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By Emily Sanders
Business to Business Magazine
March 5, 2009
Being told to "get your financial house organized" can be a daunting order for many people. Some view it as a painful exercise akin to using a crystal ball to peer into the future. Some in the financial industry use it as a sales tool to convince clients to purchase the latest and greatest product.
In the proper sense, a financial plan is a clear road map for an individual, a family or a business to obtain clarity on what the future may hold, and to make smart decisions that can impact the likelihood of achieving financial goals.
The ups and downs of the financial markets have made everyone uncertain, and many wonder if they will have to dramatically alter their financial goals in light of what some experts are calling "The Great Recession."
One common emotional reaction is to adopt a bunker mentality and completely cease all financial planning and goal setting. While it's important not to overreact and make rash decisions, it's more important than ever to have a financial plan based on informed financial decisions as we travel through a period of upheaval.
Tax Laws
There have been many changes to the tax laws in recent years, and more will certainly come with a new administration. Being unaware of the many changes might cause you to leave substantial money on the table as you give Uncle Sam a nice gratuity. Taking advantage of even one of these law changes could save you thousands of dollars.
Education Savings Plans
Many parents and grandparents have utilized 529 College Savings Plans in the past several years to save for college. Unfortunately almost all of these accounts have dropped in value considerably, rendering the tax benefits completely moot. 529 plans are not the only education savings vehicle that can be used to your advantage. Are you making the best use of your education savings dollars?
Asset Allocation
When is the last time you re-allocated your 401(k), IRA, or brokerage accounts? Studies have shown that the majority of your investment return comes not from great stock or mutual fund picking, but rather a wise asset allocation. If you haven't adjusted your investment mix in the last three months, chances are you could be doing a lot better, and improving your returns.
Long-Term Planning
Have you recently projected into the future to determine how much you'll need to save for retirement, the kids' college, or other major goals? If you used an online retirement calculator, did you take inflation and taxes into account?
The online calculator probably used a linear return assumption for stock and bond market returns. As we've seen lately, the market does not behave a linear, straight-line fashion. A more effective projection method is a "Monte Carlo" simulation, which takes into account positive and negative random market returns to form a much more accurate projection of the future.
Insurance
Insurance is important as ever, so have you conducted an insurance needs analysis lately to determine if you are over or under insured? As millions of Americans lose their jobs, the analysis highlights the importance of having life and disability insurance that is not tied to your employer. Examine the private market to get better coverage, which is not dependent on your employment situation and may even be less expensive.
Use these suggestions when you sit down with your advisor to develop your financial plan. Think of them as "conversation starters." We live in a scary time economically, so it's more important than ever to review your financial situation and be sure you are adequately prepared for the coming years. Spending time now will yield benefits for years to come.
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