Planning can broken down into 4 keys areas:

  1. Basic Financial Planning
  2. Retirement Planning
  3. College Planning
  4. Estate Planning

Why is it so important to have a financial plan?

By making wise lifetime decisions about how you make money, how you spend it and how you invest it, your financial plan can be described as a plan to enable you reach common financial goals that most people want to obtain such as:

  • Reducing living expenses, debt and taxes to have money for other things you want
  • Obtaining good credit so you can borrow money to buy cars and/or a home
  • Having money for your family if you lose job, get sick or pass away
  • Sending your children to a good college
  • Retiring early and comfortably
  • Not outliving your savings
  • Taking a long vacation

Basic Financial Planning - a 3 step process:

  1. Begins with the identification of your personal financial goals,
  2. Continues with a review of your budget and your net worth. then
  3. Completed with an action plan to help you meet your financial goals

Step 1) Make a list of your financial goals (see common examples above).

Step 2a) Create a budget. When doing your budget, always look for ways to reduce your living expenses in order to increase your savings. Here is a free budget calculator.

  • As the picture above explains, if you live in an area where certain categories of living expenses are higher than these guidelines, your budget's "Percentage of Income" will probably reflect higher costs in those categories.
    • You can see selected U.S. city cost of living adjustments by clicking here. The data is a few years old, but it gives you an idea of how certain expenses can be higher or lower in different cities throughout the United States.

When doing your budget, you should ask yourself the following questions:

  • What if my income or household budget changes?
  • What if my number of dependents changes?
  • What if my itemized deductions change?
  • What if my income tax rate changes?
  • What if my contributions to my retirement account changes?

Use this paycheck calculator to show you the impact on your take home pay.

Step 2b) Create a net worth statement.  Your net worth is the value of your savings and other things you own (called assets), less the amount you owe on loans and credit cards (called liabilities). To calculate your net worth, use this free net worth calculator. 

  • Total Assets – Total Liabilities = Your Net Worth

Reducing your loan and credit card balances owed, and increasing your savings should always be a primary financial goal.  Once a month, update your budget.  Once a year, update your net worth statement asset's balances with any additional savings and with any changes in the value of existing savings accounts.  As you pay off loans and credit cards, update these balances too.

To obtain a desired net worth (say $1 million in assets and $0 liabilities), follow these 2 simple rules of personal finance:

  • minimize your living expenses, debt and taxes to maximize your savings and
  • invest your savings in "good investments" to increase their value over time

Look at what various savings amounts invested earning 10% a year will grow into over time:

 Monthly Savings $

 $250

 $500

 $1,000

 $1,500

 Value After 10 Years

$50,364

$101,000

$201,000 

$302,000 

 Value After 20 Years

$180,997

$361,993 

$723,987 

$1,085,980 

 Value After 30 Years

$519,823

$1,039,646 

$2,079,293 

$3,118,939 

 Value After 40 Years

$1,398,651

$2,797,302 

$5,594,608 

$8,391,911 

As the table above shows, if you had saved $250 a month and you retired after working for 30 years, you'll have about $500,000.  Using a simple calculation, if you keep this money invested, even after you retired and earned an average annual return of 10%, you would have an annual income in retirement of $50,000 ($500,000 x 10%).  See retirement planning below.

To see how much your monthly savings will grow into over time, use this free savings calculator.

Want to know how much to save to be a millionaire?  Use this free millionaire calculator.

Step 3a) Now it's time for an action plan that will enable you to meet your financial goals.  Your budget will help you determine how much money is available every month to save and to reduce the loans and credit card balances (liabilities) listed on your net worth statement.  Always pay off your highest interest rate loans and credit card balances off first.  Please visit the Insurance and Taxes sections for ideas to save money in these budget areas.

Step 3b) Now look at the assets on your net worth statement.  If you have money already saved in various accounts (i.e., checking, savings, IRA, 401k, college fund, etc.), you are ready to invest your money. Please visit the Banking and Investing sections for more information.

Retirement Planning - a 6 step process:

Why is it so important to save, invest and have money for your retirement years?

Simply put, the living expenses in your current budget will be much higher 10, 20 and 30 years from today because of inflation; defined as the general increase in the prices of goods and services over time, measured as an annual percentage.

