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Fall Financial Fitness: The Basic 5 Checklist

As we fall back into financial fitness this month, we’re focusing on ways to get (or stay) on track financially for the rest of the year. This week, we’re going to layout a basic 5-step financial checklist that we believe everyone should use to guide their financial life. If you can’t check them all off, then let’s get to work!

Determine 5 places you want your money to go

We discussed step one last week, and that is determining the top 5 places you want your money to go if money were no object and there were no bills. If you haven’t done this exercise yet, take 10 minutes and do it now. I’ll wait. 

If you’re thinking, okay Dave, I’m spending my money perfectly! Well, I’m happy for you. You’re a 5-percenter. For the other 95 percent? What’s holding you back? Ask yourself what you could change in your spending habits to help reach those goals sooner. Remember, the only person keeping you from reaching your goals is you. 

Identify Insurance Gaps

Second, now that you’ve established your goals and especially if you have a significant other and any kids running around, make sure you have appropriate amounts of disability and life insurance. Disability coverage can guarantee you have a paycheck to fund your goals should something keep you from working, while life insurance ensures that, should anything happen to you, your loved ones are not only taken care, but those goals are funded for them as well. If you need help figuring how much coverage you need, pull together your current employee benefits, any existing individual policies, and we’ll run a human economic life calculator (yes this exists) to see what you need. This way we can help you fill any coverage gaps you might have. 

Maximize Your Employer-sponsored Retirement Plan

Third, make sure you’re participating in your group-sponsored retirement plan, or if you’re self-employed, set up a self-employed retirement plan, and that you’re getting any available employer match. I used to be amazed by how many people would come into our office with access to a company match in their retirement plan that they weren’t taking advantage of. Over the last 20 years, more and more employers have started offering automatic enrollment into these plans, but even so, I’m sill amazed by how many people don’t contribute more than the minimum in order to make a significant difference in their financial future. We always encourage you to continue to increase the amount you’re contributing to your retirement accounts each year – once you’ve taken care of the next two steps on this list.

Fun your Personal Retirement Plan

Fourth, fund your ROTH IRA. We are frequently asked about the difference between an employer-funded retirement account and a Roth IRA. Typically, employer retirement plans are funded with pre-tax money, reducing your current tax burden. In recent years, more employers are offering Roth 401(k) options that are funded with after-tax money, reducing your future tax burden. That bucket of your retirement plan would not be subject to federal and state (if applicable) taxes, provided you make proper withdrawals. If you don’t have a Roth 401(k) option, there are Roth IRA options which allow for contributions of up to $6,000 per year (or $7,000 catch-up for age 50 & up). Because Roth IRAs allow you to save after-tax dollars into an account that will not be subject to taxes, there are certain income limits to be aware of. I suggest having a conversation with a financial planner prior to opening a Roth to ensure you’re eligible. 

To reiterate, the biggest difference between a pre-tax retirement plan and post-tax plans is this:, if you have $100,000 in a pre-tax account, that’s not actually $100k. it’s $100k minus what you owe Uncle Sam and possibly your state. If you have $100k in a Roth IRA or Roth 401(k), you can actually take out the full $100k without any type of tax upon reaching age 59.5. 

Organize your Financial Life

The fifth item to complete is your legal documents. To be perfectly clear, legal documents probably should have been at the beginning of this article. But I know that if I start out telling you to call an attorney to draft up a bunch of documents, you’d stop reading. There is no gold star, or half-price appetizer, or $5 off coupon they give out for completing legal documents. It’s just something people do to make sure their assets go to whomever they intend them to, should something happen to them. It’s that simple. It’s out of love and respect for their beneficiaries. 

As you look over these items, you may have a few questions or need help implementing some of these items. Please feel free to contact our team to set up a time to meet as needed. If you’re reading this and you’re part of the 5 percent that have all of these items are checked off — you’re well on your way down a solid financial path. However, now that you’ve accomplished the Basic 5, it’s never too early to sit down with us. We’d love to help you review your goals and put down dates and numbers to those goals so you can work toward your best financial future. We’re here to help. 

Article by David Smyth, Senior Partner at Family Financial Partners — a financial services firm in Lexington, Kentucky.

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