Here’s Your Financial Planning Starter Pack

By Zach Reeg

Whether you are just starting your first job or re-evaluating your financial situation, the same questions often come up: 

• What should my portfolio look like? 
• How should I start investing? 

Although there are some basic guidelines, your financial life is as unique as your fingerprint. Your lifestyle, goals, family situation, risk tolerance and even your wildest dreams will give a unique signature to your portfolio. 

Let’s look at a few of the starting points today for a healthy portfolio. Whether you’re just starting out and finding your bearings or you’re experienced and need a refresher, you’ll want to make sure these personal financial planning basics are in place. 

Decide What’s Most Important – Then and Now

We’ve all been told the earlier you save, the better off you’ll be down the road. 

Is that true? Well yes, compounding interest means you will have a larger sum of money the sooner you invest. But is that reasonable for everyone’s situation? No, not even close. Many young adults will be paying off student loans into their 30s, buying their first house, or starting to have children – all of which are big-ticket items. 

The cash flow may not be there at the beginning to start stashing away thousands of dollars a year in an investment account. But that’s not to say it can’t be done. If you can, you should. I always recommend thinking of it as paying yourself first. Someday the money you invest now will become like a “paycheck” after you stop receiving paychecks from your job. Find out where you can cut back so you can make sure you get paid. 

I have a certain amount of money transferred from each paycheck directly into my investment accounts so I don’t even have the option to spend it. Take control of the situation by putting yourself in a position to live the life that you want to live now and in the future. 

Revisit Your Plan Regularly

Revisit your plan regularly to make sure you are on track to get to where you want to be. A financial plan and goal cannot be done once and forgotten about. You need to make sure you stay on top of it and adjust accordingly. 

What happens if you are re-evaluating your financial picture and it doesn’t look like it did when you drew it out five or ten years ago? There’s no “if” about it – this is going to happen! Everyone’s situation is different, and changes in its own unique way as life happens.  

Nobody holds the crystal ball that can predict exactly what the future has in store – if they do, I want to know where I can get one! Life changes and so do your goals, which is why it is important to constantly revise your financial picture as time goes on and things change. 

Maybe you got a promotion or pay raise and have more cash than you need and want to have that money start working for you. Or on the other side of the spectrum, you’re taking care of your parents now and have medical bills to pay and must find a way to come up with the cash flow to make sure you can keep paying your mortgage as well as taking care of your parents. 

Take Advantage of that 401(k)

Our third personal financial planning basic involves your foundational investment account, your 401(k). Most of us that are working have a 401(k) plan through our employer. This is the most basic and simplistic investment account. 

You should visit your 401(k) plan and company policy on employer matching. You may already be doing this, but let me emphasize it again, make sure you take advantage of your employer’s matching program. 

By contributing up to the matching limits, you are essentially getting free money, and who doesn’t love free money? The current limit for contributions to a 401(k) in 2019 is $19,000, which is generally above the amount of an employer match. 

So if you can swing it, I suggest contributing up to the employer match amount, and then consider any leftover funds to be invested into an Individual Retirement Account (IRA). 

Set Up Another Retirement Account

You can open an IRA in addition to your 401(k) that can help fund your future retirement. Should I invest in a Roth IRA or a Traditional IRA? Another open-ended question with not a right nor wrong answer. 

Personally, I think that Roth IRAs are better for younger people just getting into investing. Contributions are taxed on the way going in, and most likely you are going to be in a lower tax rate now versus when you are older so it makes it advantageous to make the contributions and pay less taxes on it. 

By paying taxes on the front end, you’re able to let the account grow tax-free. There are income and contribution limits, both of which are important but often not an issue with a young investor. 

With the Traditional IRA, you can deduct contributions from current year taxes so the money grows pre-tax. This model may be beneficial for somebody making more money and consequently in a higher tax bracket.

Develop Your Personal Asset Allocation

Our last basic of personal financial planning is to develop an asset allocation based on your investment style and goals. So you have your 401(k) and IRA open and funded, now what type of investments do you need to purchase? 

Again, I wish I had that crystal ball! As it is in life, you often get one thing and not the other. The same goes for investing, you cannot be conservative and expect to beat the market.  

My favorite wealth management proverb is: “It’s not about timing the market, it’s about time in the market.” The longer the time horizon the more risk you are most likely to be able to tolerate. Someone closer to retirement will look at more conservative investments since they will need the cash in the near future. If you’re younger and have more time, you can be more growth-oriented.

Find Your Style

Keep in mind everyone’s investment style is different and changes over time. Quite often two spouses will even have different investment styles, and there is nothing wrong with that! 

It is important to continually track your risk tolerance to make sure your goals and expectations are aligned with the risk you’re willing to take. Check out the Carson Wealth Risk Tolerance Questionnaire to get an idea for your risk profile and help you start your personal finance journey. 

Take the Questionnaire

This article is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.

Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.