  • Example: When the news says inflation was 3% last year, it means a $1 pack of gum last year now costs $1.03 ($1 x 1.03%).  If inflation averaged 3% every year:
    • for the next 10 years; a $1 pack of gum today would cost $1.34 in 10 years
    • for the next 20 years; a $1 pack of gum today would cost $1.81 in 20 years
    • for the next 30 years; a $1 pack of gum today would cost $2.43 in 30 years
  • Inflation changes from year to year; by how much depends on many economic factors. It is a very complex subject; but all you need to know about inflation is it will cost you more to live in the future and you will need to "plan" for inflation.

  • Here are some examples of current annual living expenses and how much it will cost to live in 10, 20, 30 and 40 years if inflation averaged 3.4% every year:

Current Annual Expenses

$25,000

 $50,000

 $75,000

 $100,000

Cost to Live in 10 Years

$34,926

$69,851

$104,777

 $139,703

Cost to Live in 20 Years

$48,792

$97,584

$146,377

$195,169

Cost to Live in 30 Years

$68,164

$136,328

$204,493

$272,657

Cost to Live in 40 Years

 $95,227

 $190,455

$285,682

 $380,909

Your budget helps you determine how much you can afford to save for retirement.  A savings calculator shows you how much your savings, invested earning some average rate of return, will grow into over time. You will now want to answer these retirement related questions:

  • When can I afford to retire?
  • How much do I need to save for retirement?
  • How much income do I need to maintain my standard of living during my retirement?
  • What rate of return do I need to generate the income I want and to ensure that I don’t outlive my savings?

Step 1) Retirement planning calculators help answer these questions.  If the results project that you'll run out of money before your life expectancy, you may need to save more, earn a better rate of return or work longer. Use these free retirement calculators to assist with these decisions.

  • Retirement calculators ask this question: "how many years will the money need last in retirement"? While current life expectancy is 75 years for men and 81 years for women, you should always plan as if you will live longer.  Using a lower age could cause you to run out of money before you pass away.  Example, if you are 45 and plan to retire at age 65, instead of entering 10 years, enter 25 years just in case you live to age 90.
  • Retirement calculators ask: "what is the annual inflation rate %"? Inflation was explained above, the long-term average annual change in inflation from year to year is about 3.4%.

Step 2) Contribute as much as your budget affords, up to the maximum allowed by law, into your employer’s tax-deferred retirement plan. To see the 2009 maximum contribution limits allowed, click here.  Three benefits occur when you contribute into your employer’s retirement plan:

  • The amount you contribute reduces your taxable income. Example: if your annual taxable income is $56,000 and you contribute $500 per month ($500 x 12 = $6,000 a year), your taxable income is reduced to $50,000 ($56,000 - $6,000), thus you will pay less income taxes at $50,000 instead of paying more income taxes at $56,000.  For more information on understanding income tax rates, please visit the Taxes section.
  • The amount contributed and accumulated over the years in your retirement plan account is put into investments to earn some average annual rate of return and increase in value over time.  As the table above shows, contributing $250 a month for 30 years, invested earning 10% a year will grow into $519,823.
  • The amount contributed and accumulated over the years in your retirement plan account increases in value "tax-deferred".  This means you do not have to pay any type of tax (i.e., fedeeral or state income tax, capital gains tax) on this money until after you retire and withdraw money from your retirement account.  For more information on understanding taxes, please visit the Taxes section.

Step 3) If you've contributed the maximum allowed by law into your employer’s tax-deferred retirement plan and your budget affords you to save even more money for retirement; calculate if you are eligible to contribute to an individual Retirement Account (IRA) or a Roth IRA, other tax-deferred savings accounts. To see 2009 IRA income and contribution limitations, click here.  For IRA or Roth IRA eligibility, click here.  To understand the differences between an IRA and a Roth IRA, click here.  You have until April 15th to contribute to an IRA for the previous tax year.

Step 4) Obtain your Social Security earnings history and estimated Social Security retirement income benefit that you and your family may qualify for. You will need this information for your retirement planning calculator.  It's called the Social Security Benefits Statement Form SSA-7004) and you can get yours by clicking here.

Step 5) Explore the impact on your Social Security income by using eligible retirement dates allowed by the SSA.  View SSA's retirement dates by clicking here and use SSA's retirement benefit calculator by clicking here.   The SSA also has a disability income calculator and a survivor income benefits calculator should you become disabled or pass away unexpectedly.

