Establishing A Financial Plan

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Smart investors know that they must know where they are currently, what they want to accomplish, and they know that they need to have a 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.

Many of my clients are already retired and older. They don't need any disability insurance since they aren't working, and for many of them, life insurance really would be a waste of money. However, long-term care, or nursing home insurance is perfect. These are people who have multi-million-dollar net worths. To see all of their hard work, money, and possessions decimated by having to pay for a nursing home is sad and unnecessary. Many of my clients have opted to transfer the risk of paying for nursing homes, rather than trying to self-insure or rely on family members.

However, you may find that you don't require any type of insurance. Protection analysis looks at the different types of insurance and the most economically efficient ways to manage the different types of risk.

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. I give my clients a risk tolerance quiz. The quiz is six questions long, and it gauges how aggressive my 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.

That's why I give them the quiz. Once I score them as conservative, moderately conservative, moderate, moderately aggressive, or aggressive, I can suggest investment vehicles that match up with their risk factors. It's the quiz that helps determine the mix of invest ments so that the clients can concentrate more on their lives, rather than worrying about the market's performance.

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. I explain all of this more in a later chapter.

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.

Your financial plan will tell you if there is an additional need for income, and at what age you should be able to retire. From this plan, you will also know what additional savings are needed, if any. Since we can't predict what the stock market will do, it's important to update your plan fairly regularly, especially once you get close to retirement. Knowing your financial situation in regard to your retirement is essential to achieving the kind of retirement you desire. It's better to know sooner rather than later what you need to do to make sure that you can live the way you want.

Retirement planning also addresses any job changes you have had or are planning to have. If you think you will be leaving your job, or already have, you will have to make a decision about what to do with your retirement benefits from that employer. Since for many people this is the largest amount of money they have handled, it's essential to consult with your advisor, who will help you choose the right investment vehicles and tax strategies for your retirement money. Your financial plan will address your specific concerns and help you pave the road to a successful retirement.

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.

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