Most financial plans are not worth the paper they are printed on. This has nothing to do with the planning software, the assumptions used for inflation or the products that are sold or bought to make the plan happen. The plan is not working because it got built backwards.

It’s unlikely that you would decide to build a house from the roof shingles down to the foundation. Yet this is exactly how we tend to approach financial planning.

When clients come in to see their planner, they often do not know quite what to expect. They are wrestling with a variety of competing needs. There may be aging parents to care for, kids to put through school, mortgages getting paid down and lots of bills to pay.

It’s easier for us, in the planning business, to ignore all this complexity. The best bet for a clean and easy plan is just to assume it all away.

The “assuming away” part comes in the form of one question and one answer. This particular question and answer will dictate the output of the plan, and also determine whether the plan has any real value to the client.

The question (from the financial planner) is “How much income will you need in retirement?” The answer from the client is (generally) “I don’t know I have never really given it much thought.”

This question and answer exchange is completely fair, but unless an awful lot of digging happens on everyone’s part, the plan ends up built backwards and useless.

The planner, faced with the client’s answer: “I don’t know, I have never really thought about it” will often make an assumption. This assumption for retirement income is usually something like 75% of your current expenses. The absence of a number from you means we stick our number into the planning software.

The number we just picked gets fed into the computer and out comes the plan. It has been calculated to two decimal places, it is completely accurate (using our assumptions), and it’s completely useless.

Why useless? Well, if you earn a lot of money and you assume 75% of current earnings, the plan might well tell you to save millions and you can only get there by putting aside twice your annual income every year.

The right place to start your plan is with what you spend today. What you spend and what you spend your money on are much harder numbers to come by. I have met hundreds of people in my career. I would say maybe five per cent know what they spend and where their money goes on a monthly basis.

If you would like to build a real plan, your spending today is the equivalent of starting to build your house at the foundation. These are the numbers that will make your plan relevant and allow you to strategize how you might handle retirement.

I have met people earning six figure incomes that spend thirty per cent more than they make. Does anyone really think a set of projections is going to help them retire well? I have met other people who are such diligent savers that they do not realize that they actually live quite modestly.

Chances are your financial planner cannot help you much until you know what you spend. Once you know what you spend you can see what expenses will stop when you retire and what expenses will keep going. If today you spend more than you make, strategies like borrowing money to make an RRSP contribution are just silly. Such a strategy just means the Visa bill won’t get paid. You need to start your plan by changing your spending habits.

The foundation of a real plan is in the present. My experience is that there are three things people want to do with their money in the present. People want to spend money on what is important to them, live within their means and spend less than they make. Knowing where your money is going today gives you the information you need to change your habits.

When you can get today’s spending to look like what you want, the future often seems to take care of itself.

In the U.S. today, the savings rate is actually a negative number. This suggests that not only are Americans not saving any money, they’re actually digging themselves deeply into debt.

Surely this suggests some sort of crisis in the making? That shouldn’t surprise us: our consumer society always encourages us to spend rather than save.

As a financial advisor, it’s my job to convince people to set aside funds for worthwhile activities – such as eating during their retirement. (This is particularly an issue since the globalization of our business world has meant an end to many pension plans). So naturally, I’m not one to suggest that a negative savings rate is a good thing.

But to me, something sounds a little hollow about this scary “fact.” For one thing, we all seem to be quite a bit better off financially today than the last couple of generations have been. So let’s examine the evidence carefully.

First off, the way the U.S. government measures the savings rate seems quite flawed to me. For instance, it doesn’t count as “savings” the money American put into their 401k plans – the U.S. equivalent of our RRSPs. It also doesn’t count the money they use to pay their mortgages; the equity owners have in their businesses; or capital gains on stocks.

I consider all those things to be valid savings vehicles. Frankly, if I were to remove all those aspects from my own wealth-creation activities, I’d quickly find myself in “negative savings mode” as well.

The fact is that in the last three years, the value of all assets in the U.S. has increased $16 trillion (net of debt). Another way to put that: all of America’s households have become $140,000 richer during that period.

So what’s going on here? One answer is bad measuring practices. The government is looking only at people’s bank accounts. But if you just measure those, you’re not really seeing the full picture. There are many better vehicles than savings accounts to put money in these days, and smart investors are taking full advantage of them.

Another answer is that many people today create their wealth less through savings, and more through equity. Most really wealthy people develop and/or sell businesses, invest in real estate, take an ownership position in firms, create professional practices. These are all examples of building wealth through equity rather than through savings.

I usually advise my clients to have an equity creation plan. The great thing about equity is that it grows like corn in the night: you just need to get the seeds started, and then stand back and give it time. The equity in your home builds slowly but surely. A successful business also operates on a day-to-day basis and over time it amasses a pile of equity.

Of course, this approach isn’t for everyone: creating equity always entails some risk in exchange for the potential gains. You may not be the entrepreneurial type. In that case, I recommend a disciplined savings plan of the conventional kind.

But if you do have the entrepreneurial urge, think about what equity opportunities are available around you. Is there a company you can work for that gives ownership to its key employees? Would investment real estate be right for you? Could you build a company instead of working for one?

It’s true: you can save your way to being comfortable. But as Donald Trump, Bill Gates and even your local real estate developer can tell you, you can’t save your way to being really, really rich. For that goal, your magic word is “equity.”

One strategy I always suggest to my clients is to create a financial checklist for themselves. In order of importance, the list should look something like this:

1. A comprehensive set of financial goals for the family.
2. Adequate life insurance and disability insurance.
3. Wills and powers of attorney (both general and personal care).
4. A plan for creating equity.
5. A savings plan.
6. A statement of what you believe about capital markets (to help you understand what you’re doing, and why).
7. A sound investment strategy.

Notice that “investment strategy” – which always gets such a lot of media attention – is last in my line-up. That’s because investments may mean little to the welfare of your family, if you’re under-insured or if you die without a proper will.

If you’re going on a journey, your task is made much easier if you decide on your destination first. That’s why “goals” comes first on my list. As with just about everything else in life, your chances of success are immensely improved if you know what you’re doing before you start.

If other people depend on you, enough life insurance is a must. Most people are under-insured, because they always tend to underestimate what it would take to replace their financial contribution to the family.

A quick rule of thumb: your insurance should provide enough capital to create an income equal to what you currently earn. So if your income is $100,000, and interest rates are 5%, you should be insured for something like $2 million.

Another often-overlooked factor is disability insurance, especially by executives who believe they’re covered through their employers. This is usually true to some extent, but benefits under a group policy are often limited to some percentage of the first $100,000 of income. So an executive making $250,000 may only have $60,000 of coverage for disability insurance.

As well, coverage may also be limited in terms of what type of work the insured is able to do. Benefits might not be available if you’re still able to perform any work at all – never mind the responsibilities you previously held.

Having a cast-iron will, or a power of attorney can often be the difference between your estate passing smoothly to your loved ones – and those same loved ones having to fight each other in court. (More court time is devoted to estate disputes in Canada than to any other civil or criminal activity.)

So as a favour to everyone in your family, make an appointment with a good estate lawyer. Your accountant, financial advisor or bank manager can give you a referral. A will is relatively inexpensive to establish, and could save those you love a lot of unnecessary grief.

Putting your “financial house” in order is time well spent – and possibly the most caring gift you could ever give.

• identifying their challenges and making important decisions about what they value,
• creating a life-plan to finance those priorities, and
• monitoring progress with simple tools for sustainable results and a rich life.