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Investment Planning Component One: Financial Management

In our last article, we introduced you to the six components of a successful investment plan.  Over the next six articles we will go into each component in detail, defining what each one means, and why it’s important to you.

Today, we’ll be talking about financial management.

What is financial management?  In many ways, financial management is everyone’s least favourite topic when it comes to investment planning.  It involves looking at your finances, and if you’re like most people, that is not your idea of fun. It means looking at things like your net worth which is made up of your assets (like your house and your investments) minus your liabilities (like your mortgage or line of credit).  Your net worth reflects your financial position at a specific point in time.

It also means looking at your cash flow.  How much do you receive from all your sources of income (salary, pension, investment income, etc.), versus how much do you spend (expenses, debt repayments, investments, savings, travel and fun)?  The word often used to describe this cash flow calculation is “budget”, and it’s at this point where most people stop reading and get uncomfortable. Here’s why:

Do you know how much you spend every month?  Most people think they have a pretty good handle on it; however, if that were the case, how come we have such a hard time accomplishing the things we set our minds to.  Are you taking that nice trip based on savings to a vacation fund, or are you taking it because your line of credit affords you the opportunity to pay it back later? Are you on track to ensure your children’s educational needs are met?  Are you saving enough for retirement, or are you always a little short? Where is your money going?

One of the reasons that keeping track of your financial management is so hard is because intuitively we already know there’s a problem.  It’s human nature. “Putting that information down on paper is just going to tell me the obvious, which is that I need to cut back on some things.  I don’t really care to do that.”

This is why it’s so important

What do you hope to accomplish with your finances?  Do you want to have a nice healthy retirement where you don’t have to worry about money?  Do you want to be able to take nice vacations? Do you want to be able to pay for your children or grandchildren’s education?  How do you feel every time something goes wrong with your car or your house (windows, roof, basement, electrical, plumbing, etc.) and you find yourself forking over dollars that you had earmarked for something else?

For many, financial management is second nature.  For others, it’s the opposite; however, worry about your financial management creates a chain reaction across your whole investment plan.  If you don’t have a handle on your day to day finances, how can you predict with any degree of accuracy how much you’re going to need in retirement.  And if you’re worried about those things, you’re probably thinking that you need high returns from your investment portfolio to get back what you’re not saving.  But since you can’t afford to lose anything, you are reluctant to take on any risk. This is a combination that can only lead to unhappiness.

Financial management is hard.  Not because it’s particularly hard to look at your bank statements and credit card bills for a few months to see what’s going on.  It’s hard because it involves being honest with yourself, and more often than not, being honest with your spouse or perhaps your financial advisor.  This alone can make financial management a non-starter for many people; however, strong control over your financial household allows you to design strategies to achieve your goals and makes your investment plan a lot more reflective of your personal and future financial reality.  That should be a powerful incentive.

If this is a sensitive topic, or if you stopped reading as soon as you read the word “budget”, give us a call at LGK Wealth Management.  Perhaps we can help make this process a little less painful. We believe that just going through this exercise will result in you immediately feeling better about your finances.  Taking control will do that and it’s a wonderful feeling.

Stay tuned for our next article on Insurance and Risk Management.


Gary M. Koss
Senior Mutual Fund Advisor
Manulife Securities Investment Services Inc.

Call 1-780-426-2400