I took a year off from university studies in 1981 so that I could earn my remaining tuition, fund a trip to Europe and buy my first car. I learned a number of valuable lessons.
Having no connection to real world economics, I took a job in a local department store as a commission-paid salesman in the camera department.
Despite a keen knowledge of the products, my sales figures were horrible. I knew that whatever I was earning was getting a great deposit rate, but having no debts, I had no real experience of how devastating the 22.75 per cent prime lending rate was on discretionary consumption!
It’s very hard for people to buy cameras when they’re struggling to pay horrific mortgage rates!
My worry today is what could happen if, for example, today’s prime lending rate goes from three to six per cent. The effect could be similar to 1981.
Too many households are living a lifestyle that is totally dependent on our current low interest rates.
We need to plan today for those inevitable rate increases and the remedy lies in cash flow planning.
A cash flow plan is not a budget. It is a plan that helps you manage day-to-day cash flow and takes into account your financial obligations.
It also provides guidance on future costs like purchasing your next vehicle, handling emergencies and planning for major expenses, such as renovations.
Most importantly, a cash flow plan quickly helps you find the money to channel toward your goals.
Here are 10 reasons why you need a cash flow plan:
1. Your retirement plan is not fully funded and you won’t have enough to fund your desired lifestyle.
2. Your retirement goals and plans are based on replacing a percentage of pre-retirement income rather than based on actual expenses projected into the future.
3. You have turned down reasonable insurance recommendations, putting you and your family in peril because you cannot afford the premiums.
4. You repeatedly take out huge car loans.
5. You have some major life goals and are unsure how to fund them.
6. You have not maxed out your RRSP or TFSA.
7. You are retiring in the next 10 years and will need to draw from your investments.
8. You are not fabulously wealthy and cannot burn money for fun.
9. You have tapped into an investment for reasons other than what that money was being saved for.
10. And the most definite sign you need a cash flow plan is that you do not yet have a cash flow plan!
It’s time to get serious about cash flow planning.
Every successful enterprise has one and your household should be no different. It requires work, an advisor qualified to help you, and it could truly be that missing link in your plan.
The opinions expressed are those of Richard Vetter, BA, CFP, CLU, ChFC. Richard is a Certified Financial Planner and owner of WealthSmart Financial Group in Richmond, BC, www.wealthsmart.ca
