Financial planning is an essential piece of the puzzle to solving your financial concerns. Whether you want to save for a car or for your retirement, you need to plan for it in advance. Some goals may require a long-term strategy, while others can be fulfilled with a few months of savings. Some financial goals may not necessarily be about saving money but protecting it from taxes. All of these concerns and more can be addressed with a customized financial plan.
Financial planning is a broad concept that includes a number of tasks. You can devise a plan for different areas of financial planning, such as tax planning, budgeting, estate planning, retirement planning, and business succession if you are a business owner and more. If you require help coming up with an exhaustive financial plan that would take care of your different financial planning needs, reach out to a professional financial advisor who can advise you on the same. The ultimate financial plan can include the fields that you need help with, so you can pay attention to the areas that are important for your financial security.
Here are 7 key areas of personal financial planning. Keep reading to know about each of them so you can make a plan based on the components that align with your needs.
Key areas of personal financial planning
1. Budgeting:
Budgeting is one of the most basic yet critical fields in financial planning. It can be the foundation of your plan and set the course for several other areas of financial planning. Budgeting refers to segregating your income into multiple heads, like expenses, savings, and investments. A budget can help you streamline your expenditure. It also enables you to create a roadmap for the future and instills financial discipline. A lot of people struggle with money management because of the lack of a budget. They end up spending aimlessly and saving and investing inconsistently. This negatively impacts their long-term financial stability. Having a budget can solve these issues.
When you create a budget, you allot a fixed percentage of your salary for every essential and non-essential item. For instance, you can plan to use 50% of your salary on your necessary expenses like groceries, gas, electricity, etc. 30% can be used for savings and investments, and the remaining 20% for non-essential expenses, such as travel, dining out, shopping, etc. This way, you can ensure that all your needs are met, and you save a portion of your income for your future requirements no matter what. The budget will also ensure that you stick to this arrangement month after month, irrespective of other external factors.
Financial discipline and regularity are perhaps the most crucial attributes for an investor and a budget can guarantee consistency in the long run.
2. Investment planning:
Investment planning can make or break your future in many ways. It is crucial to invest your money to cover your goals, be financially secure throughout life, counter inflation, etc. However, with multiple investment options in the market, picking the right ones can be a bit confusing. Your investment portfolio must ideally align with your risk appetite, needs, budget, and age at all times. This can be done by sound investment planning.
Investment planning can include creating an asset allocation strategy and investing in the right combination of stocks, bonds, cash, gold, real estate, etc. It also involves picking the correct retirement accounts from a 401k, an Individual Retirement Account (IRA), pension plans, etc. The choice of investments within these accounts also plays a considerable role in your future financial security. Further, investment planning can include diversification strategies, contribution and withdrawal strategies, risk management, and more.
3. Tax planning:
Taxes are a compulsory expense that hampers your overall earnings. They are one of the primary areas of financial planning and deserve your due attention. Income, capital gains, dividends, inheritance, etc., can be subjected to different types of taxes. Moreover, the tax slabs can change over time. The government can also add or remove some provisions and change tax laws and tax brackets. Therefore, tax planning is essential. Tax planning can help you pick the proper tax-advantaged accounts for retirement, healthcare, and more. It can also be helpful in estate planning.
While it may seem like there is no way to reduce or eliminate your tax liabilities, there are several ways to save on taxes. Tax loss harvesting can be used to offset your losses against the profits and lower taxes. Additionally, you can use lifetime gift exemptions to pass on your wealth to your children without incurring estate or inheritance tax. Some states may have less or no tax than others. So, relocating can also be an excellent way to reduce taxes, especially in retirement.
4. Education planning:
Education planning is essential for parents. If you have children or are planning to have them in the future, you will need to take a good look at your expenses. Right from the costs of clothes, and healthcare to education, there are several additional expenses that you may have to deal with as parents. Education, in particular, can be one of the most concerning factors. The costs of higher education are skyrocketing by the day. If your child plans to attend college or a private school, you may find it hard to cover the costs out of your salary; therefore, starting planning from a young age may be advised. You can use the 529 savings accounts for education expenses. This is a tax-advantaged account that is specifically designed for students and parents. You, as well as the child’s grandparents, aunts, uncles, and even family friends, can contribute to the account. However, you can only use the money for qualified education expenses. If not, you will incur a 10% penalty and be subjected to federal income tax.
