//Budget vs. Financial Plan: Here's Why You Need Both
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Budget vs. Financial Plan: Here's Why You Need Both

 

 

The term " Financial Plan " can be a bit confusing because most people have never seen. To add to the confusion, there are many misconceptions about what a true financial plan is or not.

For example, while there may be some overlap between a budget and a financial plan, it is important to know that the two are significantly different. Your monthly budget allows you to keep an eye on your monthly spending habits in order to understand the complete picture of your expenses and the "margin" you have left at the end of the month. On the other hand, your financial plan is a road map for your financial future, which tells you exactly what you need to do on a monthly basis to maintain your lifestyle (and your budget) in your future.

In this article, we will show you what a financial plan is, what it can do for you and why you will need it for your financial future.

Financial Planning 101

The ultimate goal of any financial plan is to align your financial activities with your lifestyle and retirement goals. For most people, this means being able to maintain their lifestyle in the future.

In other words, imagine that you can keep the same house, the same vacation, the same restaurants, the same hobbies, and other things that you enjoy while you work or you are at home. retirement. As this is an ambitious goal, your financial plan must take into account several elements, not just your budget or your investments. Here are the three great ones:

budget vs financial plan heres why you need both - Budget vs. Financial Plan: Here's Why You Need Both

1. Investments and Wealth Management

A good financial plan encompasses much more than investment but it remains the foundation of any plan and is essential to building your wealth over time. For this reason, this is the most commonly recognized part of a financial plan.

For most people, the question is, "What should I invest in?" In general, the answer is actions and obligations. However, rather than trying to pick individual stocks and bonds, or paying someone to try to do it for you, research has shown that "indexing" produces better results long-term.

Not only does indexing tend to be as good or better than any mutual fund or equity broker, but it has a major advantage: it is cheap. In fact, what most people do not know is that the money you save in fees will almost guarantee that you will do better than other solutions over time. If you have mutual funds you've got from a bank or a financial advisor, the fees could literally take away half of your life savings as they are reduced to the minimum before your return is calculated.

Besides the fees, taxes are the other killer of potential wealth. A solid financial plan will tell you how much investing in various tax sheltered accounts, such as RRSPs, TFSAs and RESPs, will help you reach your goals with more money in your plans. pockets.

2. Loans and Mortgages

It is true that not all debts are bad. In fact, the money you borrow to buy a home is almost always good. The trick is to understand the difference between good and bad debts, avoid pitfalls and structure things so you do not spend more than you need.

A classic example is mortgage payments and credit card payments. The interest rate on your mortgage must be less than 10%, while your credit card interest is probably 20% or more. Often, in a situation like this, it makes sense to use your mortgage to pay off your credit card and generate instant savings.

Optimizing your borrowing decisions could allow you to put more money in your pockets every month and save you hundreds of thousands of dollars over the course of your life.

3. Insurance and Protection

At some point, almost every household will experience an unfortunate event that may delay you: an accident, illness, or even death. When this happens, the insurance component of your financial plan is there to make sure that the health crisis will not also become a financial crisis for you, your spouse or your dependents.

Do not forget that the ultimate goal of your plan is to maintain a consistent lifestyle, both now and in the future. Your insurance can cover the bills as long as you need to reach that goal.

There are three types of insurance that can provide a safety net for your financial plan: critical illness insurance, disability insurance and term life insurance.

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Where is your budget

Do you remember the above part regarding your budget that is not the same as your financial plan? Well, that's not the case, but it's actually a very big part of your financial plan.

On the one hand, there are the expenses we all experience in our lives: housing, travel, food and recreation that your plan is trying to maintain in the long run.

On the other hand, you know how much you can afford to invest in your plan on a monthly basis. This includes everything related to debt payments, investment contributions and insurance premiums that make this all possible.

So, do you choose the joy of a latte at $ 5 now or the joy of retiring a few years ago?

Honestly, there is no right or wrong answer here. A financial plan is like a crystal ball that can show you where your budget will probably lead you so that you can make the best decisions.

Life is a balance. You want to have fun and you also want to be responsible. You want to enjoy the here and now and want to know that the future will be as good. Our advice? Set a budget, build a plan, and move forward with your eyes wide open.

Develop your wealth. Manage your loans. Protect your belongings. Planswell offers you a free plan combining investments, insurance and mortgages so you can maintain your lifestyle throughout your work and your retirement.