Beneficiary Designations

Regular Reviews with these 6 Steps to Build Your Financial Foundation

Annual financial reviews are important for keeping your plan on track. Today, unlike previous generations, you have so many investment options and access to an extensive array of financial information in the media and online. Almost instantaneously, you can review your own financial plan, ascertain your progress, and make necessary adjustments.

 

Most everyone gainfully employed has, formally or informally, a financial plan which should be regularly reviewed. For example, you have a budget, save for special goals, look over your retirement portfolio, and other important items. Whether renewing your automobile insurance or doing your income tax return, you frequently look at various parts of your financial plan. However, once each year, you should pull all your records together and take a close look at your entire financial picture.

 

Here’s a brief description of what a typical annual review might entail.

 

  1. Analyze your cash flow. Does your income equal or exceed the amount you put into savings and fixed or variable expenses in your budget? If it exceeds the amount, by how much? The amount of income that exceeds what you saved or spent is called positive cash flow. If your expenses exceed your income, you have negative cash flow. If your cash flow is negative, it may be time to reorganize and minimize your budget’s unnecessary expenses.

 

  1. Provide money for specific goals. For every one of your goals, address the projected cost, the amount of time until your goal is to be realized (time horizon), and your funding method (e.g., a scheduled savings plan, liquidating some assets, or taking a loan).

 

You should plan your goals on three tiers. On the first tier, you have an emergency fund of at least three months of income. On the second tier, you may have a unique goal and may, for example, establish a savings plan for your children’s weddings or educational expenses. Finally, on the third tier are more flexible goals such as purchasing an automobile, renovating your house, and planning a vacation.

 

  1. Enrich your retirement. Will you have enough money when you retire?

Pensions and Social Security may not provide enough income to maintain your current lifestyle during your retirement years. Therefore, review your retirement needs and plan a disciplined savings program for your retirement.

 

  1. Minimize income taxes. Many taxpayers reduce their taxes by taking advantage of tax deductions. Most are familiar with the more common deductions (e.g., mortgage interest, contributions to retirement plans, and donations to charities). In addition to tax deductions, however, there may be other ways of reducing your income tax bite. For example, under appropriate circumstances, losses or expenses from previous years may be carried over to the next tax year.

 

  1. Beat inflation. If the current inflation rate is 2%, you need an annual 2% wage increase to maintain your buying power. A decline in your buying power will undoubtedly lower your standard of living and affect your lifestyle. In the end, you will have less money if inflation starts to beat you. Consequently, you need to put your money to work to beat inflation.

 

  1. Manage unexpected risks. You are probably well aware that life sometimes throws us unexpected “curve balls”—that is, unforeseen risks. Suddenly and unexpectedly, your potential risk may become a financial loss (e.g., you become disabled without income or an untimely death causes financial hardship for your family). As a result, many have made insurance the cornerstone of their overall finances because it offers protection that can help cover unforeseen potential liabilities and risks.

 

These six steps will help you focus on the essential issues that affect your finances. If you faithfully keep track of your progress in these critical areas, you may be able to both afford your future and finance your dreams.

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