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Planning Process

The 6 Steps of Financial Planning:

  1. Define your goals & objectives
  2. Gather all relevant data
  3. Analyze data in light of your goals
  4. Develop specific solutions
  5. Implement those solutions
  6. Monitor and update the plan

Build an Emergency Fund

Maintain a cash reserve of about three to six months' of your living expenses to help you survive a layoff, serious health problem or a financial emergency. The fund can cover uninsured losses, losses covered by insurance but subject to a deductible, or insured losses where reimbursement will be delayed. Keep the emergency fund in a savings account or money market mutual fund and only use the fund for true emergencies.

Review Your Insurance

This includes not just life and disability insurance, but long-term care, homeowners and auto policies.  With your homeowner's and auto coverage, it's often a good idea to raise your deductibles and use the premium savings to buy higher liability limits. Since the first dollar of coverage is the most expensive and the last dollar of coverage is the cheapest, raising deductibles a few hundred dollars will often finance increased coverage equal to tens of thousands of dollars.

Get Started on Your Retirement Plan

It easy to procrastinate when it comes to retirement planning, especially if you are in your 30's or 40's.  If you have a 401(k) or 403(b) at work, try to make the maximum allowable contributions.  Depending on your income, make regular contributions to a Traditional or Roth IRA.  Keep to your contribution plan even when the markets are down.

Minimize Debt

Try to pay off or refinance your high-interest debt as fast as you can.  Remember that cash sitting in money market or bank savings accounts will almost always earn less than what you pay oncredit cards (currently 4% or less on money market funds).  This means you may be going in the hole by 10% or more a year by stretching out credit card repayment when the cash is available in savings.  It is also important to remember that using short-term savings to wipe out short-term debt leaves you with exactly the same net worth.

If you don't have extra cash and you're having trouble keeping up with credit card and other short-term debt, consider contacting a credit counseling agency. 

Update Your Estate Plan

If you don't have a will, get one, and if you have a will, make sure it is up to date.  This is especially important for parents with young children, as your will allows you to name your children's guardian and plan for how your assets will be managed. Those with substantial assets can also minimize estate taxes and probate costs with proper estate planning. 

Prepare for College Costs

College costs have been increasing at about twice the rate of inflation, and current costs can easily exceed $40,000 per year.  If you have significant income  and assets, you may not qualify for financial aid so proper planning is essential.  A modest savings plan when your children are young is a much better approach than trying to catch up later.  Look at the various tax-advantaged savings vehicles, including Section 529 Plans and Coverdell IRAs, but keep in mind that the use of these vehicles may reduce financial aid if you would otherwise qualify.

Myths Deter Students from Applying for Financial Aid

Are You Turning 70 1/2 This Year?  

If you will be turning 70 1/2 this year and are retired, you will probably need to start taking minimum annual distributions from your retirement accounts, including your IRAs, 401k's and 403b's.  This requires that you make some important decisions, preferably before the end of this year.