Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it. —Albert Einstein 

Whether you’re moving cities, paying off student loans, dealing with the death of a loved one, or selling your business, financial planning is helpful at all stages of life to help optimize where your money goes, reduce stress, and make progress on your goals.

The key to successful financial planning is aligning these three critical areas: goals, values, and actions. Paramount is defining what your values are, i.e. what’s most important to you and your family. One needs to define principles and purpose first, and then establish goals that align with these personal values. As time goes on, revisiting whether your financial behaviors and actions (saving, investing, spending, etc.) align with your goals and values is key to successful financial planning.

Values provide the north star. They could range anywhere from independence, power, education, philanthropy, adventure, community, creativity, and even fairness. We recommend blocking out some time to write down all the values that are important to you. Once you’ve done that, whittle them down to your top 20, then your top 10, and then to your top 5. Once you establish your main values, assess where you are in life with you current financial situation with income, expenses, savings, assets, and debt. From there, develop a realistic budget. The goal of effective budgeting is to know where your money is going before it comes in. This helps keep you in check going forward.

With a real budget in place, it’s time to see what it will take to accomplish your goals. You’ll want to estimate the cost of each goal and its expected timing, and then make cash flow projections that take into account variables such as inflation, investment returns, and annual savings. The goal of these projections is to answer questions about how you can achieve your goals and the trade-offs between these goals. For example, you’ll want to know how much you’ll have to save per month to achieve all your goals and at what age you can retire. You might discover that if you spend $500 less per month you can retire two years earlier, or that if you buy a home that’s $100,000 more it might mean working 3 more years than expected.

Financial planning is not one and done, set it and forget it, or a one-size-fits-all approach. It’s a continual process where you can personalize and pull from the following five main levers to push towards financial freedom.

1. Save. First of all, help yourself by making savings automatic i.e. setting aside part of your paycheck before you have access to spend it. Determine your priorities and make sure you have an emergency fund. After an emergency fund, the highest priority for savings would be into any employer matched savings. It’s hard to beat an instant 100% return.

2. Invest. Diversifying your portfolio lowers your probability of loss and smoothes out your fund balances over time. Historically, negative market returns are far outweighed by the positive, and market returns tower over cash gains. Minimizing expenses and trading costs should be one of your top priorities. Create a quarterly or semi-annual rebalancing strategy so that you’re continually buying low and selling high. Additionally, minimize your tax burden with lower turnover to emphasize low long-term capital gain rates over high short-term capital gain rates.

3. Protect what you have. This is also known as risk management, which can help you avoid disaster as you make progress on your financial goals. Your tools include various forms of insurance: life, health, liability, and property insurance. You should also consider estate planning to distribute assets correctly and avoid probate frustrations if something were to happen to you. Plus, you’ll want to document your end-of-life decisions (preferably as a living will that can be accessed digitally) and avoid probate frustrations with proper planning. 

4. Minimize Taxes. Tax planning, which includes legally lowering and/or deferring taxes strategically, can provide a decrease in lifetime tax rates and increase retirement funds. There are a multitude of techniques and strategies, but a big one is emphasizing long-term capital gain taxes over ordinary income taxes. Don’t overlook all the tax sheltered vehicles that the government has made available to you: you can contribute to triple tax free health savings accounts (HSAs) if you’re eligible, use backdoor Roth IRAs if you’re phased out of regular Roth IRA contributions, and consider 529 plans to fund education before even having kids to maximize the compounding period.

   Many people ignore optimal asset location, which is putting the right securities in the right accounts. Shielding bond ordinary income interest in IRAs while putting stocks taxed at lower capital gains rates in taxable accounts can save you a lot of money over time.

5. Manage debt. Debt is a tremendous tool that can potentially help you achieve your goals faster, but can also sow the seeds of financial ruin. Tread carefully when it comes to taking on debt. Aside from a thorough financial risk assessment of the amount and features of each potential debt, it’s recommended that debt be reviewed in the context of your values and goals.

   Again, always return to your values to guide your financial freedom, and future. The impact of planning is immense. 

   David Flores Wilson, CFP®, CFA, is a New York City-based CERTIFIED FINANCIAL PLANNER™ Practitioner & Managing Partner at Sincerus Advisory. Click here to schedule a time to speak with us.