Step 6) When you change jobs and/or retire from an employer, you should transfer your previous employer’s retirement plan savings into your own IRA rollover account because most employer retirement plans offer limited investment options. However, never ask your employer to give you the money because you will incur a 20% penalty from the IRS. Instead, do a direct transfer from your employer's plan into your own IRA rollover. Investment options available in your IRA Rollover account will be better to choose from.  For more information on transferring retirement accounts, click here.  While this sounds complicated, it's very easy to do and doesn't cost you anything:

  • a) Call the financial company that maintains your retirement plan account (look for 800# on your statement) and ask them how do you do a direct rollover into your own IRA Rollover account located at Scottrade or other brokerage firm.  Most financial companies require a direct rollover form to be completed and they will send you their form.  You will need your IRA Rollover account number.
  • b) Open an IRA Rollover account in your name at any discount brokerage firm (i.e., Scottrade).  You will need your IRA Rollover account number to put on the direct rollover form.  After you return the completed direct rollover form to the financial company that maintains your retirement plan account, they will transfer your retirement plan account directly into your IRA Rollover account.  This normally takes 30-45 days to complete.
  • c) Once the transfer is complete, you or an advisor will then be able to invest this money to grow in value and/or to generate income, depending on your financial circumstances.  For more information, please visit the Investing section.

College Planning

Why is it so important to save money for your children's college education?

As you can see from the picture below, the relationship between salary and education level is becoming even more prominent.  A higher education means higher potential salary.

Over a lifetime, the gap in earning potential between a high school diploma and a Bachelor's Degree is more than $800,000. In other words, whatever financial sacrifices are made for a college education in the short term are more than repaid for over the long term.

If you can afford to save and invest money for your children's college education, the Internal Revenue Service (IRS) provides these accounts for college savings that provide tax benefits:

Section 529 Plans: This is the best way to save for your children's college education. Interest and dividends earned inside a 529 plan account accumulate tax-free and distributions used for college expenses are exempt from taxation and depending on your state of residence, your contributions may be deductible from your state income tax. There are 2 categories of 529 plans:

  • Savings Plans work much like a 401K or IRA by investing your contributions in mutual funds or similar investments. The plan will offer you several investment options from which to choose. Your account will go up or down in value based on the performance of the particular option you select.
  • Prepaid Plans let you pre-pay all or part of the costs of an in-state public college education. They may also be converted for use at private and out-of-state colleges.

You can research the 529 Plans options available in your state using these objective resources:

INVESTOR WARNING: The Financial Industry Regulatory Authority (FINRA), the largest regulator for all investment firms issued an Investor Alert on 529 Plans. Most financial advisors offer a limited number of 529 Plans, which may not include your own state of residence college saving plan and may not provide the opportunity to invest in 529 Plans issued by other states, even though other 529 Plans may have lower commissions, lower expenses, and tax advantages that are not available in the 529 Plan being offered by your advisor.  Be careful.

Coverdell Education Savings Accounts (ESAs): These accounts are trusts created exclusively for the purpose of paying the qualified education expenses of the designated beneficiary of the trust. They are exempt from taxation and have the following characteristics:

  • You can contribute up to $2,000 per child per year until age 18. Annual contributions are not deductible and can be made until April 15 of the following year for the previous calendar year's contribution. The money must be used for qualified education expenses (see below) by the time your child reaches age 30 or the earnings will be taxed as ordinary income plus a 10% penalty, however there are no age limits for special needs beneficiaries. Unused money in one ESA may be rolled over into the ESA account of another family member. 
  • Allowable contributions are phased out for incomes between $95,000 and $110,000 (single filers) or $190,000 and $220,000 (married filing jointly), however corporations, including tax-exempt organizations may contribute to an ESA account, regardless of income level. Contributions must be in the form of cash; stocks, bonds or other savings vehicles are not permitted. No part of the trust may be invested in life insurance.
  • For financial aid purposes, ESAs are treated as an asset of the account owner, which may be owned by the student or the student's parent. If the account owner is the student, this has a high impact on financial aid eligibility. If the account owner is the parent, this has a low impact on financial aid eligibility. Qualified distributions from an ESA are not counted as income on the Free Application for Federal Student Aid (FAFSA) and thus do not reduce financial aid eligibility.
  • Qualified expenses include elementary, secondary and postsecondary costs including: tuition, fees, tutoring, books, supplies, related equipment, room and board, uniforms, transportation and computers. Non-qualified withdrawals are taxed as ordinary income at donor's rate and subject to a 10% tax penalty. (Non-qualified distributions remain tax-free in cases of death or disability of the beneficiary.)
  • For estate tax planning purposes, contributions are removed from the donor's gross estate but are included in the beneficiary's gross estate and a donor can contribute to both an ESA account and a 529 plan in the same year, but there may be gift tax implications if the donor gives more than $13,000 per beneficiary per year.
  • You can claim a Hope Scholarship and/or Lifetime Learning tax credit in the same year as you withdraw funds from an ESA as long as the credits are claimed using different qualified education expenses than those paid from the Coverdell distribution. You can't use the same expenses to justify two different programs.

