By Michael Gold, CFP®, MBA, Founder & CEO, Wealth Advisor
Building wealth is a slow and gradual process; patience and consistency are the keys to prosperity. There are several components in the basics of personal financial planning. Let’s walk through the basic building blocks of a strong financial future and see how they fit together.
1. Positive Cash Flow
Cash is king, and cash flow is the lifeblood of your financial plan. You read a lot about cutting expenses and living below your means, but it is equally important to invest in your skills and work toward increasing your income.
Your earning potential is one of your greatest assets. Both sides of the equation require constant tending, especially when settling down and starting a family.
One major hindrance to cash flow is credit card debt. A recent study found that Americans owe nearly $1 trillion to credit card companies. There is no silver bullet for producing positive cash flow; the only method that works is consistent discipline.
2. Emergency Fund
An emergency fund ensures that your financial plan will stay on track in the event of job loss, unexpected but necessary expenses, or other events beyond your control that could otherwise derail efforts to build a financially robust future. Most advisors typically recommend keeping somewhere between three to six months of expenses in reserve.
3. Retirement Income
It’s never too early to start planning for life after you leave the working world. But don’t think in terms of saving for retirement – think in terms of how much income you’ll need each year when you retire. Savings may provide some of that income, but likely not all of it. Many different income-producing vehicles can sustain your desired lifestyle after you are no longer working.
4. Return On Investment
Cash loses value through inflation simply by sitting in a bank account. While investment performance can vary based on the level of risk you are willing to tolerate, the goal of investing – as opposed to saving – is to put your money to work for you when you are not using it. In addition, an automated savings mechanism, such as a 401(k) plan, will ensure that you continue to invest on a consistent basis.
5. Visibility And Accountability
Financial literacy begins when you commit to looking at your income, expenses and financial goals on a regular basis. At the most basic level, the discipline of budgeting and tracking spending every month instills the discipline and the motivation to make better decisions. It is easy to fall prey to emotional decision-making when you don’t have a clear picture of your finances.
6. Measure Progress Toward Long-Term Goals
People often fail to stick to a plan if they lack a clear goal or are unable to gauge progress. Motivation changes when you can see, in dollars and cents, whether you are on track to retire, start your business venture or pursue your next major milestone.
7. Tax Avoidance
While tax evasion can land you in jail, tax avoidance is perfectly legal. In fact, it’s an essential component of the basics of personal financial planning. The goal of tax avoidance is to pay only the tax that you legally owe and no more. By making use of the right mix of tax strategies, you can keep more of what you earn and put your tax savings to work for you.
8. Risk Mitigation / Insurance Coverage
Keeping the right mix of insurance coverage in place throughout all seasons of life will help to protect your family from a financial catastrophe. Life, health, and long-term care insurance are critical ingredients. It is important to re-evaluate coverage each year, or anytime a major life event occurs, such as the arrival of a child. A recent study found that 40% of insured adults wish they had purchased their policies when they were younger.
If you build a budget during the good times, don’t forget that downturns always come. A common mistake is to overspend on illiquid luxuries, like an expensive car or a bigger house. I recommend reading “The Millionaire Next Door” by Thomas J. Stanley and William Danko, which dispels some popular myths about wealth – including the idea that the ultimate goal is to live a life of luxury.
We’re Here To Help
Even the basics of personal financial planning can be complex, but the rewards are well worth the effort. If you address on a consistent basis all nine of the areas outlined in this article, we believe that you’ll feel more confident and in control of your finances.
It’s important to remember that you don’t need to walk this financial journey alone. Our team at Gold Family Wealth would love to be your guide. Reach out to me at [email protected] or (800) 303-2533 to schedule a complimentary consultation.
Michael Gold is the founder & CEO – Wealth Advisor of Gold Family Wealth, an independent wealth management boutique and named one of The Top 100 Magazine’s 2020 Top 100 People in Finance. Michael has 20 years of experience in the financial industry and has a bachelor’s degree in business and economics from the State University of New York College at Oneonta, an MBA from NYU Stern School of Business, specializing in Quantitative Finance and Leadership and he is a CERTIFIED FINANCIAL PLANNER™ professional. He serves business owners and entrepreneurs by stress-testing their financial plan to identify red flags and missed opportunities. Michael strategically outsources knowledgeable professionals from various fields, such as tax, insurance, retirement and trust, and estate law to collaborate on potential solutions to help position his clients to pursue their desired goals.
Michael currently lives in Westport, CT. When he is not working, you can find him spending time with his wife, Giselle, their three children, Sebastian, Aria, and Pierce, and their dog, Charly. To learn more about Michael, connect with him on LinkedIn.
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