Planning as a verb, not a noun |

Planning as a verb, not a noun

William V. Burgess

The key to successful financial planning is a planned action, not reaction, to financial issues. Over the past 20-plus years, I have observed that many people react to financial issues as they occur and face the consequences, good or bad. An example of reactionary planning would be buying a vehicle at the time of rising interest rates, thus forcing higher payments and reducing available household discretionary income. Another example would be relying on current interest rates for a living income and then getting caught with falling rates and reduced cash flow.

Planning is a verb describing the use of money (cash flow) to anticipate future financial issues and concerns. Many financial advisors, however, treat planning as a noun a written plan or document showing past history and not as an ongoing interactive process.

There are six major financial planning areas and all have inter-related issues. Cash flow associated with the dollar you carry in your pocket, the home you live in, the taxes you pay, the financial “strings” at death, your future retirement can all be managed by means of financial planning. Consider the six areas of planning as a strategic or long-term forward-looking view; you are designing a financial blueprint.

To begin the design, you must first understand the scope of each area.

Cash management is more than just balancing the checkbook. This includes designing and tracking all cash flow in and out of your household.

Accumulation goals are the saving of money for family or business objectives. Dollars saved are designed specifically to accomplish each goal by considering the timeframe, risk and amount of assets. Goals can include education, homes, children, retirement and current or future income needs with the most tax efficiency.

Retirement management is preparing for that point in time where you are financially sound to pick and choose what you want to do. Today’s retirement is not the historic traditional retirement but routinely transitioning to another financial life at a later age. This process includes preparing your later years to be as comfortable and worry-free as possible by designing the most tax efficient income distribution.

Tax management is the planning for current and potential future tax expenses affecting your home and business during life and at death. Future tax costs can be over 50 percent of your income including federal, state, and local taxes. Pro forma management includes income and asset allocation utilizing techniques of deferral, exempting, deducting and reducing the tax burden.

Estate management is recognizing that death is inevitable and involves planning for the ultimate transfer of assets. The financial strings that should be managed in advance of estate transfer are preservation of wealth, asset ownership, probate costs, estate taxes, beneficiary designations and financial protection of the survivors.

Risk management is the balance of cost and reward to protect your household from the risks you cannot afford. Risk management is designing the most cost-efficient dollars to pay for the risk. You can use discounted dollars to fund the risk for property, life, health and disability.

The goals for each of the six areas of planning can be interrelated. Creating financial solutions is the foundation for what strategic financial planning is all about. Let’s use a home to demonstrate the relationship between the six planning areas.

The costs of mortgage expense, interest, taxes and insurance can be cash management (cash flow) issues.

Developing a portfolio for the purchase of a home, or the most cost-effective method for paying off a mortgage can affect accumulation goals.

The ability or lack thereof to make mortgage payments or the need to sell the property can affect retirement management issues.

The buying or selling of a home and/or the possible option of an annual itemized tax offset can create tax management issues.

The value of your home minus the debt obligations, and/or the type of ownership structure can impact estate management issues.

The protection needed to pay for the debt or to protect your household in the event of disability or death can be risk management issues.

The starting point for most planning begins with cash flow. Cash flow issues and the subsequent implementation of solutions recognizes the interrelationship of all planning areas. The following ideas have proven to be successful in managing cash flow.

One very successful tactical cash flow solution is to pay off your credit card debt and set up a savings account (you pay yourself back) at the same level as your prior credit card balance; you save credit interest and make savings interest.

Consider cash as an unguided missile with very little direction. In cash-flow planning, consider tracking. Having all cash move through a debit card gives you recordkeeping and control. After you have totaled your cash usage for the past 12 months, divide by 52 weeks. You now have a fixed dollar figure to withdraw each week. Consider withdrawing the above dollar amount from an ATM only on a Monday or Friday. Using this technique will historically save you many times the weekly cash amount per year and will force you to make a tactical decision twice a week on your weekly cash needs. This puts you in control of the “leakage”.

In retirement planning, one of the most difficult issues for many people is adjusting from 26 pay periods per year to one pay period per month (i.e., Social Security and pension payments). A cash management technique many use at retirement is a two-tier cash system. One tier (account) is a checking account for routine monthly household expenses. The other is a money market account for non-routine expenses such as DMV, taxes, insurance, vacations and emergencies.

Consider a tax-exempt strategy for managing cash and semi-liquid cash reserves. If you’re in a marginal tax bracket of 30 percent or higher, you may be better off to transfer your taxable interest-bearing account to tax-exempt money market and short mid-term tax-free funds. Consider the proposed future additional taxation on income, dividends and interest. Therefore, using a tax-exempt strategy may leave more money in your pocket.

Proactive financial planning not only gives you more control of your financial life, but has historically reduced risks and provided a higher return on personal wealth.

City National Bank, as a matter of policy, does not give tax, accounting, regulatory or legal advice. The effectiveness of the strategies presented in this article will depend on the unique characteristics of your situation and on a number of complex factors. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. The strategies presented in this article were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. The strategies were not written to support the promotion or marketing to another person any transaction or matter addressed. Before implementation, you should consult with your other advisors on the tax, accounting and legal implications of the proposed strategies based on your particular circumstances.

William V. Burgess is a vice president and investment planning officer in Reno with City National Bank. Contact him at 828-8121 or