- Understanding your current financial position can provide a solid foundation for your financial planning process.
- Knowing how much you spend and save can provide some key insights into your financial health.
- It is also important to review some of the basics of financial planning, like your insurance, college savings, will, and more.
When you start a financial planning process, you usually begin with the goal or the problem you are trying to solve. Then, you and your advisor will work together and take a deep look at your financial wellbeing. It's a bit like getting a physical for your finances.
You will review some financial vital signs—key indicators of your financial health—and then take a careful look at key planning areas to make sure some common mistakes don't trip you up.
Financial vital signs
There are key measures that are important to understand early in the planning process. One measure is a snapshot of the things you own and the amounts you owe at a particular point in time. The things you own—your assets—include your house, cars, bank accounts, investments, cash value of your life insurance policies, and other personal property. The amounts you owe—your liabilities—often include mortgage and auto loans, credit cards, and other debts. Your net worth is the difference between your assets and liabilities.
Although some people keep close track of their financial lives, many people just have a general sense of their net worth. Keep in mind, that in general there is no one dollar amount that is the right goal for your net worth, but by knowing your net worth you are better positioned to set realistic financial goals and chart your financial progress over time.
In addition to getting a snapshot of your current financial position, it’s important to get a sense of where you are heading. That means adding up all the money coming in and going out. Financial advisors call this a cash flow analysis, and it looks at all your income, from your investments, properties, work, or anywhere else. And it looks at your spending.
When it comes to cash flow, there are no hard and fast rules about what is good—it depends on your personal goals and values. But there are some general guidelines you may want to consider.
- Try to save at least 15% of income for retirement—and any employer matching counts toward this goal.
- If you are in retirement, try to limit withdrawals from your savings to about 4% of your account balance in the year you entered retirement, though you can increase that for inflation each year.
- Limit your monthly essential bills and housing costs to 50% of your monthly income.
- Save about 5% of your income for short-term expenses.
- Look to keep your total monthly debt bills below 36% of your monthly income.
Your cash flow analysis may also show some opportunities for tax savings and other ways to make the most of your money.
Cover the basics
As you build out your financial plan, you will have in-depth discussions about investment strategy and retirement income, but a good financial checkup includes a review of some of the other key steps that can help you avoid problems down the road.
Taxes can play a role in many of the financial decisions you make. So when it comes to investments, accounts, and income strategies, it makes sense to give weight to taxes as one factor in your decisions.
The people who you name as beneficiaries on your financial accounts will take ownership of your accounts in the event of your disability or death. No one really likes to think about account beneficiaries, but they really don’t take much time to update. On the other hand, if you have outdated beneficiaries named, it could cause big headaches for your heirs, or an expensive and time-consuming probate process. If you are married and want to name someone other than your spouse, some retirement plans require permission from your husband or wife. So check with your plan before naming someone else.
If you have children or grandchildren, you may want to consider an investment strategy to help meet the high cost of education. Accounts such as a 529 plan offer potential tax advantages for education savings.
Things can go wrong, and you should make sure you are covered. That means reviewing life insurance, umbrella insurance, long-term care insurance, and disability insurance so that you, your loved ones, and your savings are protected if something unexpected happens.
Almost everyone can benefit from a will that provides instructions on what to do with your possessions if you die. You should also prepare for the risk that you may become disabled or temporarily unable to manage your own affairs. You can grant power of attorney to someone who can handle financial transactions on your behalf, along with a health care proxy, who can make medical decisions for you if you can’t.
A giving plan can help you make the most of any potential tax saving opportunities and maximize the impact of your gifts. Strategies like bunching gifts every other year, donor-advised funds, and donating appreciated assets, among others, can make your gifts do more.
The bottom line
Fully knowing your financial realities—the good and the not-so-good—can help give you more confidence in making financial planning decisions and help boost your overall financial health. Fidelity has a number of educational resources to help you learn more about these topics and offers professional guidance and advice.