VOL. 116 | NO. 38 | Monday, February 25, 2002
Financial plan puts future in order
Financial plan puts future in order
By TONY JENNINGS
Special to The Daily News
Whether it's a new home, a child's education or a secure retirement, most people know what they want out of life.
But the individuals who are most likely to achieve their goals, the Tennessee Society of Certified Public Accountants reports, are those who have developed and implemented a financial plan.
A financial plan typically evaluates the current monetary situation, as well as identifies, estimates and develops strategies for meeting the cost of long-term goals. A well-constructed plan covers all aspects of economic life including investments, insurance, tax, retirement, estate planning and cash management.
A central component of any financial plan includes a long-term investment strategy that will help accumulate the capital for meeting goals. A good plan involves more than just picking the right investments.
In fact, CPAs say allocation of investments among different classes equities, fixed income, cash and cash equivalents can have a greater impact on success than the actual investments.
Once allocations are established that take into account tolerance for risk and financial goals, the plan should focus on achieving diversification within each investment class.
Any review of a financial situation must consider a family's ability to maintain its present standard of living in the event of untimely death or disability. With adequate coverage, loss of income due to death or disability should not necessitate major lifestyle changes. It is also important a financial plan reflects adequate protection against losses resulting from damage to or loss of home and personal property, including cars.
While taxes should not drive financial decisions, tax planning is important. To be most effective, a comprehensive financial strategy should include a year-round approach to making the most of various tax-savings opportunities, including tax-deferred and favored investments, income shifting, effective use of deductions and credits and managing debt.
For many people, planning for a financially secure retirement is a top priority. In developing a financial plan, it's important to estimate how much money is needed to support the lifestyle envisioned.
Although Social Security and company-sponsored pensions may provide some income during retirement, it is unlikely these resources will sufficiently cover expenses. Therefore, it is important a financial plan includes how funds will be accumulated for a comfortable retirement.
Death is an eventuality every financial plan must address. Estate planning assures the appropriate transfer at death of all assets. It also makes certain appropriate techniques are utilized to minimize potential liabilities and expenses and preserving wealth for future generations.
Another important part of a good estate plan is choosing someone to hold a durable power of attorney, someone who can handle assets in the event the owner is unable to do so.
Additionally, it is a good idea to sign an advance directive that discloses the extent of medical treatment desired in the event one becomes physically or mentally unable to communicate wishes.
Cash flow management
Cash flow management encompasses everyday strategies for budgeting, managing debt and building an emergency cash reserve. An analysis of cash flow shows, for better or worse, how money is earned and spent. A planner can use this information to adjust expenses to cover immediate needs, while investing for long-term goals.
Monitor a plan
Developing a financial plan is an ongoing process. Certified public accountants say it's important to review a plan at least annually and more often if there are major changes in life, the economy or tax law.
Tony Jennings, president of the Tennessee Society of Certified Public Accountants, is principal and managing partner of Dent K. Burk Associates PC, an accounting firm in Kingsport, Tenn.