When putting together a financial plan, whether it’s for a young person, a couple getting started, or someone nearing or at retirement, we need to make sure the foundation it is built upon is solid. The building blocks of the foundation need to be taken care of first before we can proceed with the rest of your objectives or, as referred to in my last column, some event could derail your plans. Let’s take a look at some of these building blocks and ask ourselves whether we need to deal with or revisit those areas further.

Will, Power of Attorney, Personal Directive

The cornerstone of your financial plan is your will. It still amazes me how many of us don’t have a will or a current will, as it should be reviewed on a regular basis. Life is ever-evolving and so should your will, to keep up with your wishes and changes in your life. The Power of Attorney and Personal Directive (or Living Will) are there when you are incapacitated. The Power of Attorney allows someone to make financial decisions for you and the Personal Directive states your instructions regarding medical treatment and personal care.

Life/Disability Insurance

Initially we look at life insurance as income replacement to make sure our family can maintain their lifestyle and assure that their needs (e.g. education of the children) can be fulfilled and/or your debts (e.g. mortgage) covered. Disability insurance also fulfils the function of replacing cash flow when it is disrupted by illness or injury for any length of time. Fewer and fewer working people have benefits from work, or are self-employed (e.g. on a contract basis) and need to replace this gap in their protection.

Reducing Debt/Regular Savings

These two concepts may seem at odds but they need to be looked at together. Especially when you are starting up and there is only so much money to go around, you need to allocate your cash flow in the best possible way. Learning to save or pay yourself first is one concept you need to embrace, and there you need to budget to determine what you have left over for savings. Then you need to determine how best to allocate it and what your priorities are, whether an emergency fund, education plan or retirement plan.

Emergency Fund

An emergency fund is needed for those unexpected events as mundane as having to replace a major appliance, or to assist in covering cash flow after a job loss or slowdown as we often see in the oil patch. Without an emergency fund you might have to put those expenses on your credit card, get a loan, or take money out of savings (possibly even from your RRSPs). Any of these actions would negatively affect your financial future, as debt would require use of free cash flow. Taking money out of savings would put you behind in your savings strategies and possibly even cause disadvantageous tax consequences.

With a sound foundation, you can build a plan and have your long-term goals become a reality.