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Brief Overview of Items Included in Overall Financial Plan

Updated on January 2, 2013
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What is a Financial Plan?

It's the new year and everyone has resolutions. If yours involves being more fiscally responsible, then you'll need to focus on several parts of your financial plan in order to reap the highest benefit. Some financial advisers focus on one area and expect that to be sufficient when it comes to your future, but your future is far more secure when you follow all of the areas simultaneously. The areas you need to focus on are the financial plan itself, your asset protection plan, your taxation plan and your estate plan. When used together, your finances are far more certain down the road.

Start of Career Planning

So, you've got a new job and you're earning a steady income for the first time in your life? Congratulations, but don't celebrate for the first five years as these are the most important years for retirement planning. Compounding interest is remarkable, so the money you save in the first ten years of your career become an enormous amount of savings when you retire. For your retirement, I recommend saving the $5,000 per year in an IRA for the income tax deduction and if your employer has 401(k) matching, max out how much they will match for your retirement account. These two strategies really enhance how much you're earning throughout your life and, especially the 401(k) matching or similar program, should not be wasted.

Example: If you contribute $5,000 per year to an IRA that makes 8% interest over the long run for the first 10 years, you will have $787,175.90 after 40 years. So, imagine you started working at age 25 and retire at age 65, without even contributing to your retirement account after age 35, you will already have three quarters of a million dollars for your retirement savings. Any amount contributed over $5,000 will yield fantastic savings once you retire. The sacrifice now is worth it later.

Now is the time to start saving for a house and for your family as well. Figure out how much you can spare to pay a mortgages, taxes, and maintenance on a house and start saving that much each month straight away. Be sure to have enough for the down payment and several months before you sign the sale agreement, as you want to be safe if something were to happen to your job. As we've seen within the last decade, it is far better to get a house within your means than it is to stretch your payments and get the house you might not need. There's also nothing wrong with renting, as it gives more flexibility, allows less maintenance and less taxes on you.

If you want children, begin saving for their cost as well. Children are not cheap with medical expenses, the birth expenses, schooling, clothing, furniture, food, vacations, etc. Be prepared. Before buying a house or having children, you should focus on building a financial buffer. This buffer should be between 3 and 6 months of living expenses in case you get laid off, have a serious medical or legal emergency or have a sudden need for the money. Not having this buffer can lead to all your planning being ruined.

You may think it is way to early to consider other factors of your financial plan, like your estate plan or your asset protection plan, but that's not true. Asset protection should be considered as often as you think about other forms of insurance. If you look at your health insurance plan, why not consider taking a quick look at your asset protection plan? It makes sense too, as asset protection insures your money is still there when you need it. Typically, it is something done by a skilled professional, but there are some ways you can help yourself. For those ways, I recommend checking out my upcoming book on Asset Protection, which will feature ways to do asset protection free or cheap, and easy enough that you can do it yourself. Until that book comes out, continue to read my blog and Hubpages!

Life insurance is important at all stages, but during this one, it's the least important. If you have a spouse who depends on your income, your life insurance should be enough to provide for him or her, but absent having kids, your life insurance should be enough to pay for your funeral and other expenses should you suddenly pass away. The good news is that your life insurance at this age is far cheaper than later on, so considering a whole life policy as part of your retirement plan is not a bad idea.

You should also research what will happen to your assets should you die without a will in your state. If that outcome is acceptable to you, there's no need at this point for a will if you're not earning more than $100,000 per year. If you are earning $100,000 per year, you'll want to discuss how to avoid estate taxes with an estate planning attorney by using irrevocable trusts, lifetime giving, and other good plans. Part of your estate plan, which should be done as soon as you're 18 years old is your Power of Attorney and Medical Power of Attorney with advanced medical directives. These give people permission to act on your behalf should you become incapacitated or unable to make your own decisions. With these powerful documents, you can have someone you trust looking over you should something go wrong.

Recap: For early in your career you want to start saving. Save for retirement, your house, your kids, your buffer in case something goes wrong, but sure to consider your estate plan, taxation and asset protection throughout the whole process, and keep saving. Every dime saved yields many dollars later.

Family Planning

Now, it's time to have a family. Everyone is excited, and you should be. This is a major life step, and one that changes much of your financial plan.

For your own retirement planning, you should still try to contribute $5,000 per year to your IRA and obtain whatever 401(k) matching your employer has in place, but by now, you should have your buffer in place and am making steady payments on a house or renting somewhere that you can care for your children. Assuming you've been making payments to your retirement account for sometime now, you should be in a comfortable position if you need to reduce either of those, keeping in mind that any amount paid now yields significant returns later, but amounts paid later have much less effect.

