4 Things a Good Financial Plan Should Have

Financial planning is designed to give you a clear sense of where you stand now financially and how best to reach your future financial goals. Whether you would like to retire in a few years or a few decades, the foundation of your financial planning process remains the same. 

A good financial plan requires you to take a hard look at all of your assets and liabilities, current income and expenses, and expected future cash flow. Your ultimate goal is to ensure you have the ability to take care of yourself and your family when you retire, whatever that may look like to you. 

As a financial advisor in Santa Rosa, CA, I’ve helped many families establish a financial plan that works for them. And in my experience, there are 4 things that a good financial plan should have:

  1. Portfolio Management
  2. Tax Planning
  3. Risk Management
  4. Estate Planning

Once these 4 things are aligned with your financial goals, your chances of enjoying your retirement without financial worries increase substantially. Why are these elements so important? Let’s take a look. 

What does your financial future look like? Contact Montgomery Taylor Wealth Management to see how we can help.

Portfolio Management 

Managing your investment portfolio is arguably the most important aspect of your financial plan, as a big portion of your assets are likely working to build wealth for you rather than sitting in a low-interest bank account. Without the right investment portfolio in place, you can potentially undermine the well-being of your entire financial plan. 

Portfolio management is about having the right mix of investments and knowing the risks associated with each one. For example, stocks tend to give you higher returns than bonds, but they are also riskier. Buying and selling stocks at the wrong time can mean the difference between retiring comfortably and having to work a few more years. The percentage of your portfolio that should be allocated between stocks and bonds is highly dependent on your risk tolerance and time horizon. As you get closer to retirement, rebalancing and diversifying your portfolio become increasingly important.  

It is also important for you to understand the fees you pay to buy and sell your investments. 

Ask your financial advisor about the kind of fees he or she charges to manage your portfolio. Make sure you are working with a fiduciary financial advisor who is required to avoid any conflicts of interest, such as earning sales commissions when recommending certain investments to you. Paying small commissions might not seem like much each time, but adding them up over many years can hurt your returns significantly.

Tax Planning

 The premise of tax planning is simple enough. Your goal is to have a plan in place that allows you to maximize your deductions and minimize your taxes. The end result is being able to keep more of your money in your wallet and less in the IRS’s pockets. 

 One of the easiest ways to lower your tax liabilities while also growing your nest egg is to contribute a portion of your taxable income to retirement accounts. If you have the opportunity to do so, contribute the maximum allowable amount to your IRA or 401(k) each year. In the 2019 tax year, you are allowed to contribute up to $6,000 to your IRA and $19,000 to your 401(k). You can contribute an additional $1,000 and $6,000, respectively, if you are over the age of 50. At the very least, contribute up to your employer’s 401(k) matching contributions to take advantage of the benefit of free money.

 But contributing to your retirement account is only half of the equation. Once you make the contribution, be sure to avoid withdrawing any funds before you reach 59-½ years of age. Otherwise, not only are you liable to pay income taxes immediately upon withdrawal, but you may also be assessed a 10 percent penalty.

 Risk Management

The concept of risk management isn’t just about managing the risk in your investments so that you can grow your assets. It is also about managing the risks in your everyday life so you don’t end up incurring expenses at the least opportune times. 

Ask yourself what can go wrong and identify any areas of your life that can potentially incur large unexpected expenses. Once you have identified those risks, take the necessary steps to mitigate them and minimize the chances that if something does go wrong, it doesn’t derail you from reaching your financial goals. 

Unfortunately, many unexpected issues are not within your control. For example, you cannot prevent natural disasters like fires, floods, or earthquakes. You also cannot prevent reckless drivers from causing car accidents. However, what you can do is buy insurance that covers disasters and accidents, as well as perhaps disability insurance in case you are not able to continue working.

Estate Planning

It is understandably difficult to think about the day when you will no longer be around, but what will happen to your assets when that day comes? Undoubtedly, you want to ensure that your family is taken care of financially instead of having to deal with the IRS while mourning your loss at the same time. This is why estate planning should be prioritized, not put on the back burner until it’s too late.

Having a will or a living trust is important. Taking this step allows you to put a succession plan together that spells out how you would like your assets to be managed when you are gone. 

In the same vein, think about putting all of your important documents together in a safe place that your surviving family members can easily access. You will also want to designate a power of attorney to handle your affairs for you when the time comes.

Another estate planning strategy that can reduce estate taxes significantly is making cash gifts to your desired beneficiaries now. Currently, the IRS allows you to gift anyone $15,000 per year without triggering any taxes. This can be a great way to give your children inheritance over a period of time.

Final Thoughts

If you don’t have a financial plan in place yet, now is the time to get started. If you’re in the Sonoma County area, enlisting the help of a financial advisor in Santa Rosa, CA can be a huge benefit. 

If you don’t have the time to research the market, ever-changing tax laws, estate planning best practices, and key risk assessment variables, find someone who does