It’s time to consider a new vision for your financial plan
My son asked the other day if he had to get glasses when he became an adult. I told him that I sure hoped he didn’t! I guess he assumes adults wear glasses since both of his parents have had glasses since he was born.
This question got me thinking about a person’s financial planning vision. When was the last time you looked to see if your financial plan had good vision? As our vision changes with age, so do the needs of a financial plan. As a financial planner I am always looking for the best prescription for a client’s financial goals today – and into the future.
With that in mind, I’d like to introduce you to a financial planner’s 80/20 vision as an example for Canadians to meet their financial planning goals during their very important earning years.
A financial planner’s 80/20 vision
Back in the early 1990s, I was introduced to a book about financial conversations that took place in a barbershop. For me, it was the very first financial book I read and what I didn’t know then was that it would become the first of many financial books in my library. In his best-selling book The Wealthy Barber, David Chilton wrote about the wisdom Roy learned from old Mr. White:
“Wealth beyond your wildest dreams is possible if you learn the golden secret: Invest ten percent of all you make for long-term growth. If you follow that one simple guideline, someday you’ll be a very rich man.”
The Pareto Principle that many of us know today was first developed in a garden full of peas in Italy by business management consultant Joseph M. Juran. He came to the conclusion that 80 percent of the peas in his garden came from only 20 percent of the pea pods. This was further to the work of Vilfredo Pareto whom the principle is named after.
What’s a wealthy barber got to do with it?
It’s time to consider a new vision for your financial plan
So what does The Wealthy Barber and a pea garden have to do with the Pareto Principle? As a financial planner I would argue that it would be wise to consider the following: Invest 10 percent of your monthly income into your investment portfolio and another 10 percent into a plan that will assist you in maintaining as much as 80 percent of your current income. This will help you save for your retirement and be able to have a plan in place that will assist you in maintaining your current standard of living if you come across a short or long term disability or illness that prevents you from earning 100 percent of any current or future income due to an injury or disability.
A case-by-case basis
Now, you may be asking how much does an income replacement plan cost? And my answer to this is that it depends. It all depends on the type of job you have, the current coverage you have in place, your age and health status, among other factors. This article is not intended to suggest a particular coverage, as everyone has different needs. Rather, this article is meant to get an income replacement conversation started with your friends, co-workers, family and your financial planner.
In my book, Financial Fotographs: How to talk to your family about money, I introduce many examples of how to start a conversation with others so that you can find out how they are protecting their earning ability. These conversations will hopefully encourage you to go further and find out what plan is best for you and your family.
My challenge to you
With today’s environment of debt-building rather than asset-building, my challenge to you is to see if you and your family could live on 80 percent of your income. If you are already doing this, then I tip my glasses to you. However, if you are not able to, I suggest a conversation with your financial planner to see if your financial plan needs to have its vision checked.