Parents can also use an IRA for qualified education expenses. However, it is essential to note that while the IRA can be used for education planning, it is primarily a retirement account. So, it is advised only to use it for your children if your other retirement accounts are sufficient for your retirement needs. Using your retirement fund can be detrimental to your future. So, make sure to plan in advance and make an informed choice on the matter.
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5. Retirement planning:
Retirement is one of the essential aspects of a financial plan. It is a time in your life when you can be in your most vulnerable state. Your age and health may not allow you to work and earn money. You may also not find adequate work opportunities. Moreover, retirement can be long. It can easily account for 20 to 30 years of your life, sometimes even more. Therefore, you must save enough for it. Retirement planning can help you save for your future needs, grow the value of your money to beat inflation, and offer you the chance to live a financially comfortable and dignified life for as long as you live.
Retirement planning can include using instruments like the IRA, 401k, Health Savings Account (HSA), annuity plans, etc., to secure your future. For instance, if you are saving in a 401k, you can aim to maximize your contributions every year. This can help ensure that you get your employer’s match and are able to save more in the long run. Retirement planning can also involve choosing between a Roth and a traditional account. For instance, a Roth IRA will not be taxed in retirement. So, if you foresee a high tax bracket in the future, you may choose this.
On the other hand, a traditional IRA will be taxed in retirement but not before. So, if you are in a higher tax bracket now, you can opt for it and push your tax liabilities to the future. In addition to this, retirement planning can help you plan your withdrawals in retirement and understand the rules of Required Minimum Distributions (RMDs), too.
6. Estate planning:
Estate planning is another one of the critical areas of financial planning. Your estate can include your physical and financial assets like your home, business, retirement accounts, insurance plans, mutual funds, stocks, bonds, gold, collectibles, etc. All of these may be under your ownership right now, but you may want to leave them to your spouse or kids after you. This requires creating a will, adding nominees to your investment accounts and insurance plans, building a trust for minor children, etc. You can also set up health directives for the future when you may not be capable of making financial and other important life decisions yourself. All of these things are essential to protect your money and the financial interests of your loved ones. The absence of an estate plan can put your family in a lot of turmoil. It can also lead to probate and unnecessary legal fees. So, try to be as efficient as you can to ensure that your loved ones are protected in your absence. Estate planning can be even more critical if you have been married more than once. So, make sure that your will states your current wishes and that the names of the beneficiaries are updated to reflect your current family members.
7. Insurance planning:
Insurance can offer financial security and stability against several odds. There are several types of insurance plans that can be used according to your needs and responsibilities. For instance, life insurance can offer the grieving family some financial cushion to carry on with their lives. It can be particularly important for the chief earnings members in a family. It is also essential for single parents. Likewise, health insurance is a must for access to quality healthcare. Medical expenses are among the highest for the average individual. Even minor illnesses and treatment can sum up to a few thousand dollars. The expenses can further double if you suffer from a severe injury or a critical illness. Some diseases can also require long-term care and create post-hospitalization costs. All of these can be covered with health insurance. So, make sure to get adequate insurance for yourself and your spouse and children.
Some other essential insurance plans can also include car insurance, jewelry insurance, homeowners insurance, travel insurance, and more. You can purchase these according to your possessions.
To conclude
It is critical to understand that financial planning is a vast topic that includes several more minor aspects. This is why everyone’s financial plan differs from the other person's. Your individual financial plan does not necessarily have to include all of these components. However, it should be customized to your needs. For instance, if you do not have children, you do not need to worry about their future expenses. So, you would not require a 529 savings account. Contrarily, retirement planning may be essential for everyone. Irrespective of what you do for a living, you will retire one day. So, plan your financial needs after carefully evaluating your unique goals.
If you find any issues, you can consider hiring a financial advisor in your city and discuss the key areas of personal financial planning. Use the free advisor match service to match with 1-3 advisors suited to meet your financial needs and goals.
For additional information on how you can effectively manage your financial plan to suit your future financial goals, visit Dash Investments or email me directly at dash@dashinvestments.com.
About Dash Investments
Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.
Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.
CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.