The Financial Planning Pyramid: Securing Your Financial Future

There are three levels to a well constructed financial plan, starting with a solid foundation, which
is designed to alleviate the effects of uncontrollable risks.

First Level

Is to satisfy the need to take charge of the uncontrollable events in our lives. As we cannot
predict when we will die, become inflicted with a life threatening illness or suffer an
incapacitating physical injury, we need to plan for these eventualities via a well constructed
financial plan. This plan would be required to pay a sufficient amount of money to allow for my
family and/or I to sustain the type of life we are accustomed to, in the event of an unforeseen,
insurable and life-altering event.

Life Insurance

This is designed to pay an immediate lump sum at death that can be used to pay all debts, and
provide a monthly income for the surviving spouse to raise the children to the age of 18 and
beyond. Although the money cannot bring back a loved one, it can ensure the surviving family
remains well cared for.

Will and Power of Attorney

Approximately 30% of Canadians have a will. This can be established for about $100, by using
the Canadian Will Kit that is available from any registry office. If you have a more complicated
situation, e.g. second marriage, adopted children, trust or business arrangements, it may be
more beneficial for you to talk this over with a lawyer. If you do not have a lawyer, I would be
able to assist you.

The power of attorney is an important attachment to your will, and will guide your directive and
provide a person to look after your affairs in case you are mentally incapacitated.

Health and Dental Cover

This pays for costs incurred on prescription drugs, prosthetic devices, dental care, out of
province and country emergency medical expenses, and paramedical services.

Self-employed people, not covered by a company group benefit plan, have several affordable
options to look at. Incorporated business may find additional tax benefits in using a health and
welfare trust. Call your financial advisor and ask to look at the available options.

Critical Illness

This pays a lump sum within 30 days, after being diagnosed with one of 24 life threatening
illnesses like heart attack, stroke, cancer, and bypass surgery.

With most of these products there is an option that in case you do not contract any of these
illnesses you receive a 100% reimbursement. This product has many different facets to it and
requires a more detailed discussion.
Long Term Care

Pays an income when you need assisted care. If you need assistance to eat, dress, get out of
bed, bath, or go to the washroom this will start to pay an income until you are able to become
independent again.

Disability Insurance

The traditional disability policy pays a monthly income when you are sick or injured and not able
to perform normal daily functions.

Given that many people get confused between these three products; disability, critical illness
and long term care, it is advised you discuss these with an experienced advisor.

The question is not "if" you need insurance, but rather "how" to ensure your financial survival,
in the event of an unforeseen occurrence. This insurance is required whilst you are alive, yet
unable to earn an income, and in need of additional medical care. Should you dip into savings,
do you extend your mortgage, do you acquire a bank loan or does your spouse assume the
responsibilities? Alternatively, do you consider an insurance option?

Second Level

This starts with the more controllable events. First, the family has to decide who is the better
money manager in the house. Once that decision has been made, it eliminates a lot of stress,
placed on the family, regarding financial priorities. Remember, It is not how much we earn, but
rather how much we keep, that is important.

Emergency Capital

This is the unsecured line of credit you can arrange with your personal banker. It is normally
about $10,000 and is only to be used in case of an emergency. My advice is to have this in
place, but never to use it. This is for emergency purposes only, like when I lost my job, or my
grandma died and I want to go to the funeral etc. This is not to finance any household
equipment, car loan, or to finance a holiday. The rate of interest on this kind of loan is normally
about 2% above the bank prime rate.

Personal Saving Account

This account is where you save about three months of living expenses. For example if your
monthly cost of living is about $3,000, you need to keep about $9,000 in this savings account.
This is to use in case of an emergency, or to do big purchases for the house, like when the
washing machine breaks down, the new couch, preparing for a new baby, save to go on holiday,
a deposit to buy a vehicle or saving for a down payment on a house.

This savings account is the provision, the buffer of cash we need to keep to keep our financial
plan stable, and to keep us out of short-term debt. Once we have used a big portion of this cash,
to buy something we need, we need to reign in our spending habits for a few months, to make
sure we get the savings account back to $9,000 again. What about credit cards? They are for
convenience only. Pay them off monthly. They carry very high interests rates, normally about
18%. Rather use a term loan to buy a big item like a car. The interest rate will be less than half
what you are paying on the credit card.

Handling Debt

On this site you will see a lot of information about the advantages of using other peoples money
to get what you want, faster. So what is the golden rule? To have a plan in place, to monthly not
only repay the debt but also some of the capital, you borrowed. Determine a timeline to the
repayment period and keep to it. This brings financial discipline. Once you have mastered the
debt burden, you will be free of the urges to do compulsive purchases that do not form part of
your long-term financial plan.

Before we increase our debt load it is wise to always first check our cash flow and ability to take
on additional debt. If in doubt don’t.

Buying A House

For some of us, the first house is or was probably the biggest event in our lives. The big
question, will I be able to afford the monthly mortgage payments over the long term? Once you
have a down payment of about 10% of the price of the house, and the total price is not more
than 3 to 4 times your income, you will most likely be able to afford it. Once you have the down
payment it is a good time to talk to a mortgage broker.

RRSP

Saving for retirement is another very important building block in our financial plan. By the power
of exponential growth we know that the sooner we start, the sooner we will have enough to
retire. We can put 18% of our income away annually up to $22,000 for 2010. As there are many
facets to a RRSP plan, it is best to choose a financial advisor who is experienced and well
qualified to guide you in the process.

RESP

With a Registered Education Savings Plan you receive several government grants to assist in
building capital for your child’s post secondary education. You receive an annual 20% federal
grant as well as a one-time Alberta grant of $500, plus other amounts. Contact your financial
advisor, as there are specific details on how the plan works.

Third Level

Once we satisfied the needs of the previous two levels, the focus changes to pure growth
opportunities. This may include a second property, residential or commercial property, non-
registered investments, investing directly in the stock exchange, stamps, gold coins, expensive
carpets, diamonds etc. This is also a period we start to look at additional tax saving strategies,
incorporation, expanding the business, using trusts.

This is the level of special interest to small and medium size business, and professional people
like, doctors, engineers, accountants, and lawyers.

Financial planning in this category requires the services of experienced, suitably qualified
advisors. For this purpose we work as a team and are able to bring in a specialist to satisfy
specific needs. You can contact Daniel Botha directly if you have specific questions not yet
covered under this section.

Daniel Botha - Sun Life, Calgary