Hitting On All Cylinders

I miss the days of being able to work on my own car.  Growing up, cars were infinitely simpler than today’s computer driven models.  While it is still possible for one to change the oil or the spark plugs, automobiles have become so complicated it has become nearly impossible to do anything beyond those simple tasks.  I was never exceptionally mechanical, but “necessity is the mother of invention”.  If it was broke, I would try to fix it.

Friends and classmates were always a good source of information.  If I had never replaced a fuel pump, someone I knew would at least know someone else that had done it.  Backyard or back-alley mechanics were everywhere.  With a little help, I managed replacing brake pads, alternators, water pump, and fuel pump.  More ambitious projects like a new transmission were beyond my ability and tool chest.

The ability to rely on your means of transportation imparts a sense of freedom.  That same feeling is derived from having your financial engine in working order.  It requires some discipline, education, expert input, and a willingness to tackle the tasks.

Like a car and its various components, one’s financial health spans a number of aspects.  Some are easily accomplished.  Others may require professional assistance.  Just like some amateur mechanics, you may be able to tackle most of your financial tasks alone.  It is important, however, to recognize the need to pay for professional help if you are uncertain.

The components of your financial engine should include Investment Planning, Risk Management, Education Planning, Estate Planning, Tax Planning, and Retirement Planning.

Investment Planning is determining your risk profile then creating a portfolio with an appropriate asset allocation.  Unfortunately, many investors neglect to build a cohesive portfolio aligned with their risk appetite.  Oftentimes, they take a scatter shot approach of cobbling together a basket of investments without an investment strategy.  A simple discussion with an advisor can quickly lead to action steps to shore up your investment planning.  On-going, this meeting should occur at least once a year.

Risk Management can also be referred to as Insurance Planning.  After all, insurance is simply risk mitigation.  A 40-year-old with 2 kids and a non-working spouse needs risk mitigation to a greater degree than an 85-year-old retiree.  Term life insurance would be an immediate focal point for the 40-year-old.  An insurance review should likely occur every 3 to 5 years.

Education Planning goes beyond college if private schools are a desire for one’s children.  As everyone knows education can be expensive.  Beyond the basic step of saving for school, an on-going discussion should be had about expectations with the family and the advisor.

At a minimum, Estate Planning is the act of creating important legal documents.  These should include the following: A Will, An Advance Directive with a durable power of attorney for health care, A Durable Financial Power of Attorney, and possibly a Revocable Living Trust.  While it is possible to do this oneself, I cannot stress enough that everyone use the services of an attorney.  You do not want to make a mistake here.  Most advisors can refer you to experienced, competent attorneys to assist.

Tax Planning should be occurring throughout the year as circumstances change.  Often, advisors will coordinate with a client’s accountant to align potentially tax-impactful events.   Tax gain-loss harvesting should be an active component of your investing.  If you are unaware of this strategy, ask your advisor about using it in your investing strategy.

Finally, the big kahuna, Retirement Planning is the dominant component of anyone’s financial plan.  The best advice is to save early and often.   If working at a company with a retirement plan such as a 401(k), one should at the very least contribute up to the company match.  It is literally free money.  When you are able you should try to contribute up to the maximum allowed often 15% of your salary.  This is a powerful wealth building engine.

In coordination with the company plan, one should also contribute to an IRA (whether it is a traditional or ROTH will be dependent on your income).  These two legs of the retirement stool should be joined with the third leg, a brokerage account.  At some point, you may have maxed out all your tax deferral options.  A brokerage account will allow you to continue to build wealth with sound investing, albeit with some tax impact due to interest, dividends or realized gains.

Putting all this together can be done by any motivated investor, but it may be worth the expense to hire a professional advisor just like you pay your mechanic to fix your car’s computers.

To learn how an independent, fee only advisor and a CERTIFIED FINANCIAL PLANNER™ professional can help you, please contact me.  Feel free to share with others and make suggestions for future articles: peter.oneill@fiduciamwealth.com