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Tags: financial planning | savings | investing | salary | disability insurance

Bryan Kuderna: Financial Planning in 5 Simple (But Not Easy) Steps

Bryan Kuderna: Financial Planning in 5 Simple (But Not Easy) Steps

Bryan Kuderna By Friday, 09 June 2023 03:12 PM EDT Current | Bio | Archive

Money can be the hero or nemesis, a master or slave. This coveted source of financial planning has been one of the most researched subjects of all time, eternally entertaining and perplexing its followers. As a Certified Financial Planner™ having counseled thousands of clients over the past 15 years, I can say without hesitation that the reality is, money is not all that confusing.

Since the fading of defined benefit pensions and lofty employer benefits, and the solvency of entitlements coming into question, a push for financial literacy has been well underway.  In 2000, only 6 states required a course in personal finance for high school graduation, versus 23 states today (Council for Economic Education). So, why hasn’t the problem been solved?

I would posit two causes which go back to the “eternal entertaining and perplexing” issue referenced earlier. The rise of independent financial decision making has been accompanied by a rise in independent products, technology, and services.

The most obvious products being offered are investment and insurance services made available through the internet, which tore down any barriers to entry. What was once out of reach for most people who were not accredited investors or those in the highest tax brackets, is now available with the click of button to nearly anyone with a bank account. This new, enormous audience has been met by an equally large network of business channels and finance gurus, be it the thousands of books, podcasts, and 24/7 media outlets dedicated to conversations on money. Entertainment leading to confusion.

The second cause is that the fading of financial safety nets has coincided with the fading of an appropriate wealth mindset. The generation who created Social Security, Medicare, and pension plans did so as a result of having lived through the Great Depression.

Baby boomers often credit their wealth accumulation habits to their parents’ memories of the Great Depression, and the loud advice to save for the “rainy day” and not spend what you don’t have.

As time heals all wounds, so has the distant pain of the Depression era detracted from recent generations’ financial discipline. The current U.S. Personal Savings Rate is 4.1% versus rates of 10%-15% for most of the 1950s-1980s (U.S. Bureau of Economic Analysis).

The talking heads responsible for much of the financial planning confusion have also supported this second cause via get-rick quick schemes and popularizing millennial movements such as Financial Independence, Retire Early (FIRE), which pull most of its followers away from reality.

Here are my 5 simple and timeless steps to building an optimal financial plan.  Please note, they may be simple, but that does not always mean easy.

1.) Protection First, Fully, and Forever

Most people don’t want to pay for something they hope they never use, let alone spend time thinking about worst-case scenarios. However, life happens, and a plan that is unprepared for the unexpected is a gamble.

Since working to make money is the foundation of every financial plan, it is critical to protect your ability to earn an income.

This can be done most effectively by obtaining Individual Disability Insurance while young and healthy, ideally through a NonCancellable / Guaranteed Renewable policy with an Own Occupation definition. Hopefully, illness or injury never strikes, but the facts show for someone starting their career in their 20’s a 1-in-4 chance of becoming disabled before reaching retirement age (Social Security Administration).

Obtaining life insurance is also typically easier and cheaper while young and in good health. While the chances of passing away during one’s working years are far lower than that of being disabled, the economic loss of an income combined with the loss of a loved one is arguably the most difficult financial hurdle to overcome.

Life insurance can come in a variety forms to serve both temporary or permanent needs, and may offer the benefit of building accessible Cash Values through products such as Whole Life Insurance.

Liability insurance through auto, homeowners, and umbrella policies is another facet of the financial plan that should be reviewed regularly to protect future earnings and existing assets from any potential claims. Insurance may not seem to matter until it matters, but at the time of disability, death, or lawsuit, it may then seem to be all that matters.

2.) Liquidity

After being well protected, the next step is building adequate liquidity.

Many financial experts encourage saving 20% of gross income annually. Early on, the bulk of this savings should be allocated to cash equivalents (i.e. Savings, Checking, and Money Market accounts).

I like to see at least 6 months of my clients’ fixed expenses readily available in cash as an emergency fund or opportunity fund. While such accounts typically don’t offer a very high return, the average savings account rate is currently 0.39% (FDIC), having too much cash on hand is often a complaint of a good portfolio versus a great one, as opposed to not having enough cash bringing about many potential pitfalls.

3.) Debt Management

After being well protected and supported by liquidity, any debts should be addressed.  Arguably the worst kind of debt to carry is credit card debt, with the average interest rate currently at 20.92% (The Federal Reserve).

Debt is part of the American way of life, but it’s important to use it wisely and have a detailed strategy for paying down personal loans, student loans, and mortgages. Jumping ahead to investing while carrying high-interest rate debt is akin to swimming upstream rather than getting ashore to take a walk.

4.) Wealth Creation

The rich person works hard to make a lot of money, whereas the wealthy person works hard and their money makes even more money.

Once the first 3 steps of financial planning have been addressed, then you can begin accumulating wealth with confidence. Any allocation of capital should be analyzed as a stool with 3 legs. These legs are liquidity, taxability, and risk.

It is important to recognize these 3 implications on the type of accounts that are used within a financial plan.  Taxable investment accounts, tax-deferred retirement accounts, Roth retirement accounts, and 529 College Savings Plans all carry different pros and cons in this regard.

5.) Growth

Once the overall plan has been drafted, then the details can be filled in via this last step of the process.

Here are the ingredients that go in the pot. There are many factors to consider in investing, such as risk tolerance, time horizon, fees, and overall objectives. Investors might consider a passive approach of buy-and-hold, or a more active approach in working with a financial professional.

Depending on one’s goals and the amount of money being invested, mutual funds, exchange-traded funds (ETFs), and/or individual stocks and bonds may all be utilized.  While this last step garners the most attention and entertainment, it is important to remember that it is the last step.

I have used this 5-step process for years to guide my clients. Conceptually, it is quite simple to understand, but like sticking to any exercise over the long-term, it may not always be easy.  Do not let time and effort lure you into complicating a financial plan that only requires 5 simple steps.
Bryan M. Kuderna is a Certified Financial Planner and the founder of Kuderna Financial Team, a New Jersey-based financial services firm.  He is the host of The Kuderna Podcast.  His new book,"WHAT SHOULD I DO WITH MY MONEY?: Economic Insights to Build Wealth Amid Chaos"  is available wherever books are sold.

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Money can be the hero or nemesis, a master or slave. This coveted source of financial planning has been one of the most researched subjects of all time, eternally entertaining and perplexing its followers.
financial planning, savings, investing, salary, disability insurance
Friday, 09 June 2023 03:12 PM
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