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Mistakes are Expensive: A New Generation Embraces Financial Planning at the Mid-Stage

Financial planning has evolved beyond investing assets. The old model limited comprehensive planning to a wealthy few with high levels of manageable assets. For many people, their first engagement with a financial advisor was when they needed to create a retirement income plan.

The new fee-only model allows financial advisors with experience and knowledge to assist across the landscape of financial life. And a new generation with very different goals is taking advantage of all the elements to create plans that work for them.

Retire early, create “work optional,” or work part-time
Save for kids’ college
Enjoy life now – and save for the future
Invest in a second home or rental property

This generation has created high income and realizes they do not have to wait another 20 or 30 years to have the lifestyle they truly want. They understand that financial planning is all about tools, tactics, and strategies that can be deployed in tandem to help them keep more of what they make and actively grow their wealth.

It’s about understanding the options, making the right choices for a highly individual path forward, and solving problems.

Cash Flow Planning is the Foundation

Budgeting is the buzzword – but not-so-secret – it doesn’t work. It’s about making choices to keep spending in check, with almost a scarcity mindset. It is about current expenses and works best over a short-term time horizon. Cash flow planning looks at the short-term and the long-term. It is a tool to help you make decisions that will help you achieve future goals.

The process helps you identify future income and expenses and plan for big-ticket items. The result becomes part of your financial plan and dictates changes across your financial plan. Understanding and detailing your flows keeps your investments tracking. It ensures you are realistic about return opportunities and gets you thinking big picture, including minimizing taxes and protecting your assets.

Saving for Kids’ Education

If you haven’t started one yet – the sooner you get saving, the better. They grow tax-free so that you can build a nest egg for education spending. You can fund a 529 plan with up to $16,000 per year and still qualify for the annual gift tax exclusion – but you can also fund five years at once if you’re behind and want to catch up. They aren’t just for college – K-12 qualifies too.

Risk Management

Life insurance is critical to keeping your family’s lifestyle and goals on track. For most people, a term life policy offers the ability to cost-effectively replace your salary during your prime earning years. The rule of thumb is the policy should be 5-10 times your annual pre-tax income. It may also be time to think about an umbrella liability policy to protect your assets over and above your existing coverage. But as your income increase – or the potential for income through equity compensation – you want to be sure you minimize risk. An umbrella policy can provide the coverage you need, but it’s important to factor in the cost.

Retirement Savings

Maxing out retirement savings is the best way to lower your taxable income and increase your investment pool for the future. If you have complex compensation that is bonus-based, you need a strategy to do this that takes into account the current volatile markets. This is especially important for tech employees who have concentrated stock positions from ISO’s or RSU’s with limited ways to reduce the tax bill.

It’s Not a Rainy Day Fund – It’s a Sunny Day Fund

Having an emergency fund of 3-6 months of expenses in an accessible account is a solid place to start. But once you’ve achieved that, are maxing out your 401(k), and saving for specific goals on the side, what do you do with excess income or stock option grants?

It’s all about your time horizon. While your emergency fund is in cash, your taxable investment is goal-specific, so having an account that you invest for opportunities can make sense. It can allow for growth, possibility, and above all – optionality.

Tax Planning Keeps Your Income in Play

All of the tactics we addressed above have one thing in common: tax planning. The theory behind effective tax planning is two-fold:

Reduce taxes this year
Reduce lifetime taxes

Tax planning touches every part of your financial life, and it is a series of tactical maneuvers combined with proactive actions. It’s thinking through the impact of every move with a tax lens. Because what you make is ultimately defined by what you keep.

The Bottom Line

Financial planning can help you make the right choices to move towards your goals, but selecting the right partner is important. It’s not about the asset you bring. Fee-only planners can work with you to create the plan you need.

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