If you own a business, you know about risk and opportunity. Compared to many people, you’re willing to take more personal and financial risk in order to gain more personal and financial opportunity. It’s a trade-off that can be highly rewarding.
However, even with a successful business, there’s a good chance that you (alongside most Canadians) will experience a lifestyle decline at some point in the future. It’s most likely to happen when it’s time to pay for the kids’ university education, when you hit retirement, or because of something unexpected, such as an accident or illness.
It takes financial planning to protect yourself from this risk, but good planning has traditionally been reserved for the wealthiest of the wealthy. This article is here to help you out and point you in the right direction.
How much do you love calamari?
Imagine if one of the things that you most enjoy about your lifestyle is regular vacations in Greece. The fresh seafood, salty sea and warm night air is something you just love, and you make the trek back there every few years.
If that were the case, you could think of your financial plan as a way to make sure that you will continue to enjoy vacations with the same frequency and quality of food and accommodations now and in the future.
In fact, tying your plan back to the things it supports – whether that’s travel, time with family and friends or pursuing hobbies and interests – gives it real meaning and makes the effort seem worthwhile.
How your plan makes it happen
Here are the three main areas of a financial plan, including special considerations we often see for business owners:
1. Your borrowing.
How much of your monthly cash flow is going towards debt? Can that debt be made less expensive? If so, how can the monthly savings be reallocated to building and protecting your wealth?
For business owners: In addition to personal debts, you may have debts related to your business. The nice thing about these debts is the interest is generally tax-deductible. Your financial plan should seek to maximize this opportunity.
2. Your investing.
How much money will you need in the future? How much should you invest each month to get there? Which types of investment accounts will lead to the maximum after-tax income when you need to spend it?
For business owners: Your income may not be as consistent and predictable as a typical employee, which can make saving more difficult. In addition, if your business has a higher degree of risk, you may want your RRSP, TFSA or other investment accounts to balance it out with a lower degree of risk.
3. Your protection.
What types of insurance policies and in what amounts are required so that, even if there is an accident, illness or death in your household, the negative financial impact on you and/or your family will be minimized?
For business owners: You don’t get workplace insurance benefits provided for you, but you do get an excellent alternative: a Health Spending Account (HSA) that lets you use pre-tax money to pay for your healthcare expenses.
Another unique concept for business owners is corporate-owned life insurance. If you have cash or investments held inside a corporation that you don’t need to withdraw for the foreseeable future, this strategy may allow you to access the funds in a very tax-efficient manner.
Your plan optimizes each of these areas and tells you exactly what to do on a monthly basis to hit your goals. Once you retire, your plan determines how much money to take from which sources in order to maintain your lifestyle among the ancient pillars and olive groves of beautiful Greece.
How your plan adjusts with you
What happens if you build your plan today, then your business doubles next year? Or if the stock market goes down or you get married or have a baby or decide to downsize your empty nest? Indeed, life will always bring change, and your plan must change with it.
The solution is to update your plan every six months. This way, if business is booming, your plan will adjust to maintain a higher standard of living. If the market has made any major moves, your investments will be recalibrated. If there are changes to your family status or living arrangements, this will be captured in your plan too.
Once upon a time, when financial planning was only done by highly-paid humans, it was totally impractical to update your plan frequently. In fact, among the small minority of people who actually have a financial plan, most will only do it once in their lives then hope for the best.
Today, so many tools make it a snap to update your plan any time you want.