“I can find only three good uses for money. Money is good for FUN. Money is good to INVEST. And money is good to GIVE. Most anything else you find to do with it doesn’t represent good mental and spiritual health on your part.” - Dave Ramsey in Total Money Makeover.
In this blog, I will share the financial planning principles I learned over the last several years through my reading and discussions with friends, colleagues, financial advisors, and my CPAs. I am not a certified financial advisor, and this blog is NOT meant to give advice on tax, investments, insurance, or individual financial plans. This is my attempt to provide a simple framework of available financial instruments in the USA. Each country has equivalent tools, and you can use this guide to choose.
“A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life,” said Financial Advisor and author Suze Orman. Individual financial planning should aspire to provide this foundation. Let’s look at the fundamental objectives and related ideas:
- GROW money to fulfill future responsibilities
- Retirement: How much money do you need to live comfortably after retirement? Today’s life expectancy has grown to 80 years, which means one should plan to save 15–20 times their income at retirement. Planning for one’s retirement fund should be above and beyond the Social Security Benefits. One should consider all the options and create an optimal portfolio.
- 401(k) – Maximize the contribution. Ensure one has a healthy mix of funds to ensure healthy growth.
- Annuities / IRA (Traditional or Roth): These are retirement planning investment options. A traditional IRA may provide tax-deductible investment options based on one's income. Roth allows one to earn tax-free distribution during retirement. The details of various IRAs are provided in the table below. Small Business/LLC owners should consider SEP IRA, Simple IRA, or Simple 401(k), which would give a tax deduction and growth.
- Stocks, Bonds, Mutual Funds – A portfolio should contain a healthy mix of these instruments based on the risk appetite. You should feel good if you beat the index long-term!
- Others (Real Estate, Precious Metals) – To diversify the portfolio, a balanced mix of all options should be considered, making the investment robust and allowing it to absorb shocks of the vagaries of the economy or the stock market.
- Child Education: The 529 Plan is excellent for making planned investments for the future of one’s children. Some state-specific plans even provide a tax deduction. However, the benefits of investing solely in education versus mutual funds to allow flexibility have been debated.
- PROTECT
- Insurance: Insurance protects your loved ones. Period. Most people buy Term Insurance or company-provided insurance and believe it to be enough. Insurance is vital and should be part of one’s financial planning.
- How much Insurance should one have? Rule of thumb: Life Insurance Amount = Outstanding Debt + Mortgage + 10 times one’s annual income to provide a comfortable life for one’s family + Child Education.
- Company Life Insurance does not extend post-employment. The cost of insurance increases with age, and any adverse medical conditions might make one uninsurable.
- Whole Life / Universal Life / Variable Life – Paying a higher premium is debatable as one can buy the term life and invest the difference for a potentially higher income. This holds true for a savvy investor and a competent money manager. However, changing market conditions and employment status might influence performance. Besides, getting equivalent insurance becomes more complicated with age.
- Healthcare: Everyone should plan for unexpected medical expenses, including short- and long-term disabilities. Employers cover these as part of Group Insurance. Putting money in a Health Savings Account(HSA) would cover tax-free out-of-pocket expenses with growth. Please read more in the table below. One should also consider long-term care not covered by Medicare or health insurance. To protect your savings, consider Long Term Care, available as a standalone policy or as a rider in Whole Life policy.
- Will or Trust: If one does not have a will, the government decides the distribution of one’s estate. A Will is essential to distribute ownership of one’s assets and guard one’s children’s welfare. Please do it now!
- EMERGENCY Fund: Put aside six months of your monthly income as savings. Do not touch that!
Food for thought on tax deductions: I list some instruments or ideas that require reflection.
Life should not merely be about investing and accumulating money for the future; money should be used for FUN sometimes ?; that is also essential and should not be ignored.
And last but not least, start GIVING back. Putting aside money monthly or annually for charitable purposes is a good practice. The opportunities are manifold, and if you are looking for something right now, don’t hesitate. I support two charities yearly and would appreciate your donation to these noble causes!
- Adruta Children’s Home: Rehabilitation of the unclaimed, deserted, and parentless children in Odisha, India. My fundraiser link: https://www.facebook.com/donate/137509341084771/
- Covenant House: Covenant House is a large, privately funded agency in the Americas providing shelter, food, immediate crisis care, and other services to homeless and runaway youth.
- My fundraiser link: https://mygivingaccenture.yourcause.com/home#/fundraising/12507
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