UGMA or UTMA Accounts: A donor can contribute up to $13,000 per year and per child ($26,000 jointly) to a Uniform Gift to Minors Act (UGMA) or a Uniform Transfer to Minors Act (UTMA) account without incurring any gift taxes (a donor you can give up to $1 million in gifts over a lifetime before owing paying gift taxes).

  • An UGMA account is a way for a minor to own securities. An UTMA allows ownership of securities, real estate, art, patents, royalties, and transfers to occur through inheritance.
  • Contributions are not deductible on federal or state income tax returns.
  • Control of the money passes to your child at age 18 or 21, depending on your state of residence, which means the funds earmarked for college can be spent on a car or other transitory delight your child desires.
  • For financial aid purposes, UGMA and UTMA accounts are considered assets of the student. This means there is a high impact on financial aid eligibility.
  • All income (after the first $950) earned by children age 19 and older (24 for full-time students) is taxed at the child's tax rate. This is often referred to as the "Kiddie Tax". The taxes are on all income, including unearned income such as interest, dividends, and capital gains.
  • If a child's earned income exceeds one-half of their support, the tax rate is based on whether the child reached age 18 as of the end of the tax year. Before a child reaches age 18, the next $950 in income is taxed at the child's rate. Earnings above $1,900 are taxed at the parent's marginal tax rate. All income (after the first $950) earned by children age 18 and older is taxed at the child's rate.
  • If a child's earned income does not exceed one-half of their support, the tax rate is based on whether the child reached age 19 (24 for full-time students) as of December 31 of the calendar year in which the taxable year of the taxpayer begins. Before a child reaches age 19 (24 for full-time students), the next $950 in income is taxed at the child's rate. Earnings above $1,900 are taxed at the parent's marginal rate.

Finanial Aid

There's no escaping the fact that college prices are rising.....

But there is good news. There is more than $168 billion in financial aid available and despite college cost increases, a college education remains an affordable choice for most families.

To apply for student financial aid from the federal government, including the Pell Grant, Perkins Loan, Stafford Loan and work-study, you will need to submit the Free Application for Federal Student Aid (FAFSA). There is no charge for submitting this form. The FAFSA is also required by all state and many school student assistance programs.

Some private colleges and universities will require one or more supplemental forms to obtain information not included on the FAFSA. They may have their own forms or they may ask you to complete the College Board's CSS PROFILE form.

Paying for college may require financial aid.  FAFSA4caster will help you get an early start on the financial aid process by:

  • Providing you with an early estimate of your eligibility for federal student aid.
  • Giving you an experience similar to FAFSA on the Web.
  • Allowing you to transfer all of your FAFSA4caster data to FAFSA on the Web once you are ready to apply for aid.
  • Providing you the option to apply for your Federal Student Aid PIN.
  • Increasing your knowledge of the financial aid process, and providing information about other sources of aid.

You should apply for aid every year, even if you think you don't qualify. There are many factors affecting eligibility for financial aid. For example, a student who didn't qualify one year might become eligible during the next year when a brother or sister enrolls in college. A change in family financial circumstances might affect your eligibility for student aid.

If you want to get an early estimate of what the government thinks you can afford to pay for your education, try FinAid's Financial Aid Estimation Form. It lets you play what-if games, to give you an idea how changes in income and assets affect the Expected Family Contribution (EFC).

