Smart Money: 5 steps to a financial plan

How do you start saving your pennies?. Justin Sullivan / Getty Images

Things aren’t what they used to be. 30 or 40 years ago, if you went to school and got a job, you could be reasonably assured of a fairly comfortable life, house and retirement, said Scott Hannah, president and CEO of Credit Counselling Canada.

Now, not so much. People enter the workforce with huge student debt, have trouble affording a home, and no longer have access to the same kinds of generous pension plans as generations before.

READ MORE: How to choose a financial planner

“It doesn’t mean you have to like it. I’d be ticked off too about the boomer generation who has really had it all, bought a house, seen the house value go up 400 per cent, has a defined pension – it’s a win-win-win for them — and it’s not for you.

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It’s all on us to get our financial house in order. But where to start?

First of all, don’t get too comfortable. Seriously – keep using that old couch from your parents’ basement as long as you can. “One of the mistakes that we see is that people coming out of school, they get a job, maybe it’s their first big boy or big girl job, and they’re making more money than maybe they’ve ever had before. And one of the mistakes they do is they immediately increase their living expenses,” said Hannah.

Hold off on the fancy apartment and car, he said. “Once you become accustomed to a certain lifestyle, to go backwards is really hard.”

The key, he said, is to figure out some financial goals and start working on them, before you start dedicating your paycheque to the finer things.

1. Create an emergency fund

Your first priority should be to protect yourself. Create an emergency fund so that you’re prepared to deal with surprises, like precarious employment, illness and anything else.

Hannah recommends that everyone have six months’ expenses on hand to cover emergencies. He suggests that you consider keeping it in a Tax Free Savings Account (TFSA) instead of a simple bank account, so you’re not tempted to dig into it for big purchases. Even if you’re just starting out and you have a mountain of student debt, you should try to build up a cushion of at least three months, even before you start paying down your debt.

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One way to do this is to set up pre-authorized contributions into a savings account. That way, as soon as your paycheque comes in, you automatically sock away funds – before you get a chance to spend them. This is easy to arrange with your bank, and can even be managed online. It’s even better if you deposit the funds into a TFSA, said Hannah, because it typically takes 24 hours to withdraw funds from them. That means you’re less likely to be tempted to use your emergency fund for other purchases.

2. Pay off debt

Getting out of debt should be your second priority. “It makes it really difficult to get ahead in life if you’re carrying debt,” said Hannah. Paying it off quickly not only saves you interest charges and helps you save money, he said, but offers you greater flexibility elsewhere in your life. For example, you’re not forced to take a less desirable job with a higher salary just because you need the money right now to service your debt – something I know some of my friends have had to do.

Again, you can apply the same kind of strategy as you did for your emergency fund – automatic payments. Hannah also said that any extra money you get over the course of the year, like tax refunds, raises, bonuses and gift money, should be used to pay off your debt, rather than spent.

“When a person’s salary goes up, we encourage them to put those funds towards debt repayment before they get comfortable and add this to their lifestyle expenses.”

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READ MORE: Tips for paying off your debt and saving for the future

3. Get some advice and set some goals

This is tough for me. I hardly know what I’m doing next Thursday, let alone in 10 or 20 years. I have an emergency fund, I have paid off my student debts, and I save money every month – but I have no idea what I’m saving it for or how best to do that.

This is where outside help can come in. A financial professional can “help you identify what are your goals, establish your current financial situation,” and help you figure out how to achieve those goals, said Chris Buttigieg, senior manager of wealth planning strategy at BMO.

So how do you find the right person? You can start by asking your friends and family about who they work with, said Buttigieg. But he recommends that you also look for credentials – in particular the “certified financial planner” designation.

But don’t necessarily just go to your bank. “You may not get the best advice from your financial institution. Their job is to sell products and services,” said Hannah. He said that it’s your job to do your research and determine whether a financial planner is the right fit for you. You can find people through non-profit credit counselling agencies and provincial securities commissions.

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READ MORE: How to choose a financial advisor

4. Live within your means

This one is obvious, but it needs to be said: don’t spend more than you make. Don’t even spend everything that you make – set aside money for that emergency fund, debt repayment and financial goals before you figure out the rest of your budget, not after.

People are constantly under pressure to spend, said Hannah, but sometimes you have to refuse. “Having some financial goals that are important to you, it gives you the discipline to say no.”

5. Keep it up

Once you’re on your way to establishing your emergency fund, paying off your debts and are making progress towards your financial goals – congratulations! You’re on your way.

“The person who is doing that: living within their means, setting financial goals, they’re setting money aside for annual seasonal allocations, and they’ve got some professional guidance in terms of how do I make this work, how do I manage this – looking towards their future, they’re going to be well-positioned,” said Hannah.

And the process isn’t as painful as you might think. “For the average person to really get this working well, it takes about six months, that’s it,” he said.

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“But that six month investment, especially when you’re doing it young, is going to reap huge rewards later on.”

Note: This feature is included for expository and informational purposes; it is not meant to be taken as personalized or expert financial advice.

Follow the conversation online at and on Twitter, #GNSmartMoney.

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