7 Cornerstones of a Basic Financial Plan

With your personal finances, like most things in life, there are things you can control and things you most definitely cannot.  It is important to address those areas where you exert the most influence on your finances - the control areas. Obsessing over things about which you have zero influence is wasteful and, even worse, can lead to poor decisions. Thus, identifying and addressing the areas you can control is an all-important financial exercise.

Background

Much is written about the current stock market environment pretty much all the time - this time of year is the time for market prognostication.  Where are we? Where are we going?  Why has this happened?  Why will that happen?  The media bombardment answering these and other similar questions is non-stop.  In the midst of all this pandemonium, you hear few people preaching the efficacy of being brilliant on the financial basics.  Unsexily, simply completing a few simple-to-understand tasks can fortify your personal finances for the long-term, thus making near-term market contagion immaterial to you.  If anything, general panic becomes your opportunity.

Cornerstones

The cornerstone is the first stone set in the masonry foundation of a building.  Furthermore, all other constituent pasts of a building's foundation are lain in reference to it.  Labeling 7 Items as "Cornerstones of a Financial Plan" is something of an oxymoron.  However, this idiosyncratic label is intended to illustrate in a cogent way how multiple redundant self-reinforcing pieces can collectively form a Gibraltar-like Financial Fortress for you.

The 7 Cornerstones of a Basic Financial Plan

1) Have an Estate Plan

With RARE exceptions, just about everyone needs an Estate Plan - even if it is only a basic one.  For single parents, you are doing your children a tremendous disservice if you lack an estate plan naming a guardian and providing for your children.  

For younger folks with no children, your chances of becoming disabled are greater than your chances of dying.  Therefore, a Durable Power of Attorney - one of the basic estate documents - is essential so your car payments, student loans, and mortgage payments can be made while you are on pause and the rest of the world is on play.

For others with more complex needs, a Trust can be your friend.  I understand there are entire courses taught at Law School about Trusts, so I won't delve too far into details.  Suffice it to say, Trusts are the Swiss Army Knives of Estate Planning.  They enable you to address issues in a customized way.  Don't be afraid of Trusts - they are tremendous resources in the Estate Planning process.

2) Establish an Emergency Fund

An Emergency Fund is your Financial Foundation's shock absorber for - to continue the metaphor - seismic events.  The more variable your income, the more you should hold in your Emergency Fund.  The more guaranteed your income - think Active Duty Military - the less you need.  Whatever the case, everyone should have a repository of funds for the unforeseen circumstances they might not have anticipated.

Please do not rely on Credit Cards or other quick fixes for your Emergency Needs - the interest and pain involved with re-paying the funds are too much of a toll.  Indeed, Credit Card Debt and the interest it brings are, in my opinion, not part of a viable financial plan. I could be wrong, but I am probably not.

3) Mitigate any potential damaging financial risks with insurance

Insurance is intended to account for risks you cannot bear yourself.  While Auto Insurance is required for Drivers in every state, think of it as "income smoothing" where you forgo a bit of your salary via insurance premiums in return for not having your income interrupted by a car accident.  Other forms of insurance - Homeowner's and Umbrella - serve similar purposes.

It is essential to review your risk exposures periodically to assess your liabilities and how to best mitigate them.  Sometimes, self-insuring is the best option...think Travel Insurance and Extended Warranties.  In other cases, you may be assuming risk of which you are unaware - think Long-Term Disability.  This is where a Financial Professional (Full Disclosure:  I am a Financial Professional) can be an invaluable resource in assisting with highlighting Risk Blindspots.

4) Have enough cash on-hand to pay current taxes due

Death and Taxes are the only guarantees in life, according to Benjamin Franklin.  Assuming this is true, it is generally a good idea to have cash on-hand to pay your tax liabilities.  Indeed, the penalties for failure to pay Federal Taxes are draconian.  Therefore, it is wise to estimate what your liabilities are going to be and reserve the funds so you can settle up without undue penalties and/or interest.  Don't forget to account for your State and Personal Property Taxes and whatever else your state or municipality have dreamed up.

5) Have an Executable Budget

One of the basic tenets of financial planning is to spend less than you make.  True, outflows can exceed inflows in some years.  In fact, as in college years, this may be a desirable occurrence.  However, in the long run, essentially no one can spend less than they make over their professional life, meaning the years where there is earned income.  Some outliers can distort that statement - think inheritances and the unicorn lottery winner.  

For the VAST majority, warming up to the "spend less than you make" mantra is essential to growing a net worth capable of supporting a multi-decade retirement.  Don't fret, it's not all spinach...you can still spend a boat-load while you are saving over your professional lifetime.

6) Contribute to your Employer Retirement Account

Recognizing the financial realities of retirement, the Federal Government (and some states) have availed the citizenry of numerous tools to assist in funding retirement.  The most popular is perhaps the 401(k) - its matching funds and tax-deferred growth make it a potent Retirement Planning tool.  If your employer provides for matching funds to your salary deferrals, you are best-served taking advantage of this free money.  There are few instances in life where you earn an immediate 100% return on your money risk-free.  Employer Matching Funds are one of them, so if you have not signed up, get down to the HR Office (or on-line) and get to it.

7) Address your Long-Term Care Needs

One of the many challenges in retirement are the numerous potentialities that are unknown as to when they will happen, how they will happen, and to what extent they will happen.  Long-Term Care is one of these potentialities.  To have a look at your odds of needing Long Term Care at the end of life, please read this.  For an estimate of today's costs, you can visit this.    

At Resilient Asset Management, we spend a great deal of time addressing end-of-life and the "next" living solution with our Clients.  While anything is possible - needing several years of Long-Term Care Coverage or perhaps none - in our world, if there is any doubt, there is no doubt.  Therefore, we endeavor to design a Long-Term Care solution with our Clients.  Some plans are better than others, which is usually a product of Client Health and financial circumstances.  Whatever the efficacy of the plan, it is far better to address this issue when you are healthy and stable than to have your family hastily concoct one after a severe medical event.

Conclusion

Everyone's personal financial situation is unique.  Across the spectrum, there are some common traits nearly everyone's financial plan ought to have.  The "7 Cornerstones" highlighted above are a great start for most.  You may have other necessary Cornerstones - like a Business Succession Plan if you are a business owner.  Whatever the case, if you address these 7 items, your financial situation is likely to be better off than it would be otherwise.

Comments, criticism, and suggestions are always welcome.  If you would like to provide any, please contact me here.