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  • Writer's pictureThomas Hayes

7 Steps to Building a Basic Financial Plan

Updated: Dec 20, 2023

  1. Form a Household Budget: Establishing a basic budget is the cornerstone on which the rest of your financial plan is built. If you cant master your cash flow, you'll never be financially independent. A great way to force yourself to stick to a budget is to automate all of your spending and savings as best you can.

  2. Establish an Emergency Fund: Once you know your monthly expenses, you can calculate your emergency fund. Generally you want to have a minimum of 3-6 months of expenses saved in cash and short-term fixed income instruments. Avoid investing these funds in longer duration assets such as stocks, because you never know when an emergency can occur. It's no surprise to anyone that stocks generally sell off in conjunction with a reduction in economic activity. If you lose your job as a result, and need to withdraw your emergency fund, you may have to do it into a severe downturn.

  3. Contribute up to 401(k) Match if Possible: Most employers offer some type of retirement plan, such as a 401(k), where they match employee contributions up to a certain percentage of their salary. For example, a company might match 100% of employee contributions, up to 6% of their salary. For someone making $100,000 per year, that 100% match on a 6% contribution amounts to an extra $6,000 of pay annually. The funds then grow on a tax deferred basis until withdrawal. If your company doesn't offer a retirement plan, a Traditional IRA or Roth IRA are also potential options. Although you won't have the benefit of the company match, you may have access to an larger universe of investments than you would in a 401(k).

  4. Start a Roth IRA: If you are below certain income limits*, you may be eligible to contribute to a Roth IRA. A Roth IRA allows you to make after tax contributions up to $6,000 per year, or $7,000 if you're over 50 years old. Using after-tax money to fund the account means that withdrawals can be made tax-free after the funds have been in the account for five years, and you are over the age 59 and a half. This tax-free withdrawal feature makes the Roth IRA a good hedge against future income tax increases.

  5. Start a Taxable Investment Account: Once your emergency fund has been established, consider diverting any additional savings to a taxable investment account. As mentioned earlier, for emergencies or short term expenses you want to make sure you have funds readily available. However, for funds you won't need in the short term, you need to make sure you maintain long term purchasing power. Due to inflation, any savings held in cash is consistently losing purchasing power. For example, in 1970, the median home value in the US was $17,000*. Imagine putting $17,000 under your mattress in 1970, and then trying to take that money out today to buy a home, you're going to have a difficult time finding anything in your price range. Instead, by investing in a mix of stocks and bonds, you can increase your chances of maintaining your purchasing power over the long term.

  6. If You're Married or Have Dependents, Consider Term Life Insurance: I won't dive into the many different types of insurance products here. However, if you own a home with your spouse, or have any dependents, you should consider protecting yourself with a term life insurance policy. At a minimum, a good place to start is mortgage protection. For example, if you and your spouse own a home on which you have a $250,000 mortgage, and one of you passes away, a $250,000 term life insurance policy would allow the surviving spouse to pay off the mortgage balance and remain in the home.

  7. Estate Planning and Avoiding Probate: Ideally, everyone should consult an estate planning attorney to establish a will and a comprehensive estate plan. However, at a minimum, make sure that as you're going through the process of establishing any investment accounts, you name beneficiaries for each account when possible. Any account with a designated beneficiary avoids probate after the owner's death. This simplifies everything for your heirs after you have passed away. No one wants their loved ones left with a complicated and expensive situation after they're gone.

This is a basic outline you can use to get started, but it is by no means a personalized financial plan, and is not personal financial advice. A comprehensive financial plan involves taking a much deeper look at your finances, understanding the relationship between all of these pieces, and how to maximize their benefit. Always consult a financial advisor or tax professional prior to making any investment decisions or tax decisions.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

This material contains only general descriptions and is not a solicitation to sell any insurance product of security, nor is it intended as financial or tax advice.


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