10 BEST FINANCIAL DECISIONS A CLIENT CAN MAKE (2024)

Financial planning can reach a lot of areas in life. Here are 10 decisions that you can make to help ensure your finances are working as a support system for you.

1. Save at least 25% of income.

The earlier you start saving, the better. For example, someone who begins saving at age 25 does not have to save as much as someone who begins saving at age 35 (in terms of percentage of income) because the 25-year-old has more time to benefit from compounding interest.

Generally, it is better to focus on saving a percentage of income rather than a specific dollar amount. By doing this, you potentially put yourself on track to build a portfolio that can generate enough after-tax income for you to continue living the same lifestyle during retirement that you are used to living during working years.

A good rule of thumb that we have seen lead to success is saving at least 25% of income.

For example, if someone earns $200k/year, their target savings should be $50,000/year between their own contributions and matching contributions (if offered through an employer sponsored retirement plan). If this is done over a 30-year period with a 7% compounded rate of return, the future value of the portfolio would be ~$5M at retirement.

Assuming a 4% withdrawal rate (which many deem to be the ‘safe withdrawal rate’ to preserve principal), this person could take $200k/year from the portfolio to help cover fixed and discretionary expenses during retirement.

2. Reverse Budgeting.

Reverse budgeting is a system that can alleviate decision fatigue and stress to ultimately give you permission to spend. Here’s how it works:

1. Determine the total sum of your “fixed expenses.” In other words, we want to define the items that absolutely need to happen each month, such as paying your mortgage, car payments, savings, daycare, etc.
2. Set all of these expenses to autopay and have them come out of 1 checking account, which is designated as a “fixed checking account.” All fixed and recurring savings or contributions should come from this account as well.
3. Coordinate with your payroll provider and have them deposit this exact amount to the fixed checking account each month.
4. Send the remainder of your paycheck to an entirely separate checking account, which is designated as a “variable checking account.”
5. Lastly (very important), in order for this to work, never take funds out of the fixed checking and never comingle funds between the two accounts because this will throw the entire system off.

The goal is to automate as much as possible in your budget through the fixed checking account, then spend whatever is left over each month from the variable checking account.

For more information on this strategy, click here to see a video by EWA on “controlling the money temperature” –https://vimeo.com/548158104

3. Create a good philosophy around competing goals.

Financial planning is full of paradoxes. Finding the right balance between risk and return is a perfect example. A financial plan needs to have a good return to meet your goals (such as planning for retirement and college) but if you take on too much, or too little, risk, these goals may not be met.

Another good example is the phrase “the best savers are the worst spenders.” It can be very tough to not only break the habit of saving, but then also start to withdrawal money during retirement. We have often times seen this exact concept delay retirement / full financial independence by several years for some clients.

It is very important to be aware of competing goals and have a sound game plan in place so you can prioritize and execute.

4. Figure out what is best: renting or buying your home.

When it comes to housing, many people have very strong opinions on whether to rent or buy. Most often, if you end up staying in the home for more than 5 – 7 years, you will likely come out ahead by buying.

It is important to consider the following when looking to rent or own a home:

• How long do you plan on staying in the home?
• What is the opportunity cost for the down payment? Can you save this money elsewhere if you instead decided to rent, and can this investment vehicle outperform market appreciation of the home when you eventually sell?
• If you rent, will the monthly payment be more or less than the monthly payment of a mortgage?

If you plan on relocating in the short term, we have often seen clients come out ahead by renting. This allows you to save money that would have otherwise gone to a down payment, plus save the monthly difference between your rent payment and your mortgage payment (assuming the rent payment is less than the mortgage payment).

In general, we recommend to approach renting vs buying from a lifestyle perspective. If you want to make a place your own through renovations and home improvements then it likely makes sense to buy. If you do not want to be bothered by ongoing maintenance and prefer to be ‘hands off,’ then it may make sense for you to rent.

