Financial planning and personal finances
Many financial decisions aren’t made in isolation. Getting a raise could impact your tax bracket. Purchasing a house may reduce your capacity to contribute to retirement. Reviewing an insurance policy might show that your beneficiaries are outdated. When each piece of your money is addressed in silos, you can overlook trade-offs and leave gaps in your overall financial picture. By connecting all your financial planning elements, namely cash flow, debt, savings, investments, insurance, taxes, retirement, and estate documents, you create a system instead of a list of disconnected actions.
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Start with what actually comes in and goes out
The first step in any plan is understanding your cash flow, meaning the money you take in and spend each month. It’s more important than budgeting because it helps you understand what is actually feasible to allocate to living expenses, long-term objectives, and emergencies.
A person who is aggressively paying off high interest-rate debt might have a very different investment strategy than someone with no debt and enough liquid cash to cover an emergency. One dollar saved and invested might make perfect sense for one couple but could create severe stress for another couple who contributes it toward retirement. A comprehensive cash flow analysis can help you answer questions such as:
- How much should I keep in a liquid account for emergencies?
- What order should I pay off my debts?
- Can I afford to buy a house without jeopardizing my retirement savings?
- Am I fully insured?
If you don’t have a clear understanding of your cash flow, your investments, even if they’re good ones, could end up straining other parts of your personal finance strategy.
Give every goal a date
“Savings goals” is a great concept, but “save more” isn’t a plan. You need specific targets with deadlines and priorities. A move in 12 months, your child’s college tuition, selling your business, or retiring could all be competing for the same pool of money. Time horizon, something Fortune walks through at fortune.com/recommends, matters, too.
Money that you’ll need in the near term shouldn’t be exposed to the same level of market risk as money that you intend to leave untouched for 20 years. Categorizing your savings based on specific objectives could keep you from dipping into a retirement account to pay for a new couch. And you probably won’t be able to fully fund all of your goals simultaneously. You should prioritize them so you can see the trade-offs.
Taxes, insurance, and documents need to agree
Taxes aren’t limited to tax season; tax planning is integrated into many day-to-day money decisions. Your savings account, charitable giving, income and investment withdrawal timing, and investment sales all factor into your eventual tax bill and how much money you have to work with. Planning for taxes requires taking a holistic view of your cash flow and future income.
A strategy that reduces your current taxes might help, but it shouldn’t eliminate the need for an emergency fund or an effective plan for future withdrawals. Be aware of the specifics of your particular plan, too. Many employer-sponsored retirement plans have a waiting period before you’re eligible for matching contributions. If you miss the sign-up deadline, you might not be able to join until later in the year, losing valuable months of matching contributions.
Insurance and estate planning documents
Insurance is typically evaluated only during significant life events. But it serves as a crucial safeguard for your overall financial security. Health, disability, life, property, and liability policies all protect against a variety of risks. The correct amount of coverage is highly dependent on your income, dependents, debts, assets, and other protections. People with very simple financial lives, no dependents, little to no debt, and no outside insurance obligations probably don’t need complex coverage.
That said, it’s still wise to evaluate your emergency savings, essential insurance, and beneficiary designations. It’s also important to align insurance planning with estate planning – the practical side of Legacy Life Planning starts there. Your will, power of attorneys, health care directives, account titles, and beneficiary designations must all be consistent. Beneficiary designations can override any instructions in your will. So, if there are discrepancies, you should fix them quickly.
Make investments serve the whole plan
Investments are often seen as the star of the show, but they’re just one part of a successful financial plan. Your asset allocation should match your goals, time frame, tax status, liquidity requirements, and risk tolerance. A portfolio might appear well-diversified, but it might not be well-suited for the individual who owns it. For example, someone who anticipates using most of their savings in the next five years should have a different strategy than someone who receives steady income and anticipates a long retirement. The point isn’t to chase the maximum returns, but rather to utilize your investments to fuel your desired lifestyle.
A unified plan gives you a clearer view of how today’s financial moves will affect your future goals. It also makes it easier to adjust your strategies when you experience a change in income, family size, or other life events that open new opportunities. Collect all your recent account statements, insurance policies, debt information, beneficiary designations, and cash flows before meeting with your advisor for your next financial review.
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