Common Financial Planning Advice

Before I began writing about personal finance in earnest, I did quite bit of personal financial planning and counseling. My practice was strictly oriented around providing advice on an hourly basis because I wanted to avoid the inevitable conflicts of interest that came with selling investments, insurance, etc. that paid commissions. (Managing money and charging a percentage of assets under management can also cause conflicts of interest.)

Recurring themes and issues came up in the advice that I gave to individuals, families and small business owners. Here are the common ones:

• Establish a proper size emergency reserve in a safe, liquid investment. You should have at least three to six months' worth of living expenses set aside in a money market or savings type account for those inevitable rainy day type situations like car repairs, fixing a leaky roof, replacing an old washing machine, etc.
• Fund tax-favored retirement accounts. When saving money, you should take advantage of retirement accounts through your employer or those you can fund on your own (e.g. SEP-IRA, Keogh) with self-employment income. Contributions to these accounts generally are free from federal and state income tax in the year that you make them and the investment earnings compound over the years without taxation.
• Invest long-term money based upon your time horizon and desire to take risk. For example, when investing retirement money, the bulk of it should be invested in growth investments such as stocks, real estate, etc. A 35 year old could have 65 to 85 percent in growth investments whereas a 50 year old might have 50 to 70 percent in such investments. When investing in stocks, be sure to diversify worldwide.
• Buy and maintain broad based insurance coverage that protects against events that would be financial catastrophes for you and/or your loved ones. You should have comprehensive coverage for your car(s) and home, which insures those assets and provides liability protection on them. If you are dependent upon your employment income, you should have long-term disability insurance. If others are dependent upon your income, you should also have term life insurance. 
• Do basic estate planning. Have a will drawn up and as you age and accumulate assets, learn more about estate planning that may make sense.