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Nine Basics Of Financial Planning

With all the financial information available out there it can be tough to keep track of what’s important. If you find yourself getting lost in the details just remember these nine basic tips:

  1. Create a financial reserve.  Set aside a reserve equivalent to 3 to 6 month’s living expenses. Being prepared will help relieve anxiety over unexpected events or emergencies.  Use an automatic savings plan to build the reserve, by saving a set amount from each paycheck.  The fund will grow faster than you realize and you may not even miss the money automatically set aside each month.
  2. Get rid of high-interest rate credit card debt.  If you are carrying over balances and paying interest, cut down on your card use and pay more than the monthly minimum.  Then find a different credit card with a lower interest rate.
  3. Develop a household budget.  Understanding how you spend your money can also show you how you might spend less.  Consider using a financial management software program to help organize your finances and save time.
  4. Save for retirement.  The decisions you make before retiring will determine your retirement lifestyle.  Take full advantage of your employer’s retirement plan.  Participate in the plan, contribute as much as you can and try to get the maximum available employer matching funds.  Then consider opening an IRA or Roth IRA account.
  5. Be aware of your responsibility as a taxpayer.  Yes, pay your taxes.  But no one likes to pay more income taxes than they should.  Keep good records of potential deductions like mortgage interest, state and local taxes, charitable contributions and certain medical expenses.  Also, take advantage of tax deferral or preferential tax treatments on your investments.
  6. Develop a sensible investment strategy.  Start with an asset allocation goal that divides your investments into equity, fixed income and cash investments based on your time horizon (age) and risk tolerance.  If you are younger and more comfortable with risk, allocating a larger portion of your funds to equities may help you earn the higher returns historically found with stocks.  However, all investments involve risk and past performance is no guarantee of future results.
  7. Make sure you are adequately protected.  Insurance provides protection against the unknown or unexpected.  Make sure your possessions, health and role as a provider for your family are adequately insured.  Examine the level of deductibles and the coverage amounts to get the protection you need at the lowest cost.  Consider an umbrella liability policy for additional coverage above what is provided in your homeowner and auto policies.
  8. Set up an estate plan.  A well thought out plan lets you decide how your assets are distributed, can reduce taxes for you and your beneficiaries, and covers other issues, including various powers of attorney.  A “durable power of attorney for finances” designates someone to make financial decisions and a “durable power of attorney for health care” designates someone to make medical decisions if you are incapacitated.
  9. Organize your records.  Have a system for handling expenses and keeping organized records to save time and reduce stress.