Albert Einstein coined a phrase “a definition of insanity is doing the same thing over and over again and expecting different results”. Many people want different outcomes in their lives, however, cannot or will not make the positive change(s) required to achieve these desires. From the experience I have gathered over the years, habits and beliefs prevent many people from changing their income levels and spending patterns. Small changes can make a big difference over many years. That is the power of compound interest in one’s life. That said, I will recount a story early in my financial planning career.

I went to my first big financial planning conference in 1996. This event was in San Francisco, and it was a big deal for a guy from small town Canada. The event had people attending from all over the world and there were more people at the convention than were living in my hometown! At that conference, I was introduced to a gentleman by the name of Bruce Etherington. Mr. Etherington, a Canadian, was licensed to do business in both Canada and the United States. (I was very impressed by this!) His presentation was simple and easy to understand. His three questions became central to my presentations to my clients for the remainder of my career. Mr. Etherington’s three questions are:

1) What if you live too long? It is not uncommon for Canadians to live on average, well into their mid to late 80’s. This means that people can live in retirement for more than 20 years.

2) What if you get sick or disabled in your working years or in your retirement years? Being sick or infirm can be very costly, either in lost wages or in having increased care costs.

3) What if you die too soon? No one knows the hour of one’s death. Having money in the form of life insurance or substantial cash on hand, is a responsible thing to have.

I recently finished a course that educated me about the Canada Pension Plan. In one chapter on “Longevity”, the author cited that those living in 1800, had an average lifespan of about age 40. Life expectancy has consistently increased since and now stands at 82.7 years in the year 2021. All things being equal, life expectancy is expected to rise by 0.2 years per year for at least the next 20 years or more. This is important because if people are looking to retire in their 60’s, then your money need to last at least 20 years!

Al’s nuggets:

1) See the world as it really is! Loose the rose-colored glasses!

2) Embrace the discipline of developing and following a budget. Spend less than your income and you will have a rosier future! The sooner you start, the better it will be for you and your family.

3) Insurance and Investments work hand in glove as part of sound financial plan.

4) Make time your friend. 30 or 40 years of saving and investing, coupled with debt elimination, is better than getting it going when you are in your 50’s or 60’s.