ON MONEY || Financial Planning The Right Way

I recently read a book by Gary W. Keller and Jay Papasan, titled "The One Thing". Since then I've narrowed my focus to doing 'The One Thing' in various aspects of my life.

When I get distracted from an important task or goal because there are easier problems to tackle and check off my list, I remind myself of this concept and how important it is to complete the ONE thing. 

Applying this to financial planning, what is the ONE thing you want your finances to do for you? Is it freedom to travel for 2 months out of the year? Is it to buy a new car? Is it to buy your first home? 

Whatever the goal is, you need to open a spreadsheet, or your reminders app on your phone, or grab a spare napkin if you are having lunch and write down all of the costs you will need in order to reach your financial goal. Only when you know how much it is going to take you to get to that ONE thing you really want, can you plan properly for your finances. 

When everyone says they want to get rich? How rich is rich? Is $10 million rich? Is $100 million rich? If you don't know where you want to go, how are you going to get there driving around aimlessly? Define what your idea of 'wealth' is and then get hands-on with the planning process by mapping it all out.

Here's an example of financial planning that works:

Grab that napkin, phone app, or spreadsheet and write down each line item you will need to spend on to get to that goal. Let's take the example of buying a new home. Here's what you will need to pay:

  • Down payment of approximately 20% if you are in Vancouver. An average new home in Vancouver is around $1100 / square feet, so if you are a couple, looking to buy a 2 bedroom home to plan for a family, the price tag is roughly $935,000 Canadian dollars. 
  • Lawyer fees of ~ $2000 - paid to the lawyer for preparing the documents for your deal. 
  • GST of 5% (if you are in Vancouver) - $935,000 x 5% = $46,750
  • Gap between your down payment and what the bank will lend you for your mortgage. If you are lucky you can get the full 80% and not have to pay additional at the closing of your deal.
  • Your monthly mortgage payment and strata fees (ongoing costs). This depends on the interest rate at the time, but let's say for a place that's $935,000 the annual interest rate is 3%, bringing your mortgage payment close to $2350/month. Strata fees for a new building for an 850 square feet space would be approx. $400/month. 
  • Cost to furnish your home - To furnish the living, dining area and 2 bedrooms we can safely say this will cost around $5000. 

Let's add it all up! 

  1. Your up front cost to get into a new home is $187,000 (20% down payment) + $2000 (lawyer fees) + $46,750 (GST) + $5000 (furniture) = $240,750 Canadian Dollars
  2. Your ongoing costs would be ~$2750 / month.

Now you know where you are going, you need to figure out how you can get there. There are two ways - you either SAVE money or your MAKE money. Given the amount is sizeable, you will likely need to explore ways where you can make more money. Can you use your savings to grow your wealth by investing it? 

Usually when you attend a financial planning seminar, the advisors take their time to tell you about the different vehicles, such as GICs, mutual funds, stocks investing, but they don't ask the critical question - how much money do you need and why?

So figure out the exact number you need for the ONE thing you really want, and then figure out how long it will take you to get there and what you will do to grow your wealth to get there.