What is Financial Planning?
There is a lot of financial planning myths. A common misconception is that financial planning is only for wealthy individuals and families – which is simply not true. No matter the size of your bank account, financial planning can be used as a tool to help you achieve your financial goals. Other myths suggest that financial planning is a daunting process and that you don’t need a plan because things will “work out” on their own. These thoughts cause many people to shy away from financial planning, but without a set plan, you’re less likely to stay motivated on your financial journey.
The first step in the financial planning process is to define your priorities and goals. What are you trying to accomplish? What are your aspirations? When do you want to achieve your goals? Your goal could be retirement or saving for your kids’ college. Once you have identified your goals, you can set a timeline to achieve them. Using retirement as an example, one way to determine the timeline is to ask yourself, “It’s important to me/us to be able to retire at age 65, with an annual income of $X because of X “. You are basically wondering if you are taking the necessary steps to achieve this goal. Many of us have multiple goals when formulating our financial plan, and those goals guide strategies and next steps.
Consider your life stage
Financial planning can begin at any age, but your approach may differ depending on your situation. Certain life events can influence your financial strategy.
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New to planning: If you’re just starting out, consider opening a savings account and setting aside whatever you can from each paycheck. With most banks, you can set up an automatic transfer from your checking account to a savings account, so you won’t even have to think about it. Also consider a retirement fund, either a 401(k)‡ or similar employer-sponsored plan, or individual retirement account (IRA)‡ .
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Personal Steps: If you’re ready to start a family and eventually want to help your kids pay for college, start taking action on that goal as soon as you know they’re on their way. Planning allows you to manage expenses as they arise.
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Approaching retirement: If you are approaching retirement, it is essential to meet with your financial partners to find out when you can retire and feel comfortable with the results of your financial planning and long-term finances.
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Retired: During retirement, it’s more important than ever to watch your finances. At this point, your long-term financial plan should focus on a fixed income and stable expenses to help ensure financial security for the rest of your life.
Budgeting and Balancing
Once you’ve set goals and an approach that matches your current life stage, it’s time to get started. take stock of what you have: assets, debts, expenses, income – everything. You may already have a budget, so it can be simple to start there to review your current expenses and income, current account balances, and total debts. Once you know your financial situation, rebalance your budget to include your financial goals and priorities.
Yes repay the debt Whatever your goal, whether it’s a student loan, mortgage, credit cards, or another type of debt, you can use two different approaches: interest first or the small balance first. Although the principal (the amount borrowed) is set in stone, the interest is not. Paying off your highest-interest loans first is therefore a smart strategy for long-term savings. While it’s motivating to reach your goals faster, you can approach paying off your debt by tackling the smallest balance first. Identify your smallest debt and devote any extra money to paying it off. Once you’re done, move on to the next smaller debt.
During this examination, it is also important to look at your credit score and credit reports, as these are essential elements of your financial situation. Your credit score plays a major role in determining whether you’ll be able to receive a loan or be approved for a credit card, which impacts your financial goals. According to FICO‡, your payment history makes up 35% of your credit score, so focus on paying your debts on time. Setting up automatic payments, whether to pay off debts, allocate funds to savings, or pay bills, can help you stay on track.
Retirement and health
If you want to have the most impact on your future through financial planning, you might consider saving for retirement and health care expenses beyond contributing to an IRA or 401K. First of all, do you know “your number”? Once you’ve estimated your average monthly costs for health care, taxes, charitable donations, and living expenses, you should be able to see how much you’ll need to maintain the lifestyle you want. Finding out this number helps prioritize when planning your retirement date. If you find it difficult to choose a retirement date, you can also try phased retirement or semi-retirement to maintain additional income and enter the new chapter of your life. Although it may take a bit of introspection and calculation, in the end you will be able to see if and when you might be ready for retirement.
A useful tool when planning for retirement is a health savings account (HSA). Unlike a traditional retirement account, you can withdraw money tax-free for eligible medical expenses. An HSA allows you to carry your entire unspent amount forward year after year and calculates, compounds and credits interest monthly based on the applicable rate for different account balance levels. Money in an HSA is not taxed at any time in the life of the account, nor are your earnings if any of the money in the HSA is invested. Because of these benefits, an HSA is a powerful way to shore up your finances in anticipation of any healthcare expenses you may have in your prime.
Legacy planning
Considering what will happen to your assets after you leave is an important part of your financial plan. Understand the difference between a will, probate and trust can help you decide how you want to manage your finances after your death. A will documents who should inherit what and ensures that your assets are distributed according to your wishes rather than according to state law. Depending on your situation, there are many ways to write a will to accommodate marriages, children, charitable gifts and debts.
A living trust is an option that offers excellent control, flexibility and privacy over your overall estate plan. With a living trust, you can be your own trustee while you’re alive, then appoint a successor trustee (like a bank) to serve after you can’t or don’t want to serve. The terms of such a trust are flexible while you live, so if you become disabled, your successor trustee can step in and pay your bills, manage your investments, and allow you to avoid a “living probate” where a conservator appointed by the court may need to manage your affairs. Trusts can be established for minor children or grandchildren to be created after your death, hold additional trust assets for disabled or disadvantaged beneficiaries, and even charities.
Wealth and estate planning is not a set and forget activity. Be sure to review your plans at least once a year to see if any updates need to be made. Events that may affect estate plans are tax and marital law updates, family changes, relocations, changes in income/expenses and other factors.
Consult finance professionals
Once you’ve taken the time to review your finances, set long-term goals, and take action to achieve them, you’re on the right track. With more assets, stretching goals, or complex legacy needs, it makes sense to reach out to a finance professional to help define your strategies for success and provide advice and experience. Consulting professionals also helps you feel confident about your plan, next steps, and your financial footing.
Regardless of your life stage or financial goals, financial planning is a valuable process that has the power to change your future.
Interested in learning more about Private wealth management?With UMB, you have a partner who guides you from financial advice and investment portfolio management to wealth building strategies and retirement and legacy preservation plans.
Financial planning services are offered by UMB Private Wealth Management and UMB Financial Services, Inc. UMB Private Wealth Management is a division of UMB Bank, na which manages active portfolios for individuals, trust accounts, benefit plans social services, endowment funds and foundations. UMB Bank, na, is a subsidiary of UMB Financial Corporation. UMB Financial Services, Inc. is a wholly owned subsidiary of UMB Financial Corporation and a subsidiary of UMB Bank, na
This material is provided for informational purposes only and does not contain investment advice or recommendations to buy or sell specific securities or engage in any specific investment strategy. The statements in the presentation are based on the opinions of the author and may be changed at any time without notice. You should not use this presentation to substitute for your own judgment and you should consult the appropriate financial professional before making any tax, legal, financial planning or investment decisions.
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