Our lives are ruled by money – whether we like it or not.

How much you make determines how much you spend (or at least it should) and the only way to start taking control of your financial situation is by knowing where to begin. But what numbers are most important? Also, which ones (if any) can you ignore?

We’ve compiled a list of the five most important financial planning questions you should know the answer to – master them and become confident that your financial future is on the right track.

1. Am I Living Within My Means?

Do you know if your budget is in the black or in the red at the end of the month? Do you even have a budget (sometimes called a spending plan)? The term budget has received a bad wrap. It’s commonly associated with not having enough or always scraping to get by.

However, living off of a budget is not bad. Maintaining a healthy budget and knowing where you spend your dollars month in, month out is one of the smartest money moves you can make.

Putting a spending plan in place and having a surplus (income exceeds expenses) at the end of the month will enable you to achieve your financial goals such as saving for retirement, college or paying down debt. A deficit (expenses exceed your income) on the other hand, means that you need to make some changes before you start getting into (more) debt.

How else will you know if you can truly afford something? Or predict your retirement expenses? It all begins with the budget – if you do not have one, start one today!

2. Do I Have an Emergency Fund in Place?

Do you have a savings account set aside for emergencies? It’s not a matter of if an emergency will arise; it’s a matter of when. People without an emergency fund tend to tap into credit cards, take out loans against their 401(k)’s and usually are much worse off after an emergency occurs than their peers that have savings set aside.

You should have a cash reserve (or savings account) with at least 3-6 months of living expenses (not income) set aside for financial emergencies or mishaps. Putting a budget or spending plan in place (see above) will help you to better determine your monthly living expenses.

Whether it’s to pay an insurance deductible, to fix the car or to replace your water heater – something is going to come up eventually, and it’s best to be prepared. And no, your credit card or home equity line of credit does not count! Having a fully funded emergency fund can seem overwhelming, so if you do not currently have one, start with first saving $500-1,000 and build on it from there.

3. Am I Adequately Insured?

When’s the last time you reviewed your life insurance or long-term disability coverage? Do you have enough life insurance? Do you even need disability coverage? Is it best to utilize the benefits from your employer, get individual coverage or a combination of both?

If you don’t know the answers to these questions, you should start a list today. Figure out what policies you have in place (medical, disability, life, long-term care, home and auto are a good start), who they’re with, how much you pay (premiums, deductibles and co-pay) and what the benefits are.

Once you’ve compiled this information, you need to assess your needs in each category. If you died today, would your family have adequate resources to bury you, pay off debt and survive day-to-day? If you could no longer work due to disability, would you be able to pay the bills?

When reviewing life insurance, the industry standard recommends that the death benefit (or payout amount) of your life insurance policy should be seven to 10 times your annual income. Where do you currently stand?

Insurance itself can be overwhelming and complicated, but it doesn’t have to be. Start with listing out your current coverage (and premiums) and peel off one category at a time. Assess your current coverage against your needs and make adjustments as necessary.

4. How Much Should I Be Saving Towards Retirement?

Did you know that just 53% of the American workforce contributes to a retirement plan? This could be for many different reasons, but hopefully it’s not due to the confusion surrounding how much to save for your retirement.

Many experts suggest saving 15% of your household income towards retirement. Others offer up 10%. Most fall somewhere in between.

The appropriate savings rate is going to differ per person (based on individual circumstances like age, how much you have saved, etc.), but consistently saving is key. Also, getting an early start is the best way to increase your likelihood of success. It’s never too late to start.

A good rule of thumb is to contribute 15% of your salary towards a taxed advantaged retirement account, like a 401(k) or IRA. If you can’t do 15%, start out with 5% (or whatever you can) and work your way up over time. Analyzing your unique situation is the best way to find out a more accurate savings rate based on your individual needs and goals.

5. What’s the Appropriate Asset Allocation for My Portfolio?

The percentage of stocks and bonds that is appropriate depends on your risk tolerance and should be in-line with your financial goals. Your investment time horizon will also play a role in creating your optimal asset allocation.

For example, if you are saving for a down payment on a home in the next five years (a short-term goal), then you may want to have the money in a safe place such as a CD, money market or savings account. You may want to take more risk for longer-term goals, such as retirement or college planning.

To help you choose an appropriate bond to equity proportion (or asset allocation) for your portfolio, you should fill out a risk tolerance questionnaire. Here’s one from Vanguard to get you started. This investor questionnaire makes asset allocation suggestions based on information you enter about investment objectives and experience, time horizon, risk tolerance and financial situation.

A moderate portfolio, for example, is typically broken down 60/40. 60% invested in stocks or equities and 40% in bonds or fixed income. Typically the older you get, the more conservative you should be (since you have a shorter investment horizon), but this is not always the case.

The next step will be choosing appropriate investments once your asset allocation is determined. Keeping investment fees and expense ratios low and creating a diversified portfolio are important factors when selecting your investments. Indexed mutual funds and ETFs are great options to consider.

In Conclusion

Financial planning covers a lot – even more than the five questions we addressed above. By asking yourself the above questions, I hope that you have a better feel for what you have a handle on and what you don’t.

The good news is that you don’t have to come up with all of the answers on your own. If you don’t have a budget or emergency fund in place or if you don’t know if your insurance, retirement savings or asset allocation is adequate, we can help.

Contact Arthur Flores, a Certified Financial Planning professional, by phone or email and he’ll sit down with you for a no obligation consultation to assess these needs and more to start putting a plan in place to better your financial future today.

 

Sources: U.S. News Money and CNN Money

Read more about industry standards of life insurance: http://www.bankrate.com/finance/insurance/how-much-life-insurance-should-you-buy.aspx#ixzz3Y3B0rjA9

2024 Financial Planning Annual Limits

Download our two-page “Important Numbers” guide.  This quick reference guide covers the most important annual limits as well as figures that are commonly referred to during the year.  It includes: 

  • Tax rates for MFJ, Single and Estates
  • AMT annual limits
  • Standard deductions for MFJ and Single
  • Social Security annual limits (including earning limits)
  • Full Retirement Age chart
  • Social Security taxation summary for MFJ and Single
  • IRMAA Surcharges
  • Retirement Plan Annual Limits
  • Traditional and Roth IRA Annual Limits
  • Estate and gift tax annual limits
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  • And More

 

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