FinAid also has a variety of other EFC calculators such as the QuickEFC calculator which provides an approximation of the EFC and tips on how to legally maximize your eligibility for need-based financial aid by careful financial planning.

Use this college cost calculator to see how much college will cost when your children enroll. If you have a particular college in mind, you can project from actual costs. If you don't, just use the average costs provided.

Education Loans

Education loans come in three major categories:

  1. Student loans: To apply for a Stafford Loan, you must submit the FAFSA (see above). The Perkins Loan is awarded to undergraduate and graduate students with exceptional financial need. This is a campus-based loan program, with the school acting as the lender using a limited pool of funds provided by the federal government.
  2. Parent loans: To apply for a Stafford Loan, you must submit the FAFSA (see above). The federal Parent Loan for Undergraduate Students (PLUS) lets parents borrow money to cover any costs not already covered by the student's financial aid package, up to the full cost of attendance.
  3. Private student loans: Private Education Loans, also known as Alternative Education Loans, help bridge the gap between the actual cost of education and the limited amount the government allows you to borrow in its programs. Private loans are offered by private lenders and there are no federal forms to complete. Eligibility for private student loans often depends on your credit score.

Estate Planning

An estate plan allows you to decide how your assets are distributed, both during your lifetime and at your death. Your estate plan should be structured to achieve your personal financial objectives and to maximize wealth to be passed on to your heirs or your favorite charities, while minimizing your estate taxes and other final expenses.

If your net worth is worth several million dollars or more, you can afford to hire an estate planning team. In fact, you can’t afford not to. Estate planning is complex and no one individual can stay on top of an ever-changing tax code. It takes a team of experts in different disciplines to design a prudent estate plan. Your team should consist of an estate planning attorney, a Certified Public Accountant (CPA), a fee-only insurance advisor and fee-only investment advisor.

12 Simple Steps to an Estate Plan: A Checklist

1. Make a will.  In a will, you state who you want to inherit your property and name a guardian to care for your young children should something happen to you and the other parent.

2. Consider a living trust. If you hold your property in a living trust, your survivors won't have to go through probate court, a time-consuming and expensive process.

3. Make health care directives. Writing out your wishes for health care can protect you if you become unable to make medical decisions for yourself. Health care directives include a health care declaration ("living will") and a power of attorney for health care, which gives someone you choose the power to make decisions if you can't. (In some states, these documents are combined into one, called an advance health care directive.)

4. Make a financial power of attorney. With a durable power of attorney for finances, you can give a trusted person authority to handle your finances and property if you become incapacitated and unable to handle your own affairs. The person you name to handle your finances is called your agent or attorney-in-fact (but doesn't have to be an attorney).

5. Protect your children's property. You should name an adult to manage any money and property your minor children may inherit from you. This can be the same person as the personal guardian you name in your will.

6. File beneficiary forms. Naming a beneficiary for bank accounts and retirement plans makes the account automatically "payable on death" to your beneficiary and allows the funds to skip the probate process. Likewise, in almost all states, you can register your stocks, bonds, or brokerage accounts to transfer to your beneficiary upon your death.

7. Consider life insurance. If you have children or own a house, or you may owe significant debts or estate taxes when you die, life insurance provides money due to an unexpected death.

8. Understand estate taxes. If you and your spouse together own assets worth at least $1.5 million, you may want to consider taking steps to reduce federal estate tax that will be due at the second spouse's death. You may want to make tax-free gifts or consider an AB trust.

9. Cover funeral expenses. Rather than a funeral prepayment plan, which may be unreliable, you can set up a payable-on-death account at your bank and deposit funds into it to pay for your funeral and related expenses.

10. Make final arrangements. Make your wishes known regarding organ and body donation and disposition of your body -- burial or cremation.

11. Protect your business. If you're the owner of a business, you should have a succession plan. If you own a business with others, you should have a buyout agreement.

12. Store your documents. Your attorney-in-fact and/or your executor (the person you choose in your will to administer your property after you die) may need access to the following documents:

  • will
  • trusts
  • insurance policies
  • real estate deeds
  • certificates for stocks, bonds and annuities
  • information on bank accounts, mutual funds and safe deposit boxes
  • information on retirement plans, 401(k) accounts or IRAs
  • information on debts: credit cards, mortgages, loans, utilities and unpaid taxes
  • information on funeral prepayment plans and any final arrangements