In my opinion, we need to know a few very basic questions with regards to your personal finance. Do you know the answers to these?
How much assets do you need to retire? – This is a more complex question than it seems. You need to know a rough estimate of how much you need (in today’s dollars) to live the lifestyle you want. You need to factor in that you may need to pay your own health insurance, long term care cost. You need to factor in how you intend to live and spend your time when you retire (going on a world vacation may cost more than you think).
You need to know how much you need to save – While nothing is for certain, you need to get an analysis done to know how much you need to save to have a high probability to reach you retirement goals.
You need to know your risk profile – You need to know your risk profile. How much loss on your portfolio are you willing to tolerate. Can you sleep at night if your portfolio declines 10%? You need to know your risk profile so you can formulate a proper asset allocation strategy based on your goals and risk tolerance. The mistake I see most often in the press and bloggesphere is that all the talk is about asset allocation without regards to risk tolerance.
While one can argue that you should be in 100%b equities if you are 30 years old. But if you do not have the risk tolerance for potential declines in the equity markets, you are better off having a more conservative asset allocation because you will be less inclined to get out the equity markets in the worst possible moments.
How much do you need to save for your kids college – This goes without saying. Surely you want your kids to go to the best college you can afford.
How much insurance do you need – You will know this answer if you do a proper financial plan. It depends on your current expenditure and how much assets you need to sustain your current lifestyle.
How much do you spend every month? – As basic as this sounds, most people do not know precisely where their money goes. Treat your expenses like a CFO treats what every department spends. A CFO knows where every penny goes.
How much do you spend on every major category of expenses every month? – Aside from knowing how much you spend every month, you should know to the penny how much you are spending on your mortgage, auto loans, groceries, gasoline, cable, internet connections, phone bills etc every month.
What is your present tax bracket? – Well, you need to know your tax bracket as this will affect whether you invest in municipal bonds or taxable bonds. You also need to estimate what your taxes in retirement will be because that will have an impact on the retirement plan you choose today.
What is the optinum retirement plan? – If you work for a company, then you will most likely go with a traditional 401k. But if you are self employed or own your own business, you have a variety of choices – SEP, Individual 401k, Roth 401k, Roth IRA. You need to know (or someone to explain) the pros and cons of each plan, your estimated taxes post retirement, the amount you want to contribute and figure out the best plan for your circumstances.
How much taxes will you pay when you leave this planet? – As much as we do not hate to face this topic, doing your wills and planning your estate has to be done. You need to know how much taxes you will approximately owe and minimize the taxes.