The FAQs of a Financial Planner

As a financial planner, I can’t tell you the number of times I’ve heard, “I think we’re making good decisions, but I don’t know.” For many, it boils down to the fact that you don’t know what you don’t know. In that situation, it’s hard to feel confident you are doing the right thing. To help you, here are some common questions that I receive.

What Should I Do With This Cash?

Over time, you may find yourself in a position where you are building up excess cash in your bank account. While it may provide some peace of mind, it’s not doing you or anyone else any good. So what should you do with it? You have two decisions here. What to do with the cash on hand and how to manage future cash flow.

You can direct excess cash to other financial goals after setting aside enough to cover 3 to 6 months of living expenses. That could be investing in a brokerage account, paying down debts, or contributing to an IRA account. Prioritizing your financial goals will help make this decision clearer.

The next step is managing future cash flow so your bank account balance doesn’t get too big again, and you find yourself right back where you started. Are you currently maxing out your retirement contributions? A common misconception is that you are making the maximum contribution if you contribute enough to get the employer match. While the employer match is important, there is usually an opportunity to contribute more. Please review the 2021 contribution limits for your employer plan and ensure you are on track to max it out.

In addition, you may be eligible to contribute $6,000 to an IRA or Roth IRA account.

Should some of that extra cash go toward college savings? Maybe. Make sure your retirement goals are on track before you focusing on college. You don’t want to prioritize education savings over retirement savings. While you may not like the idea, students can take loans for college. No one is going to give you a loan to fund your retirement years.

I bought these insurance policies a while ago. Do I still need them?

Are we talking about life insurance, disability insurance, or any of the countless other types of insurance policies out there? Regardless of the type of coverage, it’s likely that your circumstances are different now than when you purchased the coverage, so a review is warranted.

Life insurance may have been purchased when your income level and family situation were in a different place. Think about who would be impacted if you passed away and what type of financial security you want to provide. The life insurance policy that your parents bought for you as a child may be paid up, but it might not provide a large enough benefit to maintain your family’s lifestyle or get your kids through college.

I frequently hear, “I have a policy through my employer. Do I need more than that?” That’s a nice perk, but again – if the death benefit doesn’t allow your family to maintain their quality of life, then you likely need additional coverage. If you leave that employer or your employer changes their employee benefits, your life insurance coverage could be eliminated.

Disability insurance is often overlooked but is valuable coverage to have in place. Think you don’t need it? Think again. According to the Social Security Administration, over 1 in 4 of today’s 20-year-olds will become disabled before they reach retirement age. That’s not necessarily a permanent disability but could be time off due to major surgery or cancer diagnosis. Those types of unexpected events can cause a disruption in your income stream, which creates more stress in an already stressful situation. You can generally insure 70% of your income stream. If you have had a policy in place for a few years or more, make sure the benefit is still in line with your income.

How much should I be giving away?

There’s no black and white answer here. Ultimately, it depends on what you are trying to achieve. How much you can afford to give may be different than how much you are comfortable donating. So the first question to answer is how much would you like to be able to give annually? Work with your financial planner to see if this number is realistic.

The second step is to determine how to make those gifts in a tax-efficient manner. Gifting investments, especially ones with a low basis, is much more tax-efficient than gifting cash. If you are over 70 ½ years old, you are eligible to gift directly out of your IRA account through Qualified Charitable Distributions.

Where Does This Leave Me?

When it comes to your financial future, trial and error can be expensive, and Google can’t factor in every element of your situation. Your best bet is to seek out a financial planner who can answer your questions and help you think about the questions you don’t know to ask.

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