Sheldon Niemiec, Wealth Advisor

Financial Planning: What can you do to bake a great financial plan?

We’re always hearing about financial planning, but most of these conversations revolve around the final result of this planning. For instance, take a look at the Smith Family Financial Plan (https://tinyurl.com/smithfamilyplan) I built based on an actual plan I built for my clients – a business-owner couple. As a result of working with us and implementing our recommendations, the family’s net worth is forecast to be approximately 52% higher.

This article, though, is not merely about the final result. What I want to talk about is – what goes into building a powerful financial plan? What might it really take to significantly increase your net worth? I’ve received a number of inquiries and realized that there’s little explanation out there as to what building your financial plan looks like. So here we go.

To simplify a slightly complex financial matter, let’s assume that building a great financial plan is a lot like baking a great cake. What ingredients do I need? Can I modify the recipe? How long does it take to get it just right?

As with any great recipe, this plan requires following a few important steps diligently. The good news is – if we work together on achieving your financial goals, however ambitious they may be, my financial planning team and I handle the majority of the work for you.

Let’s take a look at the steps:

1. The Ingredients: Your financial data
2. Recipe Review: Consultation to ensure we have all the correct data
3. Baking the Cake: Construction of your financial plan
4. Monitoring while Baking: Draft review by myself and my financial planning team
5. Final Presentation: Financial plan presentation with your feedback incorporated

1. The Ingredients

The first step in the construction of your financial plan is to collect data from you on a number of important questions, the “ingredients”, in our workbook. These include your personal family situation, desired retirement age, your current expenses and planned retirement spending, major purchase goals, post-secondary expenses, real estate and financial assets, liabilities, types of income, pension plans, current insurance coverage, wills & current estate planning, trusts and charitable giving goals.

For business owners, we also dive into data such as business assets, ownership details, real estate, liabilities, life and key-person insurance, operating income, dividends, withdrawals and potential business sale down the road.

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While this may seem tedious, this step is absolutely crucial. Building an inaccurate plan with poor ingredients, i.e. incomplete data, does not create a strong-enough base from which to implement our suggestions. So, it is important for us to collaborate to get this step right. Rest assured, your information is handled with the highest level of confidentiality and never shared with anyone other than our relevant team members.

2. Recipe Review

After completing the workbook, we will review the data together to ensure that we’ve captured all the relevant information. Some points may require clarification, or you may have questions while filling out the workbook – I’m always available to assist. Once we’ve reviewed the ingredients and the recipe, we’ll get to the most exciting step, i.e. start baking the cake.

3. Baking the Cake

Now that we have all the ingredients, i.e. your financial data ready, my team and I begin constructing a custom financial plan for you and your family / business. We work together to build your plan based not only on your completed workbook from Step 1, but also incorporate notes and insights from all our meetings. This ensures that your financial plan is driven not purely by data, but also by your perspective, concerns, and goals.

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Now all our clients who know us can attest to the fact that we don’t do cookie-cutter plans. Since each plan is different and custom-designed for you, this process can take anywhere from a few days to a couple of weeks depending on the complexity and the factors involved.

For business owners, the plans may sometimes require multiple iterations, taking slightly longer. In short, we’ll determine the right temperature to bake your cake.

4. Monitoring while Baking

A human element is required to bring the numbers in your plan to life and to ensure they make sense. So next, my financial team and I review the draft of your plan, discussing it internally to ensure it truly reflects your current situation, goals and requirements. There may be a key ingredient missing or we may need to make additions before it’s done – perhaps a glaze or some icing sugar?

5. Final Presentation

Once the cake is baked, i.e. once your plan is completely ready, we’ll schedule a time to present it and review it with you. This is also an opportunity for you to provide further feedback and make any changes if necessary. In this case, you can have your cake and eat it too. Ok, enough baking puns.

Sure, the perfect cake is ready – all done and dusted. But remember, a successful financial plan is dynamic in nature – it needs frequent reviews – and no one understands that better than our team. Once we’ve provided your financial plan, we will work with you to update it at least once a year. If an event occurs mid-year that changes your financial trajectory, we will update it at that point instead. We’ll do whatever it takes to help you implement your financial plan to achieve your goals.

For more information or to get started building your financial plan, please feel free to reach out at [email protected] or 403.298.4053.

Original post: https://sheldonniemiec.ca/financial-planning-what-can-you-do-to-bake-a-great-financial-plan/1.

Should I pay off my mortgage or invest?

What a great problem to have! My clients ask about it frequently. My answer is always the same – why not both?

So, you've come into an unexpected windfall from the sale of a business, inheritance, or otherwise. Perhaps your home is paid off. That is undoubtedly a great place to be. But only if you deploy your capital right. Idle capital is, very simply, returns lost. In this article, I am going to help you explore options for maximizing the returns on your idle capital.

The ideal solution is a two-step process. First, use the additional capital you’ve just received to pay off your mortgage, and second, borrow against your home with an interest-only loan. Your mortgage payments are eliminated, and you now have idle capital to invest. Your portfolio will cover the interest cost on your interest-only loan and deliver returns suitable to your risk tolerance.

With proper risk management, this investment strategy can significantly contribute to your nest egg, retirement goal, or financial independence. Before we dive in, let's look at each option separately.

Option 1: Pay off your mortgage. This eliminates your mortgage payments and you can use the new free cash flow to invest. A potential issue might be that your net worth is concentrated in a single housing market. So, let’s say you’ve had exposure to Vancouver real estate for 10 years – well, congratulations. But the same exposure to Calgary real estate for 10 years would, unfortunately, produce very different results.

Option 2: Invest your capital. By doing so, you earn dividends, income, and generate capital gains. The balance in your account grows over time, and the compounding effect is significant. More importantly, your net worth now comprises diversified asset classes, beyond your local housing market.

The downside is that you are stuck with mortgage payments, and that there is less free cash flow to invest each month.

Option 3: Why not combine the two options? First, pay off your mortgage, and then borrow against your home equity to invest. Borrowing in this case is in the form of an interest-only loan. As in option 1, your mortgage payments are eliminated. Further, as in option 2, you gain exposure to diversified asset classes, beyond your residential housing market.

Additionally, when you borrow to invest, the interest on the loan is tax-deductible. Thank you CRA! This lowers the effective rate of the loan. So, what you’ve done here is – constructed a strong portfolio that will not only grow over the long term but will also yield sufficient cash flow to cover the interest cost of the loan.

When I explain this strategy, a common question I am asked is: "Well, how much should I borrow to invest?". This, of course, requires a more in-depth conversation, specific to your case. However, generally, the lesser you borrow, the lower your risk. For example – if your home is worth $750,000 and you borrow 20% or $150,000, the portfolio would have to decline by a very significant amount to impact the terms of the loan.

I would never intentionally place my clients in a position where we need to revisit the loan terms. Borrowing to invest is a remarkable wealth-building strategy. However, as with any other investment decision, the risks must be weighed individually.

What to do next: This is a unique strategy and an opportunity to achieve mortgage-free status while investing or adding to your future. To determine if this strategy is suitable for you, we will need to consider your financial position and risk tolerance. I understand not every situation fits into these three options. To explore further, let's discuss.

I can be found at [email protected], 403-298-4053, or by direct message on LinkedIn.

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