Financial Planning for All Ages

Are you wondering where the world economy is going and how your personal finances will stand up to the changes?  If so, you are not alone.  Part of the fun of being on this planet is planning for the future even when it’s not clear what will happen tomorrow or next week.

If you’re old enough to know who Gilligan is without watching syndicated reruns, then you’ve already been through a variety of economic conditions.  Inflation, recession, economic booms and busts…today’s shifts are no shock to you.  However, if you consider anything by Aerosmith, Savage Garden, and most “boy bands” to be an “oldie”, then today’s economic conditions may be new to you and you’re probably wondering what’s going on.

The good news is that financial planning can benefit anyone regardless of their stage in life and without regard to future economic conditions.  Financial planning looks at your current financial situation to determine what moves you need to make to reach your future financial goals.

You determine your current financial status by creating a balance sheet and income statement.  The balance sheet is a snapshot that tells you where you stand financially at any specific point in time.  It lists the assets you have available and the debts you need to pay.  Some assets are more liquid than others. Liquidity is a measure of how long it might take to get access to the “value” represented by an asset.  It takes much longer to sell a house than to take money out of a checking account.  On the flip side, the balance sheet also lists the money you owe.  Loans (mortgage, car, student…), credit card account balances, and other debt will need to be repaid either soon or over time.  Comparing the asset side to the liability side lets you know how you stand at that moment.

The income statement tells you how money flows to and from you.  The income portion includes your salary, business income, dividends, interest, and other income flowing to you.  The expense portion includes your mortgage or rent payment, utilities, food, clothing, gas, car maintenance, insurance, healthcare, taxes, entertainment, and other outflows.  These outflows might be one-time costs or weekly, monthly, or annual payments.  When you compare your inflows (income) to your outflows (expense), you will know if you have surplus funds available to apply to your financial goals or you aren’t even making ends meet.

If every dollar you receive is spoken for, then the next step in financial planning is to review your expenses and lifestyle to be sure they fit your income.  Can you reduce your expenses so they are less than your current income?  If so, you have an initial plan of action.  If not and/or you’re unwilling to change your current lifestyle, it’s time to find new sources of income to adequately fund your current lifestyle and future financial goals.

If you have excess funds available, you then need to decide how to put that money to work to reach your financial goals.  One of the most rewarding parts of financial planning is retirement planning.  It may not seem rewarding today if you have to skip those Beyoncé tickets.  But money put away for the future can create peace of mind and untold benefits down the road when you need it.

There are several common ways to save for retirement.

Pension plans – Traditional pension plans still exist but they are not common outside of governmental or union-related employment.  These plans pay employees a certain amount of regular income upon their retirement if they’ve met the requirements of the plan.  Often, these plans also offer the option of taking a lump sum instead of regular payments.  The federal government generally taxes pension income subject to some exceptions.  Each state decides for itself whether it will tax pension income.

401(k) and other employer-sponsored plans – These are plans set up by your employer that allow you to contribute a portion of your pay to a retirement fund up to the limits established by law and/or the terms of the plan.  Many plans allow for two types of contributions: traditional and Roth.  With traditional 401(k)s, contributions are tax-deferred meaning that you do not pay tax on the income that “supports” the contribution.  However, withdrawals from traditional plans are taxed at the time of the withdrawal.  With Roth 401(k)s, the earnings that “support” the contribution are taxed when earned but withdrawals from these accounts will be tax-free if certain conditions are met.

Individual Retirement Accounts (IRA) – These are accounts that you set up for your own benefit.  Like 401(k)s, they have contribution limits and traditional and Roth account options.  These accounts are generally opened at a bank or investment company although there are other IRA custodians that can hold alternative investment assets like gold and real estate.

Health Savings Accounts (HSA) – If you have a qualified high deductible health insurance plan and have not yet enrolled in Medicare, you can open and contribute to a Health Savings Account subject to limitations.  The contribution is tax deductible in the year it is made and withdrawals are tax-free if used to pay for medical expenses and/or certain other expenses.  This is not really a retirement plan per se but it can be used with retirement in mind.

529 plans and Coverdell Education Savings Accounts (ESA) – Although not retirement plans, I mention 529 plans and ESAs here as a financial planning device to save for your children’s future education costs.  Contributions are made after tax and are subject to limits.  Withdrawals for specified educational purposes are tax-free.

Bank and Investment Accounts – These accounts generally hold funds that may be needed in the near or long term or exceed the limits of the specialty accounts listed above.  They are generally invested in savings accounts, certificates of deposit (CDs), money market funds, exchange traded funds (ETFs), stocks, bonds, and/or other financial instruments.  Since 401(k)s, IRAs, HSAs, 529s, and ESAs have penalties associated with withdrawing funds from the accounts under certain conditions, bank and investment accounts can be a way to put money to work without risking penalties (other than the early withdrawal fees related to some of these options like CDs and other account fees).

With so many ways to plan for your future, it’s best to consult with a financial professional if you’re not very confident about managing your finances.  From compiling the data to analyzing it and putting a plan together, a qualified financial adviser can help you develop a clear understanding of your current financial situation and create a solid plan to help you reach your future financial goals.