Things to know about Financial Planning

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Financial Planning Overview

The first step is to decide what you realistically want to achieve financially. Financial goals might include early retirement, travel, a vacation home, securing your family’s financial comfort on the death of a bread-winner, planning for the care of elderly relatives or building a family business.

The following rules of thumb may work for some people, but they do not make financial sense for everyone. What is more important is to be able to know whether a particular rule of thumb suits your situation. Here are six of the more common rules along with some considerations that should not be overlooked.

  1. Life insurance should equal five times your yearly salary.
  2. Save 10 percent of your salary per year.
  3. Contribute as much as you can to retirement plans
  4. You need 80 percent of your pre-retirement income to retire comfortably.
  5. Subtract your age from 100 and invest that percentage in stocks.
  6. Maintain an emergency fund of six months’ worth of expenses.

The investment process is comprised of several steps that enable you to select a portfolio appropriate to your risk tolerance and desired return. The primary steps in this process are:

  • Determine your desired return and risk tolerance
  • Develop an asset allocation plan
  • Select diversified investments within each asset class
  • Monitor your investments
  1. Never give in to high pressure. A high-pressure sales pitch can mean trouble. Be suspicious of anyone who tells you, “Invest quickly or you will miss out on a once in a lifetime opportunity.”
  2. Never send money to purchase an investment based simply on a telephone sales pitch.
  3. Never make a check out to a sales representative.
  4. Never send checks to an address different from the business address of the brokerage firm or a designated address listed in the prospectus.
  5. Never allow your transaction confirmations and account statements to be delivered or mailed to your sales representative as a substitute for receiving them yourself. These documents are your official record of the date, time, amount, and price of each security purchased or sold. Verify that the information in these statements is correct.

Have this list of questions with you the next time you talk to your broker. Write down the answers you get and the action you decide to take. Your notes may come in handy later if there is a dispute or a problem. A good broker will be happy to answer your questions and will be impressed with your seriousness and professionalism.

  1. Does the investment match my investment goals?
  2. How will the investment make money for me (dividends, interest, capital gains)?
  3. What set of circumstances have to occur for the value of the investment to go up? To go down? (e.g., must interest rates rise?)
  4. What fees do I have to pay to buy, maintain, and sell the investment? After fees, how much does the value have to increase by before I make a profit?
  5. How easy is it for me to unload this investment in a hurry, should I need the money?
  6. What are the specific risks associated with this investment, for example what is the risk that rising interest rates will devalue your investment or the risk that an economic recession could decrease its value?
  7. Is the company experienced at what it is doing? How long has it been in business? What is their track record? Who are their competitors?

Here is a list of potential questions to ask before making a mutual fund investment:

  1. How has the fund performed over the long run? Where can I get an independent evaluation of it?
  2. What specific risks are associated with it?
  3. What type of securities does the fund hold?
  4. How often does the portfolio change?
  5. Does this fund invest in derivatives, or in any other type of investment that could cause rapid changes in the NAV (Net Asset Value)?
  6. How does the fund’s performance compare to other funds of its type, or to an index of similar investments?
  7. How much of a fee will I have to pay to buy shares? To maintain shares?
  8. How often will I get statements? Can you explain what the statement tells me about the investment?

Yield is the amount of dividends or interest paid annually by an investment. The yield is usually expressed as a percentage of the investment’s current price. It does not consider appreciation. Because certificates of deposit and money-market funds maintain the same value, their total return does not differ much from their yield. But because stocks and bonds fluctuate in price, there can be a large difference between yield and total return.

You can minimize or eliminate tax on inherited retirement assets by using the following methods:

  1. Leave them to your spouse. This saves money owed to estate tax and helps postpone withdrawals subject to income tax–provided your spouse takes no withdrawals before age 59 ½.
  2. Leave them to charity. Although there’s no financial benefit to the family, again, this saves income and estate taxes.
  3. Leave them to family for life, with the remainder to charity in the form of a charitable remainder trust. This reduces estate tax with some benefits to family.
  4. Provide life insurance to pay estate tax on retirement assets. The benefit of this option is that it provides estate liquidity, avoiding taxable distributions to pay estate tax.

Step One: Know Where You Stand. The first step to creating your financial plan is to understand your current financial situation. …

Step Two: Set Your Goals. …

Step Three: Plan for the Future. …

Step Four: Managing Money. …

Step Five: Review Your Plan.

  • Rule #1: Keep Debt Under Control.
  • Rule #2: Avoid Being House-Poor.
  • Rule #3: Aim to Save at Least 10% of Income.
  • Rule #4: Don’t Overlook Emergency Savings.
  • Rule #5: Be Realistic About Retirement.

Financial planning covers all aspects of a person’s financial well-being. This includes savings, investments, retirement and college savings plans, insurance coverage, and estate planning. Retirement planning covers only investments made for retirement.

First, ask about his or her experience with people in a similar situation to yours. Second, ask about education and certifications. Third, ask about the breadth and depth of products offered. Fourth, ask how he or she is compensated for services. Finally, always be sure to check that the financial planner is fully licensed and in good standing.

The answer depends on many factors such as your age, circumstances, goals, and values. If saving isn’t already a habit, the important thing is to get started at a manageable level and then strive to increase that level whenever possible. Always make sure you are contributing enough to receive any company matching contributions to retirement plans. Don’t leave that compensation on the table.

Choose a financial planner who has experience dealing with clients in similar circumstances to yours. You’ll also want to make sure that the financial planner has your best interests in mind, and that he or she isn’t selling you products that are not suited to your needs. Interview prospective financial planners and ask them about credentials, management strategies, and history of performance.

Financial planning looks at a person’s overall financial picture. A financial planner will often ask a prospective client to fill out an extensive questionnaire in order to understand his or her financial needs and goals. The planner will usually put together a detailed, short-term 5-year plan designed to improve the client’s overall financial position. That may be followed by a long-term plan, along with suggestions about how to save and invest for retirement and a child’s college education at the same time. The planner will also look at ways to reduce current and future tax liabilities and protect assets by having the proper life, health, disability and long-term care insurance coverage in place. Finally, he or she may offer suggestions on estate planning.

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