Through general financial planning, it is possible to amass hundreds of thousands of dollars of wealth over the long term. To arrive at that point, you will follow the framework of your financial plan as it relates to providing for day-to-day expenses, managing credit, and purchasing assets. All effective financial plans begin with goal setting. From there, you can best project required savings amounts and coordinate strategy to balance risks against rewards.
Defining Financial Goals
Well-defined financial goals provide a sense of purpose for your plan. Common financial goals are often related to a first-time home purchase, college tuition payments, and retirement lifestyle. You will categorize each goal according to importance, size, and time frame. With the kids already off to college, your chief goal may remain to provide for you and your wife’s own retirement. Perhaps the two of you will need to save up $2 million within the next 20 years — to live out your Golden Years off the Oregon Coast.
With a set of financial goals in hand, you can pull up an online financial calculator and toggle through multiple projections. After using the financial calculator, you may determine the amount of money you should be saving on a monthly basis at a projected rate of rate of return to meet your life’s goals. You will then reconcile this information against your current finances. If your goals appear unrealistic, you may need to undergo major lifestyle changes and eliminate discretionary spending from your budget. Discretionary spending for consumer goods, such as concert tickets and designer jeans, rarely adds value to your bottom line.
Cash, Credit, and Insurance Management
Before saving aggressively towards your life goals, you must get your cash, credit, and insurance needs in order. The goal here is to access cash in nearly all economic scenarios — so that you are not forced to tap into long-term investments in emergency situations. In terms of banking deposits, you should maintain a cash balance worth six months of living expenses in cash reserves at all times. Meanwhile, you should also keep expensive credit card debt to a minimum and take out insurance policies on your health, automobile, home, and life.
Investment Account Types
You will choose to put money into investment accounts that match your savings objectives. If retirement is a primary goal, you will look to allocate cash towards retirement accounts that offer tax deferral. Tax deferral means that you will not owe taxes on interest payments, dividend income, and capital gains as they occur within the retirement account. Retirement accounts include 401(k) alongside Traditional and Roth IRA plans. You fund 401(k) and Traditional IRA plans with tax-deductible contributions, which means that your withdrawals at retirement will be taxed as ordinary income. Roth IRA contributions, however, are made with after-tax money, which allows for tax-free withdrawals. A Roth IRA is ideal if you expect to make more money in the future, while a Traditional IRA is recommended if you already earn good money and prefer to take immediate tax breaks.
In most cases, retirement plans do not allow for withdrawals until age 59 ½ — without a 10 percent additional tax penalty. For flexibility, you will also put money into a regular taxable brokerage account. With a taxable brokerage account, you can sell investments at any time to access cash — without penalty.
You will purchase a diversified portfolio of money market securities, bonds, and stocks for your investment accounts. Money market securities and bonds generate interest income in most commercial conditions, while stocks are best for long-term growth through dividends and capital gains. You should increase exposure to bond and money market assets as you age and near retirement. The SEC recommends that you purchase mutual funds, which provide for diversification and professional money management.
General Financial Planning, Sources:
SEC: Invest Wisely – Mutual Funds
SEC: Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing
IRS: Publication 590 – IRAs
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