Financial life planning is an important part of creating long-lasting wealth for your family. Undergoing the financial life planning process creates a roadmap for navigating your family. Although it may seem overwhelming, there are several simple steps your family can take in order to meet your financial objectives. While the services of a certified financial planner are helpful, there are many things families can do on their own to build and increase wealth.
Understand Your Situation
How much is your net worth? Are you on schedule for retirement? Is your cash flow negative or positive? Despite the importance of these questions, it is common for families to not truly know where they stand financially. The demands of everyday life in NYC can make it easy to focus on the details while forgetting to evaluate the big picture.
In order to understand your financial standing, consider the following:
- How much are you worth? This can be determined by evaluating your total assets against your total debt. If this number is positive, you have a positive net worth. If this number is negative, there is no need to panic. Many families have negative net worth, particularly those who are just getting started or who have accumulated large amounts of debt. Paying off debts can improve your financial situation.
- Is your income sufficient to cover all of your expenses each month? If not, you have a negative cash flow. This sets the stage for taking on debt or falling behind on your obligations. Understanding your income and expenses allows families to determine where their income should really be spent and to control their spending.
- How much money will you need to retire? Are you currently saving towards your retirement? If so, is your savings sufficient to fund your life in retirement? There are a number of online calculators that allow families to determine how much money they will need in order to retire comfortably and what is necessary to achieve that goal.
Know Your Goals
The second step of the financial life planning process is to set goals. The financial goals your family sets must be reflective of your current situation and must be geared towards improving that situation. While each family will have goals that are specific to their situation, many of these goals apply to a large group of people, such as:
- Paying off debt.
- Saving for the down payment on a house.
- Saving for children’s college.
- Saving for retirement.
The goal setting process doesn’t start here. Think about how much money is required in order to achieve each goal along with a desired completion date. Your financial life planning session should result in both long-term and short-term goals. By setting a date, you are able to calculate how much money you will need to contribute on a monthly basis in order to achieve your goals. Additionally, the date provides a benchmark for measuring your family’s progress.
Protect Your Assets
Many families underestimate the importance of insurance. You must have insurance coverage for all valuable property as well as on your life. This way, in the event of a catastrophe your property can be replaced. Do not presume that your current level of insurance is sufficient to cover damages. Review insurance policies on an annual basis to verify that your levels of coverage are sufficient.
In addition to insurance, it is important to protect your family’s financial standing by creating an emergency fund. This fund should contain three to six months’ worth of expenses. This emergency account ensures that you are able to cover your expenses in the event of an unexpected event, such as a job loss or illness.
Protecting your assets extends to estate planning as well. Every NYC family should have the following:
- A will.
- A general power of attorney.
- A medical power of attorney.
- A living will.
- Written indication of who you would elect as guardian for your children.
Failing to document your wishes can be costly for your estate and decrease the amount of wealth you’re able to pass down to your heirs.
Start Investing
Many people think of savings accounts as the sole vehicle for saving money. However, the rate of return for interest-bearing savings accounts is typically low. There are several methods of investing that provides higher returns, thereby allowing you to build wealth faster. Take time to understand the difference between common investments including:
- Stocks.
- Bonds.
- Mutual funds.
- Exchange traded funds.
It’s important to understand how the investment vehicles work, the risk for each type of investment and the tax implications of choosing each investment type. The investments you choose should be reflective of your risk tolerance, the length of time you will be investing and your expected rate of return.
In addition to the above, there are several account types that are specifically designed for achieving long range goals, such as retirement and college savings. Making regular contributions to an IRA, 401(k) or 529 college savings plan can help you to achieve your financial goals faster.
A financial planner can assist with the selection of investments as well as provide advice based on your situation.
Review Your Life Plan
The financial life planning process does not stop. Your family should be reviewing your financial goals on a regular basis. Take time to sit down and review your financial plan with your family. Involve your family in discovering ways of reducing expenses in order to achieve savings goals. Making the entire family a part of the process increases the likelihood of obtaining their buy-in and participation.
Additionally, your financial plan should be adjusted as your life changes. Major changes in life, such as the birth of a child, a change in job or a decline in the economy, warrant a second look at your family’s financial plan. The plan should be updated continually so that it is reflective of your current position.
To ensure your family’s financial life planning process has addressed all of your needs, consider using the service of a certified financial planner. These financial experts can help to tailor your investments in order to maximize your savings and build wealth.
