Financial Planning Guide

Financial planning involves all aspects of a person's financial life. From investments like stocks, bonds, and real estate to proper insurance coverage to saving for a child's college education, consumers have access to more information than ever before. We also need to save more than ever before because we're living longer and the cost of medical care is increasing faster than the rate of inflation. While the price of some items, like electronics, has gone down over the years, the cost of big-ticket items like housing, tuition, food, and energy is on the rise.

In this guide, we cover the most important aspects of financial planning: why it's imperative to begin planning as early as possible; which investments to consider and when; how to make sure insurance coverage protects both assets and income; good debt versus bad debt; reducing tax liabilities; understanding the differences between financial advisor professional designations; and college savings plans. Proper financial planning takes all of these into account when preparing an overall plan. While this guide provides an overview and general advice, we encourage you to seek the advice of a qualified financial advisor in order to receive specific information about your individual financial situation. In the case of a living trust, which is described in the Tax Considerations section, we suggest you seek the advice of a qualified attorney.

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To see anwsers to the most common financial planning questions, visit the Financial Planning FAQ.


The key to investments is asset allocation, diversification, and making regular contributions to your accounts. Whether the account is a retirement plan, a savings account, or a mutual fund, making a deposit each month reduces the overall cost of investing. Because prices fluctuate, monthly deposits smooth out the risk of buying assets at the highest price while providing the advantage of buying some at a low point. This is known as "cost averaging."

Proper asset allocation is important for investors of all ages. While those in their 20s and 30s will typically hold more equities than bonds, those in their 50s and 60s will need to hold almost an equal amount of each. Diversification is critical to protecting a portfolio. A good financial plan will have investments in different asset classes and different sectors within those classes.

For more details, visit the Investing Guide page.


Insurance protects both income and assets. Disability and life insurance protect income by providing payments each month or as a lump sum. Disability insurance pays a portion of an employee's salary each month he or she is out of work due to illness or injury. Life insurance can be used to pay mortgage payments, living expenses, and even a child's college tuition. In most cases, life insurance is paid to the beneficiary tax-free. Before purchasing a life insurance policy, an applicant should first consider the main reason for the policy. Term life insurance pays a one-time death benefit to the beneficiary upon the death of the policyholder. The premiums are used to pay the death benefit only and are not invested into a cash-building account. Once the term ends, the insurance coverage ends.

Permanent life insurance is coverage that remains in effect for life, provided premiums are paid as scheduled. Whole, universal, and variable insurance policies each offer investment options, the proceeds of which can also be paid to the beneficiary. Permanent insurance is more expensive than term insurance and often levies a surrender charge if the policy is cancelled within the first few years.

Property and casualty insurance protect assets. Car insurance, both collision and liability, protect a driver from losing significant amounts of money if the car is damaged in an accident, or worse, if the driver is sued for causing an accident. Homeowner's insurance, which is required by mortgage lenders, protects the value of the home and property.

For more details, visit the Insurance Guide page.

Credit and Borrowing

Financial planners often counsel their clients on the benefits of good debt and the detriments of bad debt. Good debt increases in value or allows an increase in earnings. For example, home prices usually increase in value over time. Plus, home ownership provides for more stable communities. A mortgage is often considered good debt because the value of the investment will go up while it provides a family with a solid foundation.

A car loan and a student loan can also be good debt. A car allows an individual to get to work each day to make money, which in turn is spent in the community and taxed to provide services to the community. A car loan can be bad debt, however, when it is used to buy a car that is more than the borrower can afford or is used for a car that is simply a status symbol rather than an adequate mode of transportation. A student loan provides a person with an opportunity to make significantly more money during his or her lifetime. And, studies show that college graduates often pay less for items such as car insurance, life insurance, and other types of loans.

For more details, visit the Credit & Borrowing page.

Tax Considerations

The tax code as established by the United States Congress is one of the most complicated in the world. The myriad tax rates, deductions, and penalties are enough to make a taxpayer's head spin every April 15th. Seeking the advice of a qualified tax professional can both reduce the amount of tax owed and help in the event of an audit.

The first step to reducing tax liability is to contribute the maximum amount allowed to a tax-deferred retirement account. Tax-deferred means that taxes on the income are deferred until a later point in time at which the money is withdrawn. Those who have access to an employer-sponsored plan like a 401(k) or 457 plan are wise to contribute. (Not only is the tax deferred, if the employer makes a matching contribution, it's free money.)

Numerous other tax deductions and credits are also available depending on a taxpayer's circumstances. The child tax credit, education tax credit, energy-efficient appliance tax credit, and the fuel-efficient car tax credit are all credits that should be used where applicable.

For those with large estates, tax considerations often revolve around estate planning. It's a good idea to get a living trust in place as soon as possible to prevent heirs from having to sell property or other assets in order to pay estate taxes.

For more details, visit the Tax Considerations page.

Financial Advisors and Management

There are several professional financial designations. From CPAs to PFSs, financial planners and advisors must at least complete a series of exams, course work, and qualified work experience in order to obtain and keep the designation. When seeking to hire a financial advisor, first determine which type of advisor you need. A Certified Public Accountant (CPA) is a good choice if you have assets under $10,000,000 or own a small business. He or she specializes in tax compliance and preparation, and in reducing tax liability. A Personal Financial Specialist, who is CPA with additional training, can help with investments as well as accounting issues. A medium to large private business owner with assets in excess of $10,000,000 may want to seek the advice of a Certified Financial Planner. A Certified Financial Planner has a fiduciary responsibility to his or her clients and extensive training in all areas of financial planning, not just tax preparation.

For more details, visit the Financial Advisors page.

College Savings Plans

How to pay for college tuition might just be the first thought of most new parents. There's no way to get around the fact that college has become expensive. Along with the potential for financial aid, there are three good ways to save for college: a 529 plan, a Coverdell Education Savings Account, and US Savings Bonds.

The two types of 529 plans are both tax-efficient. The first is an investment account. Regular deposits are made to the account in the hopes that the value will increase. It functions very much like a retirement plan. The second type of 529 plan is a prepaid plan. A parent purchases tuition credits from the state or a school at the current rate in exchange for the right to use the credits at a later date.

Coverdell Education Savings Accounts allow a parent, grandparent, or anyone else to contribute to the account. However, a maximum of $2,000 per year can be contributed, regardless of the number of people contributing. Coverdell accounts can be used for college, secondary, or elementary school tuition.

Finally, US Savings Bonds, a favorite of grandparents everywhere, can be redeemed tax-free (depending on the income level of the bondholder) for qualified education expenses. For parents who start saving early, the combination of financial aid, 529 plans, Coverdell accounts, and savings bonds might just provide enough to get a child through four years of school.

For more details, visit the College Savings Plans page.

While we've covered the basics of financial planning here, there is much more to implementing a financial plan. To make sure you're on the right track, contact a licensed financial advisor. It only takes a few minutes, Start Now.

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