5. Take the stress out of finances.

A major stressor in financial planning can be tracking savings, expenses, and net worth. There is a ‘sweet spot’ between not tracking at all, and tracking everything. More on this here-https://vimeo.com/781215613

It is also important to evaluate how you trade time for money, or money for time. To alleviate stress, look at the context of your financial plan and make intentional decisions around how you are specifically trading time for money (and vice versa). More on this here-https://vimeo.com/781214834

Financial planning is rarely “black or white.” We have found that establishing a top 5 values list can help you navigate the “gray areas” when these times arise. The ultimate goal is to ensure your finances (and financial decisions) are in alignment with what matters the most to you, which is driven by your values. More on this here-https://vimeo.com/781213158

Simply talking about money can remove a lot of stress. Sometimes conversations that should have happened years ago never happen, and this can lead to stress that can make crucial decisions much harder to execute. More on this here-https://vimeo.com/781214013

Lastly, know when to hire (or when to fire) a financial advisor. If you are working with a good advisor, they should know what is most important to you and therefore be able to help you prioritize (and execute) the many goals in your financial life. More on this here-https://vimeo.com/781216234

6. Max out retirement plans.

There are many retirement vehicles today, the most popular of which are 401(k) plans, 403(b) plans, Roth IRAs and Traditional IRAs. All of these plans have specific contribution amounts that you cannot exceed in a given year. This is because these vehicles are tax efficient and they are usually the best place to put funds for long term, financial independence planning. Therefore, our rule of thumb is to always max out retirement plans that are at your disposal.

7. Protect your assets.

Asset protection can insulate your finances in the event of a lawsuit. If you work in a high liability profession, you should be very intentional as to where you are saving funds. In general, the following accounts provide strong protection from creditors:

• 401(k) plans
• Individual retirement plans (IRAs)
• 529 Plans
• Life insurance

Also keep in mind account titling (for example, individual assets vs joint assets). The specific titling on your house or joint brokerage account can determine if these assets are subject to creditors in the event of a lawsuit.

Asset protection laws are state specific, so it is always best to consult with a legal professional. For more information on asset protection, click here-https://vimeo.com/662036818

8. Follow and stick to investment principles.

While successfully timing the market can lead to big gains in your portfolio, studies have shown that this is very difficult to do on a consistent basis over the life of a portfolio. The reality is, if you are in your working years, it is likely that you will see several downturns before you reach retirement and begin taking distributions. Rather than selling out of the market altogether during volatility, it is important to stick to a sound investment philosophy and stay disciplined to help ensure your finances (and your portfolio) are working for you and supporting your life by design. If you have a sound investment mix and financial plan, you should never have to live life based on what the market is doing (or isn’t doing for that matter).

Here is a video resource from EWA describing the benefits of long-term investing:https://vimeo.com/658692896

9. Focus on accounts that give you flexibility, control, and autonomy.

Many investment vehicles come with certain IRS rules that must be followed. For example, if you are funding pretax investment accounts (such as a Traditional IRA, SEP IRA, or Pretax 401(k) plan), you eventually have to take a required minimum distribution (RMD) currently at age 75.

When RMDs begin, you are forced to take a distribution on an annual basis regardless of whether the market is up or down, and regardless of whether or not you even need the funds at all in a given year. If you accumulate the majority of your retirement dollars inside of pretax accounts, you can potentially run into limitations in regard to flexibility, control, and autonomy.

For example, one scenario is known as “Sequence of Returns Risk.” Link to video here-https://vimeo.com/662713470

10. Plan for college using a mix of tax advantaged savings and flexible savings.

When it comes to planning for college, a popular option is funding 529 plans. 529s are arguably the best place to save funds for education costs if you know for certain that the funds will be used for a qualified education expense.

For example, in most states you can get a state tax deduction for contributions (up to defined state limits), funds can grow tax-free, and distributions can be tax-free if the distribution is used for a qualified education expense.

However, if 529 funds are not used for college, then any growth on a distribution is taxed as ordinary income and is assessed a 10% penalty.

We generally recommend that clients fund a mix of 529 plans and non-qualified accounts (such as a brokerage or taxable account). Brokerage / taxable accounts do not have any stipulations as to what distributions can be used for, so this can give you flexibility in planning for education goals.

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Equilibrium Wealth Advisors is a registered investment advisor. The contents of this article are for educational purposes only and do not represent investment advice.

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