What you'll want now is great medical insurance for your children and family as a whole, as well as a tax deductible health savings plan. Many employers sponsor health savings plans and have excellent health insurance programs. I'm not an insurance broker and I know nothing of each person's needs or desires, so I'll just recommend a low deductible plan that covers just about everything. Kids get sick all the time, so you won't want to worry about the finances as well as the child when bringing them to the doctor. The whole point to financial planning is to make you comfortable, so worrying isn't something you should have to do, at least not with finances.

I recommend getting additional life insurance now. You'll want a whole life insurance policy to support your spouse, in case something goes wrong. You'll want term life insurance to provide for your children until they're 18, 21, 25, or 30 depending on how you feel, and some sort of whole life policy for your retirement and funeral expenses. Life insurance takes away some of the worry, and, assuming you're still young and healthy, is not that costly.

Once you have your first child, it's time to start thinking about college. If you want to help your child go to college, a 529 College Savings Plan is a great way to do it. I won't go into much detail here, but they are tax benefits to using a 529 plan over other investment-based college saving plans. Different states may have different qualified programs, or structures to the 529 qualified plans, so research your options or ask a qualified professional for help.

Recap: During this stage of your life, your kids come first. Health and life insurance will ensure they're safe and a college saving plan will help them afford college down the road.

Retirement Planning (within 10 years of retirement)

You're getting there. Your kids are hopefully out of the house by now and you're counting down the days til you get to travel the world with the love of your life. I would be lying if I didn't feel I was at this point already, but I've got many years left until then.

Once you've hit this stage, it is important to start calculating how much you think you'll need to survive, make a guess as to how long you'll live for, and how long you will have to work until your retirement account has enough in it to support your goals. If you don't have a financial adviser by this point, or a spreadsheet if you're a do it yourself type, you should get one. It's a fairly simple formula to do, but a very important one too. By this point, contributions to your retirement account might be altogether unnecessary if you've contributed all the years. Thirty years of contributing $5,000 a year would become a very comfortable, and sustainable, retirement account. This, of course, all depends on what you want your standard of living to be after retirement.

After you take a look at what you need to do, there's not much else needed for you to do, just ride it out.

As your family is likely continually changing, you should consider revisiting your estate plan. Anytime a child is born, a loved one passes away, or a marriage happens within those addressed in your estate plan, you should look to see if the results are still how you envision them. If they are, you're fine. If not, you should have your planner redo them.

Now, if any of your investment accounts, or retirement accounts has over $1,000,000 in it, you should speak with a tax professional to see how you can limit the amount of estate tax your estate will have to pay should you die unexpectedly. There's no telling what the exemption amount will be when you die, so $1,000,000 is a safe number to focus on. Also, make sure your assets are protected. It can happen, as does, where a person has to keep working past their retirement date because they got sued for a large judgment and lost a part, or all, of his or her retirement savings. Fortunately for you, many retirement accounts are exempt from creditors. To be on the safe side, find out if yours is and how to make any nonexempt assets safe from the grips of creditors. Your house is an important one you should look at.

Recap: Do the quick calculation to figure out how much more you need to save and what date you can retire, do some tax and estate planning, and continue to focus on your asset protection to ensure your retirement date is fixed. No surprises!

End of Life Planning

At this point, I feel a little like the song "100 Years" by Five For Fighting. We've gone through most of your life and have come to the final stage. How do you prepare for the end of your life? I can't tell you that, but I can tell you what you should worry about as far as your financials are concerned.

There's no need to worry about your retirement plan now, you won't need (or qualify) for new life insurances, and hopefully your family is all set for your passing as well. All you need to worry about is how your memory is going to pass on through your assets. You'll want to speak with someone about how to minimize estate taxes and the burden of probate if that's a concern within your family. If you still have minor children, you should ensure that there's someone who can take care of them. Your will should include a provision about this, but you should also have a standby guardianship set up for the time between your passing and the probate of your will, despite how short that period of time may be.

If you've done everything I recommended prior to this, you won't have to worry about much financially. You will already have enough on your plate, so that's why it is important to plan ahead while the seas of your life are calm.

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    • R W Bobholz profile image
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      Richard Wayne Bobholz 4 years ago from Durham, North Carolina

      Thanks for reading Mawker. I'm liking your hub title and I'll be sure to read it when I get some more time today.

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