Smart investors know that they must know where they are currently,what they want to accomplish, and they know that they need to havea game plan. A financial plan is just that: a financial road map. A sound plan should cover a broad range of topics that relate to your present security, as well as to your future well-being. It should include an analysis of your net worth, investable assets, commitment
to goals, and a time frame. The successful plan is balanced, pinpoints your particular needs and goals, creates an integrated strategy to help meet them, and encompasses these six cornerstones:
Examine Your Present Situation
In order for your financial advisor to guide you along the path to achieving your goals, he or she needs to have a clear understanding of where you stand presently. This means figuring out your net worth and liquid net worth, examining your cash flow, and determining your cash reserves.
Cash reserves are a vital part of your financial well-being. For instance, let’s say you have $50,000 in your savings account and $3000 in your checking account. You want to invest the $50,000 so that it potentially earns more than it does in a regular savings account. Now, I recommend keeping three to six months worth of expenses as a cash reserve. Therefore, if you find that your monthly expenses, after taxes, are $2000, then the $3000 in your checking account isn’t going to cut it. You should have at least $6000 as a cash reserve. By analyzing your current situation, your advisor may find ways
to help you save money and reach your goals faster than you may have known. Redirecting some of your money could help you put money away for retirement, or achieve another goal, without it seeming like you are spending any more money than you currently are.
Have Adequate Protection
Protecting yourself from the unexpected is a vital element in financial planning. As time goes by, you change, and so do your protection needs. Having adequate protection means a number of things, such as providing for your family after your death or replacing earning power after a disability. Protection means insurance, and while many people dislike the thought of insurance, it is terribly important.
Investment Planning
Do you enjoy sitting at your computer, trying to figure out which mutual fund is the best option for you? Chances are, you don’t. Today, there are so many different types of mutual funds, stocks, bonds, and investment choices, that it would make your head spin.
An advisor’s job is to sort through all these choices and match specific investment vehicles with your goals, needs, and time frame. Whether you are investing for the long term or short term will determine what kind of product your money should be invested in. You don’t want your money tied up in an illiquid investment if you are planning to use the money in the next couple of years. Before investing any money, it’s important that you communicate to your advisor how much risk you want to take. A friend of mine told me that he give his clients a
risk tolerance quiz. The quiz is six questions long, and it gauges how
aggressive his clients wish to be. "I’ve had more than a few clients come to see me and tell me that they are aggressive risk takers. Sure, we all are when the market is soaring to new highs and everyone is
making money". But not many people are aggressive when the market starts to come back down, people are losing money, and stocks are hitting all-time lows. The truly aggressive people are the ones who are buying when the market is low. Many people want to become
more conservative at that time. It’s human nature.
Tax Planning
Proper tax planning can be a powerful element in protecting and building your wealth. There are certain tax breaks that usually only the wealthy employ, and then there are the tax breaks that aren’t tax
breaks and are actually illegal. Financial planning can help identify the impact that taxes will have on you in the future. While we can’t predict tax increases or decreases, we will have a good idea of how to minimize the taxes you pay, both now and in the future.
There are a number of different tax-exempt and tax-deferred investments you can buy that will help reduce your tax burden. Virtually all tax-exempt investments are free from federal income tax, and many are exempt from state and local income taxes when purchased by residents of those states. The income paid on investments in certain tax-deferred products, like deferred annuities and universal life insurance, is not immediately taxable. Unlike tax-exempt income, tax deferment simply postpones the payment of taxes until receipt of this income at a later date.
This helps reduce your tax bill in that by the time you receive the income from these investments, you may possibly be in a lower tax bracket, thus reducing the tax due.
Retirement Planning
It’s never too late to start planning and saving for your retirement. If you
have already begun, it will be helpful to review what you have achieved so far and what you need to do to get you to your retirement goal. If you have already retired, you will want to look at allocating your resources so that they may provide income for your entire retirement.
Initially, you and your advisor should consider how much money you think you will need to live the kind of retirement you want. Into that equation, you will need to factor in any Social Security or pension benefits you are planning to receive.
Estate Planning
You may be thinking that you don’t need any type of estate planning because you don’t have that much money. If that’s the case, then you would be mistaken. Estate planning isn’t just for the extremely
wealthy. You may have a potential estate large enough to require the special information that your financial plan can provide. Besides, don’t your goals include having enough money and assets to make
your estate very large?
It’s important for you to know what will be available to your heirs when your estate is settled. Additionally, you want to make sure that estate transfer costs and estate taxes are as low as possible. Estate
planning is a highly specialized area that your financial plan will cover. Your advisor will help you plan to ensure that there is enough estate liquidity to meet estate settlement costs, as well as address any
other key estate planning concerns.