Understand & Create Your Wealth Plan

Know Your Budget
Start simply. Begin to understand what you have. What money is coming in and what is going out. You’ll hear words like income and expenses, assets and liabilities, but it’s not that complicated. The obvious is: less should go out than comes in. Sources of what comes in can be paychecks, social security, pensions, retirement assets, gifts, rental income from real estate, etc. Things that go out is what you spend. Some expenses are fixed and unavoidable: mortgage, rent, taxes, car payments, utility bills, insurances, food and clothing. Other “lifestyle” expenses are flexible and discretionary: entertainment, travel, fun shopping, etc. Create a simple budget where you can keep track of the ins and outs. Balance your check book – use a tool like Quicken, mint.com, a spreadsheet or pen, paper and calculator. Remember, the goal is to have money left over. If you’re not the person in the household who takes care of this, start to get involved. Ask about your household budget, learn about your ins and outs. Get access to passwords or at least know where the list of passwords are kept, what banks you use and where your money is coming in from.

Start Saving
If you have money left over, a savings plan is typically the next thing to do with your money. A savings plan can be as simple as saving for that new pair of shoes, an emergency fund equal to 3-6 months of fixed expenses or something more elaborate like a home purchase. Opening a bank account to do this is the most common way to save. Each week or month you put a specific amount into the account with the goal of saving enough to be able do what you’ve planned to do. Think about paying yourself as if you were a bill. Pay yourself before you spend it on lifestyle spending.

Start Investing
With any additional money, you could start an investment plan. This can seem overwhelming, confusing, over your head, risky or something you just don’t want to know about. If your significant other is handling it you should know some basic things and be part of the discussion about the plan’s purpose. What are your goals and objectives? What are you trying to accomplish with an investment plan? For some, it’s planning for retirement so you know you will have enough money to live on once the paychecks stop coming. For some, the goal is to maximize return and accumulate more wealth. For others, it’s to preserve the wealth they have accumulated throughout life, and for others it’s investment for the next generation. It is most certainly specific to you. Whether you start an investment plan on your own or hire an investment professional to help, it all should start with an open and honest conversation. Be candid about your needs and wants and don’t hesitate to ask questions to be sure you understand the conversation. Just like a good teacher can teach any student, a good financial professional should be able to have a conversation at any level. It should not be expected that you understand industry jargon or even what common investment words mean. A good investment professional should keep it short, clear and simple. The conversation should begin with your needs which is why step 1,“KnowYour Budget,”is critical to the process.

Craft Your Investment Plan “Recipe”
Once you target funds for an investment plan, you need to move on to “asset allocation,” or understanding the mix of different types of investments and what they are meant to accomplish. Think of it like a recipe. There are many different ingredients, some meant to harden, soften, rise or flatten, sweeten or sour. It all depends what you are trying to make. All the different investments mixed together become your asset allocation and should have some expected outcomes that should be in line with your objectives. You’ll hear about “asset capture.” This is the part of the plan where you or your investment professional pick the specific investments to fill the asset allocation buckets. Pick the sugar, the salt, the flour, etc. This can be done with several different types of “ingredients”. You will hear about stocks and bonds, mutual funds (which are simply a basket of stocks and/or bonds), Index funds (again a basket of stocks and/or bonds typically with lower fees), and more complex “ingredients” like alternatives, limited partnerships, private investments, real estate investments and separately managed accounts and so on. Be sure to stop here and ask more if you’re not sure what these options are and what they are meant to do. The plan should then include where to locate your assets. You may have different types of accounts with different tax treatments. This can be an entire article of its own, but know that you may be able to take advantage of tax benefits if you hold certain assets in certain types of accounts. Your investment professional can certainly help here. One last word you may hear is rebalancing. This means that once you have implemented your asset allocation certain investments will grow or shrink given the current market environment. You should periodically adjust or “rebalance” back to your original asset allocation you decided upon since this allocation was put into place with certain expectations.

Once this has all been decided and implemented you should review and refine it at least annually depending on your current circumstances. As life and goals change you should be able to adjust your plan as necessary.

Lots to learn and think about but feel free to call us for more information or clarification.

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