So, you've got all the basics down from my previous post about starting your financial plan. You've paid down debt, started reverse budgeting, and built a solid foundation. You're probably wondering what to do next. Here's the steps to turn your beginner plan into an exceptional plan.
Develop your tax plan
Taxes will become one of the more important driving factors in your plan and they are certainly your biggest lifetime expense. There better be a plan in place to maximize tax savings across your lifetime. The key word here is lifetime, it's not always the best strategy to pay the least amount of taxes today. Working with a financial planner combined with a CPA is the best way to make sure you are maximizing your tax plan. Your main goal here is to lower your total lifetime tax bill. The best way to do that is by being proactive with planning.
Carry the proper insurance
The last thing you want to think about, but the liability is too big to ignore. I'll have an entirely separate post regarding specific types of insurance you should carry so we'll only hit on the main concerns here. If anybody depends on you, you need life and disability insurance. It's extremely cheap to purchase and it protects against the loss of your future earnings. Make sure you have the right coverages on your property and casualty insurance to insure against accidents, damaged property, etc. Lastly, an umbrella policy is important as your net worth grows and exceeds your P&C limits. We live in a litigious society, so making sure that your net worth does not take a hit due to lawsuits is important. To start, it is typically recommended to carry an umbrella policy that is 1x your net worth.
Invest Efficiently
I'm talking about two specific things here when I say invest efficiently. The first is being efficient about what types of assets are held within each investment account. Depending on how the account is taxed you need to be strategic about what type of investments are held inside. For example, in a Roth IRA you would not hold tax free investments since the account is already tax free. In a taxable account you would not want to hold dividend paying stocks since these will be taxed every year. This is known as asset location.
Secondly, you should be cost conscious. This means you are avoiding any fee drag associated with certain investments, be mindful of what the internal costs are for your investments. There are many funds that hold identical securities but charge two different fees.
Construct your professional team
This is an extremely important step for determining your financial success. Unfortunately, there are bad apples in every industry so be mindful about which professionals you choose to trust with advice. Most importantly make sure they are always doing what's in your best interest. For most people, you will want to work with a financial planner, tax pro, lawyer, realtor, and insurance expert. The best-case scenario is that all of these professionals work together to coordinate the best possible outcomes for you.
Basic Estate Planning
You've worked hard and created a solid net worth, don't be lazy and let it get drained because you didn't create an estate plan. At a bare minimum you should have a power of attorney, advanced care directive, a will, and a living trust. These are things that allow you to have control over what happens to your estate when you pass away or become sick. As your net worth grows, more sophisticated estate planning strategies may make sense to avoid excess taxation among other things.
Fund a Taxable Investment Account
By this point you have probably realized that most investment accounts have contribution limits set by the IRS. Although there are no upfront tax benefits, a taxable brokerage account has no limits, can be tax efficient, and is 100% liquid. Inflation will slowly eat away at your dollars that are sitting in cash so once your emergency fund is setup and you've saved into your retirement accounts this account will serve as a mid-long-term bucket. It is especially useful to save up for large expenses that may come up prior to retirement. Investments held for 12 months also receive favorable long term capital gains tax rates which currently sit at 0%,15%, or 20% based on household income.
Of course, there are many different things you can do to improve your financial plan, but this list covers the most common areas I see people miss. At the end of the day your financial plan should only have one job, getting you closer to your goals. It is simply a guide that will evolve over time, based on life events. The most important thing is creating a plan that works for you and that you can stick to it. Consistency, time, and discipline will be the driving factors for your successful financial future.