How to Make a Financial Plan

For most people life involves things like setting goals, buying a house and a car, going to college, and sending the kids to college. With plans like that, one of the most basic needs is to be able to protect your stuff, so if something happens to one of your assets, you can replace it without having to start over with the goal of getting it. Once you have your stuff, and it is protected, it is time to start building your wealth with investments in order to contribute to your retirement plan. If you have enough saved for retirement, you can be comfortable while you prepare to die. But, since you can’t take it with you when you go there is still another step of dividing your belongings among your loved ones, and ensuring that they will be taken care of.

Using consumer credit in a responsible manner is the key. This is because interest on your line of credit takes away from the amount that you would otherwise use for savings and retirement. To put it as simple as possible, you are not financially prepared for tomorrow if you are still borrowing money to pay for yesterday.

Having access to emergency cash funds is also essential also. Something like losing your job or just being out of work for a long period of time can ruin your financial situation, if you don’t have that “buffer”.  Aim to keep your bills paid up for an extra month, in case something like that happens. Having the buffer is not the same as an emergency fund, but it serves the same purpose. Everybody needs to have access to enough money, right when it is absolutely necessary, to protect yourself from financial catastrophes by having some kind of emergency money. Another reason why emergency funds are essential is even if you have all the different types of insurance, there are still going to be things that none of your insurance policies will cover.

The real way to build wealth is with investing. There are many different ways you can invest your money, and even though some kinds of investment types are more popular than others, does not mean that they are more lucrative. The most popular type of investment is one that involves compounding interest. Compound interest is when interest earns interest on itself. This is where the power of multiplication comes into play, and you can build up a lot of money over time, especially if you keep depositing in the investment on a regular basis.

The time value of money (according to investments) says that if it sits longer it is worth more because it is collecting interest, unless it is a flat rate interest loan, then you would need all of your money back at once or you would lose out on any benefits of the large chunk that you put up in the beginning. Something else that would be smart is to invest in things that are gaining value with time, like precious metals and commodities, instead of paper money which actually loses value if you let it sit around. Will you have any residual income from a business or royalties, like me? I write articles, and each of them makes a few pennies each day. There is no excuse, you should be investing as much time and/or money as possible, right now! Then you take the profits from your investments, and put them into retirement plans. This also lowers your taxes on the investment profits, giving you extra tax break.

Why invest your money and take the risk of losing it? Well, most investments are not as risky as people make them out to be, but the main reason for investing is to have money for your retirement plan. The most popular type of retirement account is an IRA. There are many different kinds of IRA accounts, and they each have different requirements and specifications. The government even gives you tax credits for contributing to your retirement account. You can then take the tax breaks and add them to your retirement account and get a kind of “free money” from the government similar to how some employers match employee contributions to the 401K plans. Older tax payers can contribute more, in order to “catch up” with retirement plans. 

There are 7 basic steps to go through when planning out your retirement. To set goals is the first step. After all, if you don’t know what you want, then how will you know the way to get it? Then in the second step, you put a dollar amount on your goals. After you know how much you need to meet your goals, you can estimate how much income you will have after you retire in the third step.

Now that you know how much money you will have to live on, you have to make room for inflation, in order to keep up with the times. Inflation is what makes your money worth less, and it should be considered as the “time de-value of money”. History has shown us an average of about 3.24% a year as an inflation rate. This might not seem like much, but when you spread it over 20 or 30 years, it can seriously diminish the value of your stash of cold hard cash. At step 5 it is time to determine how much money to pay into your retirement plan in order to meet any financial shortcomings. This is another point where figuring in the average inflation rate comes in handy.

Figuring out how much you need to save each year is very simple, and that is step 6. If you are not familiar with basic mathematics, you would just divide the amount you need by how many years you have to reach retirement. Then you can maximize your returns on the retirement plans by figuring how much of that5 money to put into each type of retirement plan you have. There are online tools that make this step easier, because crunching all of those numbers can be mind boggling for some people. Lucky number 7 is probably the hardest one because now it is time to start putting your plan into action, start contributing to your retirement, and cut back on some of the non-essential things in your life. Once you get started, it gets easier and easier.

After you retire, eventually you will die, and after you die there is still business to take care of. It is important for you to have all of this lined out, so your family does not suffer any more than they have with your passing. This is where an estate plan comes into the picture. Estate plans are designed to minimize taxes, and divide your assets among the people you care about (Roland, J., 2011). This is done through wills, trust funds, and gifts. Something else that should be included in an estate plan is appointing power of attorney to someone to make decisions in case you are not capable of making your own decisions due to physical or mental impairments that may arise.

A good estate plan will define who gets what, how assets are handled after your death, and provide for your family after you no longer can. Lawyers can help you do this in a way that is clearly understood by the law (so there are less chances of lawsuits about your stuff after you die), and can show you how to take advantage of different methods of lowering taxes that are due on your estate.

Yes there are even taxes due after you die; they call it a death tax. In fact you pay taxes on everything. You pay income tax on the money you make, and you pay other taxes on everything that you buy. It seems like the governments are “double dipping” when they go crazy with all of these taxes like that. But tax money is what keeps the government running, and some government official that buys a house with tax payer money is preventing your child’s teacher from being paid a fair wage for their services. But it is the law to pay the taxes, so greedy people can benefit from your money, so it is only right for them to say they are sorry, and give you some of it back at the end of the year in the form of tax credits. 

Though this is only a basic outline of how you would go about doing it, you are now aware of how to put together a sound financial plan.  There are many details that will be specific to you, and not someone else, those things should be considered when doing this process. Keep in mind this is not something that you do one time and forget about it.