2020 was different; we were all scared and many of us faced financial uncertainties that we have not experienced before. However, if there is a silver lining from 2020, it is that we were forced to take a hard look at our personal financial plans. For many of us, it even resulted in building a financial plan for the first time. The reality is this is not the last time the world will experiences uncertainty. There will be another recession. There will be another massive market correction like we saw last year.
I believe that we have learned something from 2020 and hopefully have a newfound discipline when it comes to our own financial planning so that when the next time financial fear strikes, we will all be prepared both financially and emotionally.
For over three decades, Ciccone McKay has helped clients build financial plans based on five principles that we call the five circles. These five separate yet intertwined components to a financial plan amalgamates goals and objectives in order to build a balanced financial portfolio. The five circles include:
- Opportunity / Emergency Fund
- Replacement Dollars
- Savings Strategies
- Investment Strategies
- Tax Strategies
Throughout this blog, I will highlight the financial lessons learned from 2020 and how these circles, prove invaluable and the importance of building a truly balanced financial plan.
Circle one: Opportunity / Emergency Fund
2020 proved anything could happen. A clear lesson learned from 2020 is that it is crucial to begin building an Emergency Fund. An emergency fund is an accessible pool of assets that can help alleviate the sudden and often unexpected need for immediate capital. In a situation where your income becomes halted due to unforeseen circumstances, your Emergency Fund can provide you with the necessary capital to remain on your feet, while you search for income replacement. Although this is not a long-term solution to providing for you in the event of long-term unemployment, it will reduce the economic impact over the short-term and provide you with the peace of mind you will require during this stressful time.
Most importantly, this will allow you to avoid making withdrawals from your other investment accounts, so your future plans remain unchanged.
The rule of thumb is having six months of fixed expenses saved and available. It is important to note that while this account should be easily accessible, it cannot be too accessible where it becomes easy to spend daily. We recommend utilizing a savings account separate from your daily chequing and savings accounts.
The same can be said in the event of an opportunity. A business venture or the trip of a lifetime is presented to you.
The Opportunity / Emergency Fund can provide you the freedom to exercise these opportunities without fear of this again impacting your future financial plans.
Circle Two: Replacement Dollars
Being able to earn an income is every person's most valuable financial asset. This is especially true for younger individuals who have many years remaining of income-earning years. 2020 has provided us all will a reminder that nothing is for certain, including our income. Through these tough times, our health, wealth, and family safety came into perspective.
In the end, this component of a financial plan ensures that you are well equipped to handle the financial strain put on, should you or another income earner in your family experience a critical illness or disability diagnosis or death.
This is one of the most misunderstood parts of a financial plan because people just do not want to face these fears. Other than eating healthy and exercising, most of these circumstances are completely out of our hands, but the choice to protect our families is an action that we do possess.
By incorporating the appropriate insurance plan, you can protect yourself or your family in these situations and ensure that you or your family can avoid financial strain during the most stressful of times. Do you have the proper insurance required to pay all debt and replace income lost as a result of a death or disability? These are scary questions to ask of yourself, but 2020 shows that it is way better to be safe than sorry.
Another crucial component of estate planning is ensuring you have a will and that it is updated. Preparing now for the worst will save your family the appropriate hardship upon an unforeseen event.
Circle Three: Savings Strategies
Now that we have addressed the planning behind protecting your or your family's wealth, we can now direct our attention to building upon your wealth. It is important to understand that like you, most people will have several objectives in their lives that they would like to attain in the future.
For some, that means starting a family; for others, buying a property and some people are concerned with saving for their retirement. You may be concerned with all three. Regardless of what your goals are, they should each be saved for independently, as they will require varying amounts at varying times.
We focus our attention on goal-based planning. By doing so, we separate our savings plans into three separate buckets:
- Time Horizon up to 2-3 years
- Low Ability to Take on RiskHigh Liquidity Needed
- Capital Preservation is Paramount
- Time Horizon from 3-10 years
- Moderate Ability to Take on Risk
- Moderate Liquidity Needed
- Mixture between Capital Preservation and Capital Growth
- Time Horizon of 10+ years into the future
- High Ability to Take on Risk
- Low Liquidity Needed
- Capital Growth the Primary Objective
By first identifying how much you will need and when you will need it, reverse-engineering a savings plan will allow you to easily determine how much savings you will need to contribute to each objective. In conjunction with your savings strategies, there may be situations where you can implement paired investment strategies that provide a higher probability of attaining your goals.
The approach of having distinct buckets will better help prepare you for cyclical changes, all while ensuring the long-term assets remain on track to reach the intended goals.
Circle Four: Investment Strategies
Between February 19th and March 23rd, the stock markets around the world fell hard and fast; the US markets plunged nearly 34%, and in Canada nearly 38%. However, in weeks to come, markets rallied globally, and we saw all-time highs throughout major indices. If this tells us anything, it shows us the importance of staying invested. If the market correcting last year caused you to panic, it is important to go back to the question -- Why am I investing? Setting clear financial goals becomes a critical component in reducing the behaviour gap, as you can rest assured knowing that your long-term goals are still on track as market corrections are thought of and planned for. The main reason people falter in their investment journey and not reach their goals is for three reasons:
- quit out of discouragement
- quit out of fear of failing, or
- deviate far from their original plan.
This is mitigated with goal-based investing – because by setting a realistic investment goal from the outset, accompanied by timely periodic reviews, you will always know exactly where you are. It’s this clarity that allows you as an investor to maintain composure throughout your financial plan.
Circle Five: Tax Strategies
2020 showed us that every dollar earned is valuable. Ensuring that your investable assets are in the proper tax-deferred or tax-free account is crucial to ensure you can grow your income in the most efficient manner.
By ensuring that you have all the information available to you regarding your financial options, you can make the most educated decision as to how you implement your own financial plan.
Many decisions will have to be made as you proceed with your own financial planning, but by segregating your decisions into these five components of your financial planning, you can rest assured that you have planned for the unexpected.