Financial planning at the personal level is not a new concept anymore; it has been around for several decades now, but most of us aren’t disciplined planners. I first started saving for retirement because my company made it available, and later on, to have an educated counter argument to all reps who wanted to sell me financial products.
I break down the planning in three categories, life events, retirement planning and contingency planning.
Life events is a category for all events that will happen before retirement. School saving plans, college saving plans, independent college savings, daughter wedding (only if you want to pay for it), special vacations, new house and every other major event you want to plan for. First, establish priorities because money is usually limited, as if we did not know that already.
This step applies for all financial planning, research the tax implications and the special instruments with federal and state tax advantages. Not all tax advantages will apply to everyone, it all depends on the income level, filing status and other personal situations; therefore, we should all make our planning according to our tax strategies. Once the priorities are defined and the tax strategy is clear, it is time to open the accounts and start funding in a disciplined way.
Retirement planning, as I learned it from a good planner, goes beyond 401K and IRA’s. There are many more investment instruments to maximize your wealth. It starts with the lifestyle we want to have after retirement, our retirement age, our sources of income and the expenses we are planning to have while in retirement. Based on those assumptions, we make the cash requirement calculations; finally, we research the financial vehicles to attain those funds. Again, the tax implications and the investments are based on specific situation, lifestyle and income expectations.
Contingency Planning is having a financial backup for difficult situations. I start with a life insurance policy to replace income in case of a fatality in the family, but be careful to calculate your requirements based on your standard of living. Disability Insurance is trickier because it has multiple options, indexation, inflation adjustments and different definitions. We need to know that in case of a disability some of our income is replaced by the insurance policy. A key element with insurance products is to clearly understand the definitions and the implications for you; as an example, based on some disability policy clauses, it is hard to define a disability.
The overall financial planning might involve substantial amounts of money over time. Yes, even if you make very little money. There are certified professionals to help understand the products and implications, and to help you make the right decisions for you. In this area, a little research early on might save you a lot of headaches.
By guest contributor, Gerardo Canales of The Business Right Hand.
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