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The Seven Main Financial Planning Points

Melissa Gerhardt, CFP®, CEPA®, ChFC® | October 30, 2020

Financial planning can be a daunting task to most individuals because it incorporates every area of your financial life.  BUT it does not have to be that way! 

A financial plan that is goal focused and breaks each area of finances apart can easily be tackled and adjusted along the way.  I have seen great successes by those who plan and terrible failures by those who avoid planning. Here are the 7 main financial planning points and why you should consider each one in your plan.

#1

Cash Flow – Cash flow is the most important piece of your financial plan.  Think of it as the gas in a car or blood in the body.  If you have positive cash flow each month you have the ability to save whereas negative cash flow will lead to withdraws and debt.  Assessing your cash flow, income and expenses, on a simple page of paper can be easily done by looking at your bank account and expenses (checking account and credit card statement).  Make sure to include ALL expenses not just the basics.  Expenses I see people forget to include are entertainment, groceries, gifts, hobbies, vacations, etc.  These expenses add up to a large number. 

Emergency funds are an absolute MUST!

It’s not about budgeting, it’s about reverse budgeting.  Life is too busy for most people to live on a budget.  Therefore, I believe in reverse budgeting, which is setting goals, saving for them, and then spending the rest.  This works well for my family (with 2 kids) and many of my very busy clients. 

Emergency funds are an absolute MUST!  Without emergency funds every financial plan will fail!  Emergency funds should be 3 to 6 months of living expenses.  I advise 3 months for those who have a two-income household with stable careers and 6 months for those who are a single income household and/or fluctuating incomes.  These funds should be kept in a high interest savings or money market account just out of reach of your everyday spending.

#2

Major Purchases – A new home or car are exciting but are often filled with stress and worry about how to pay for them.  Planning ahead and having the funds stashed away can take away this stress.  For any big purchase I suggest saving to a separate bank account each month.  If it’s a new home, save the increased amount the mortgage & taxes will be, this will let you know if the new payment is possible and it will give you a bigger down payment.  For a new car or other payment, I suggest saving into a separate account the same way, if you don’t have a car payment, keep saving like you still do. 

#3

Taxes – the only thing certain in life are death and TAXES! Taxes cannot be avoided but they can be smartly managed.  Take advantage of employer sponsored plans like FSA’s, HSA’s, Dependent Care FSA’s, etc. to help you pay for things you already use tax free.  Be careful not to over fund an FSA because most expire at the end of a year.  Look into retirement plan savings options like pretax plans that allow you to save on a pretax and tax deferred basis (IRA, 401(k), SEP IRA, SIMPLE IRA).  Also, consider post tax savings plans (Roth IRA or Roth 401(k)) that will come out tax free in retirement.  Post-tax plans are some of the best tools for young people in low income tax brackets.  These savings plans should be well balanced to fit your timeline to retirement.

You should first consider how much insurance you NEED and then what you WANT before you consider what kind of insurance.

#4

Insurance – no one likes insurance until the day you need it.  There are many different kinds including health insurance, auto and homeowner’s insurance, life insurance, disability insurance and long term care insurance.  You should first consider how much insurance you NEED and then what you WANT before you consider what kind of insurance.  For example, with life insurance, how much insurance do you need and want to cover your family should you pass away, then you should consider what kind of insurance makes sense for your budget and plan. 

Having a good relationship with your insurance agents is key.  You should talk with them every year or two to see if things have changed and update your plan.

#5

Estate – If you do not have an estate plan, the government has one for you and you may not like what it has to say.  Draft your estate planning documents including your Will, Financial Power of Attorney, Medical Power of Attorney and Health Care Directive.  Spending a few hours on these documents with an attorney can save your family many $1,000’s and lots of frustration.  Remember, this is how you will be remembered by your loved ones. 

#6

Education – College education costs are on the rise and can vary greatly from a community college to an Ivy League School.  The average cost of a Penn State Main education is over $35,000 today. There are many ways to save from using a 529 plan, UGMA/UTMA, regular investment account, Roth IRA’s, etc.   Every type of account has its benefits and drawbacks. The most important thing is that you get started and use the type of account that works best for you and your family.  Remember, college is not like retirement, you do not want to overfund college.

#7

Retirement planning – is a must.  Everyone will retire and living on social security is not enough. To Roth or not to Roth… that is the question?

Look into retirement plan savings options like pretax plans that allow you to save on a pretax and tax deferred basis (IRA, 401(k), SEP IRA, SIMPLE IRA).  Also, consider post tax savings plans (Roth IRA or Roth 401(k)) that will come out tax free in retirement.  Post-tax plans are some of the best tools for young people in low income tax brackets.  These savings plans should be well balanced to fit your timeline to retirement. 

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Melissa is an Advisor with Legacy Planning Partners providing comprehensive financial planning and financial services to business owners and individuals. Alongside the team of advisors and staff in the Lehigh Valley, she is committed to providing her clients with professional service and assistance in securing their financial future. Melissa provides guidance in the areas of business family succession planning, financial strategies, retirement solutions, insurance solutions, investment management, estate planning, and education funding for children.

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