Core Elements Of A Sound Financial Plan
BY: Daniel M. Savage
1. Retirement Planning. Retirement is a life stage fraught with uncertainty that will likely last for 20 to 30 years; therefore, it is critical to begin preparing as soon as possible. A good plan anticipates your “burn rate,” or the after-tax amount of money you expect to spend.
- Do you follow a budget or prefer to spend freely?
- Do you know where your dollars are spent?
- Are your assets and liabilities properly structured?
- In light of the above, how can you optimize cash flow?
3. Risk Management. In financial terms, risk management is the practice of recognizing possible risks, analyzing and quantifying their potential impact, and taking precautionary steps to either eliminate them or reduce their effect.
Most people fail to realize that their greatest asset is their ability to earn income. So, what happens if you can no longer work due to a long-term disability? What happens to your family if you prematurely die in your 30s, 40s, or 50s? How will a long-term care event affect your investment portfolio?
4. Investment Management. At some level, investment management relates to all other elements of your financial plan. Sound investment management begins with developing a clear understanding of your tolerance for investment risk. Next comes establishing an appropriate asset allocation that, in turn, identifies a comfortable glide path for building wealth over time. Investment management also entails having the right mix of qualified and non-qualified investments for portfolio efficiency and other reasons.
5. Estate Planning. For many people, estate planning is like a trip to the dentist: something to be avoided at all costs. Nevertheless, it’s important for a variety of reasons, including, but not limited to, ensuring that your assets transfer according to your wishes, financial security for family members, estate tax minimization, nomination of a guardian for minor children, identification of who will care for you should you become disabled, and much more.
At minimum, everyone should have a will, financial power of attorney, and healthcare power of attorney.
6. Tax Planning. Last but not least, it’s important to consider our favorite partner, Uncle Sam. Most people cannot entirely escape taxation, but they can avail themselves of powerful minimization strategies such as using 401(k)s, IRAs, Roth IRAs, and other qualified plans that allow for tax deferral and/or more tax-friendly withdrawals upon retirement. A good plan also leverages the benefits of compounding and offers smart capital gains strategies as appropriate.