Your Guide to Wealth Protection and Transfer

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Wealth Protection and Transfer

Wealth protection and transfer to your dependents is one of the critical piece is financial success. One of the simplest piece of financial advice is to spend less than what you earn. It may sound simple, but if you are not fully aware of how you spend money, you may be spending more than you realize. One you have master this, rest is easy but you need to figure out some parameters to measure your success. Your net worth and cash flow are the two most important parameters in measuring your success in wealth protection and accumulation. To estimate the value of your assets and measure your financial progress, each year you should add together everything you own (assets), then subtract everything you owe (debts), including your mortgage and credit card debt. This summary of assets and debts is called a net worth statement. Also, you need to measure total earnings for the year(salary, investment etc) and then subtract total expenses for the year to figure out your cash flow. If your expenses exceed your earnings, your cash flow is negative. Sometime people get confused between cash flow and net worth because they sounds so similar. However, there is a big difference and it is critical that you have a clear understanding of both terms. In Summary, cash flow is primarily driven by the current year financial transactions. We don't consider previous years or past history when it comes to cash flow. For example, if you earned $50,000 this year and your total expenses were $40,000, your cash flow is $10,000. However, if your home(assuming $200,000) that went down 10%($20,000) in value this year, you have lost $20,000 in theory while earned only $10,000 so your net worth went down by $10,000. As you can tell, cash flow alone can't tell the complete picture of your financial life. You have to consider both cash flow and net worth together to understand the real impact on your financial life.

Here are some of the important aspects of wealth management that will help you analyze the way you currently manage your finances and make decisions to improve your financial situation.

Cash Management: Cash management helps you maximizing the interest earned on checking and savings accounts, and monitor your cash flow and net worth regularly using financial statements. Remember, maintaining a certain cash reserve such as emergency funds is an integral part of financial planning and you have to make sure you manage these funds well to take full advantage of your financial safety net. Most experts suggest that you maintain a emergency fund equal to at least 3 to 6 months living expenses. The amount of your emergency fund depends upon your age, job outlook, and personal financial situation. If you have a two-income family, you may be able to get away with just three months worth of emergency funds. You might want a larger emergency fund if you are in business for yourself, your work is seasonal, your job is uncertain, or you rely heavily on commissions. Also, if your child is about to enter college, you may also need a larger cash reserve. Remember, cash advances against credit cards are no substitute for emergency funds and could cause serious financial problems.

How you maintain your emergency cash reserve is very important as well. You don't want to leave it in a checking account because you're not earning any interest or almost zero interest. You don't want to tie it up in a long term CD(Certificate of Deposit) because you will pay early withdrawal penalties in case you need to access it. How to maintain these funds should be influenced by the window if time you need these funds in case of an emergency. Money that would be needed within one to three months of a financial emergency is best placed in an interest-bearing checking account, money-market deposit account, or money market mutual fund. Funds needed 4 to 6 months after an emergency could be placed in short-term certificates of deposit (CDs) as well as 3- and 6-month Treasury bills. Money that would not be needed for 8 months to 2 years could be placed in a money market mutual fund and longer term CDs (12-, 18-, and 24-month). As you can see, there are plenty of options and you just need to figure out the ideal timeframe for your circumstances.

Risk Management: Managing risk is probably the most difficult part of financial planning. We are exposed to risk on every aspect of our financial life and sometimes we fail to measure the level of risk that we are exposed to. One of the main problem with managing risk is that you can't measure it in pure mathematical terms. For example, what will happen if you suddenly lose your job tomorrow? For most people, Is it just lost of a paycheck but if you take a closer look, it is lot more than that. A loss of income can cause you to draw on your savings or retirement funds, you may default of your loans such as mortgage and auto loans. These events are almost impossible to quantify into some numbers and that's why risk management is a difficult part of financial planning.

Since we can't really measure risk, we each have to decide how we will protect ourselves should a risk become a reality. If you do not have a plan, you might have to go into debt or use funds set aside for other financial goals in the event of financial disaster. Appropriate risk management strategies protect against catastrophic financial losses, regardless of the cause. For example, having a life insurance policy is important but it feels like waste of money for some people because they don't believe they need it because they are young and healthy. Also, even if you believe that you need life insurance, how much coverage you really need? How do you figure out that number? These are some of the questions that are answered when you develop a sophisticated risk management strategy.
Your risks also change over a lifetime, so evaluate your situation every few years and make appropriate changes. Do you have enough saving that can cover a financial loss so that you don’t need to buy insurance? Risk management strategies can be combined with savings and investments to achieve financial goals (e.g., buying cash value life insurance). However, be careful to ensure that your strategies provide the best return on the money involved. Determine if insurance protection can be purchased less expensively so that you can invest the savings for a greater overall return.

Tax Management: If you have an income, chances are that you owe money in taxes. That's how the system works and there is no legal way around it. Tax laws continue to dictate how we structure our financial plans. As laws favor or disallow certain strategies, we need to make adjustments. Here is a good example to illustrate this. As you know that interest paid on a credit card balance is not tax deductible but interest paid on a home equity loan is. As you can see, there is definitely tax advantages of paying off your credit card balances with home equity loans. Same is true for Individual retirement accounts. If you don't participate in your employer 401(k) plan, you can put money in your own IRA account and it is tax deductible. Depending upon your income this could be a substantial saving in you're in higher tax brackets.

As a taxpayer, your goal is to pay no more than the least possible tax owed. Avoiding taxes through legal tax strategies is not to be confused with illegal tax evasion. Legally avoiding taxes means using effective financial record-keeping, decision making, and planning strategies to reduce your total income tax. For example, If you receive a big tax refund every year, it may not be because you have done outstanding financial planning but because of a poorly adjusted W4 form. You're getting your money back but you have allowed federal or state government to keep your money for a year without paying you any interest and that's poor tax management. As tax laws change, adjust your financial plans to use strategies which are most favorable to your situation. Most of us are aware of the tax advantages of tax-deferred savings. The idea, of course, is to put off paying income taxes on money until you withdraw it in retirement when, possibly, your tax bracket may be lower. However, you have no guarantee that this will happen, especially if you are very successful at saving for retirement and accumulating assets. In addition, the tax laws are constantly changing. You should seek the advice of a Financial Planner, or tax professional to gain insight into how tax laws will affect you.

Final Verdict

Remember, any successful wealth management strategy requires that you monitor it closely. You also need to have a very good understanding of your short term and long term goals to implement a solid wealth management strategy. To get where you want to go in life, it is important to decide in advance how you will get there. Goals are signposts on the highway to the future. They serve as your guide to personal, career, and financial success. By keeping specific goals in view, you can direct your energies toward achieving your goals. Financial goals are important because they help us to organize and direct our financial lives, providing a framework for decision-making. They can help us cope, provide some control in an environment where many things seem out of control, and help us visualize our financial future.