Understanding Income

Cash flow is the movement of money in and out of your household.

Money In = Income 

Money Out = Expenses
 

Positive cash flow = you earn more than you spend. 

Negative cash flow = you earn less than you spend. 

Income Categories

1. Working Income (wages, bonuses, commissions, side hustles)

2. Investment Income (savings, investments, rental income, etc.)

3. Government Benefits (CPP, OAS, child benefit, etc.) 

When qualifying for large purchases, such as a house or vehicle, some professionals may ask for your gross income, which is what you make before tax and deductions. 

For the purposes of budgeting and financial planning, you should identify your consistent net income, which is the amount you can expect to actually hit your bank account after all tax and deductions. 

Here are a few resources that may be helpful in calculating or understanding deductions.

1. Canadian Income Tax Calculator

2. The Tax System Explained in Beer

3. A Guide to Tax Deductible Business Expenses

If your income is inconsistent, it can be more advantageous to build a budget based on under-shooting your income and over-shooting your expenses. Worst case scenario, it plays out that way, and your budget still works. Best case scenario, your projections were wrong, and you have additional positive cash flow for saving and spending. 

Another important step in financial planning is understanding that some goals require more immediate attention than others. 

By establishing short, mid, and long-term objectives, we are able to leverage financial tools and implement solutions that address current needs and work towards the bigger picture simultaneously. 

Short-Term

The most important short-term need is to build an emergency fund, ideally enough to cover 3–6 months of essential expenses. This money does not need to be invested, simply saved and liquid to prevent the need to rely on credit cards when the unexpected happens (job loss, car repair, medical bills, etc.).

Although most advisors don't get paid to talk about the importance of increasing your savings account balance, having a proper saving and protection plan is the foundation of client-centric financial planning.

The short-term stage is all about creating breathing room in your budget and building momentum with small, achievable goals.

Aside from building an emergency fund, some other common short-term goals include: 

• Completing a Financial Needs Analysis with an advisor
• Buying insurance to protect income and assets
• Creating and sticking to a monthly budget
• Saving for an upcoming vacation or event
• Catching up on missed bill payments
• Buying furniture, tech, or a used car

Mid-Term

We refer to this phase of financial planning as "saving for spending". These tend to be goals that require more planning, consistency, and protection. Common examples include, but are not limited to: 

• Saving for a home down payment
• Purchasing or upgrading a vehicle
• Increasing the amount in your emergency fund
• Saving for your wedding, education, or parental leave

In some of these examples, it may be best to just save and in other scenarios, your time horizon is long enough to invest, but short enough that you can’t afford major losses. The right advisor can help walk you through how aggressive vs. conservative you should be in contributing to and growing this bucket. 

Long-Term

As you will see on the investment education page, even though the achievement of these goals will happen in the long-term, their execution should be started in the short-term as the earlier you begin earning uninterrupted compound interest, the more likely you will be to reach the goal. Common objectives in this section include: 

• Saving for retirement or early financial independence
• Funding a child’s full post-secondary education
• Creating passive income streams 
• Building a legacy or inheritance
• Charitable or estate planning

Regardless of what the math says, the psychological truth is that life happens. All the time.  To everyone. There is never going to be a perfect time to invest, but establishing a long-term, pay yourself first, set it and forget it type of account will make it a bit less stressful to navigate the roller coaster of the short and mid-term. It is also the only higher percentage strategy that a middle class individual has at eventually becoming financial independent. 

Debt management is about creating a plan to reduce, restructure, or eliminate your debt in a sustainable and strategic way. The purpose of reviewing this during the financial planning process is:

1. To understand the role of debt in your financial life and how it can positively or negatively align with your goals; and

2. To see if there are opportunities to leverage a debt strategy to free up cash flow and/or increase your net worth. 

Debt can be a tool, but without structure and planning, it becomes a trap. 

Click here to see a few examples of how we have helped people repurpose their debt into positive cash-flow opportunities. 

Click here to access a debt repayment calculator for personal use.

Click here to access a mortgage calculator for personal use.