Assets and Taxes - How To Build a Financial Plan To GROW Your Wealth | Episode #6

Episode Date: December 26, 2024

In this episode of Assets and Taxes, CFP's Peter Doherty, and Kaelan Fitzpatrick go through each step that one must go through in order to build a financial plan. They dive into the three different pillars, Liquidity, Protection, and Growth. What are some different ways to eliminate taxes? How do you allocate your assets? What's the right amount for emergency savings? They answer all that and more in this episode. (0:00) Intro (1:03) Podcast Start (1:48) What's Important About Liquidity? (3:10) What's Right Amount of Money To Have In A Savings Account? (4:55) Where Should You Put Your Savings? (6:22) What Type of Volatility Should You Expect In A Savings Account? (8:38) What's Important About Protection? (10:59) How You Can Be Protected From Taxes (13:15) How Important Is Insurance (17:21) How Is Income Part Of Your Financial Plan (19:19) What's Important About Growth? (21:03) How To Determine Your Financial Goals (24:30) Wrap-Up ---- Need Help Constructing Your Financial Plan or Have Questions? 📞 Book a FREE 15 Minute Discovery Call with us: https://outlook.office365.com/book/Ke... ---- Want more FREE resources? 📚 Download some of our FREE Financial Guides!: https://assetstrategy.com/financial-g... ---- Found this video helpful? Be sure to hit the like button on this video and share it with someone who may find this helpful. Subscribe to our channel so we can keep helping you grow and create wealth. ---- Want to know where else you can find us? Click on this link → https://linktr.ee/assetstrategy

Is your money coming in and out the door without much thought? Are you investing here and there based on fun trends you hear about? Ever wonder if you're really set up the right way to protect your future and your family? If so, this episode's for you. My name is Pete Daugherty, and I'm a certified financial planner here at Asset Strategy. In today's episode of Assets and Taxes, I sit down with fellow CFP, Kalen Fitzpatrick, and discuss all the essentials of a financial plan. At a high level, your plan consists of three foundational pillars, liquidity, protection, and growth. In our conversation, we expand upon these concepts and discuss things like choosing the right amount for emergency

savings, different ways to minimize or eliminate taxes. We ask what's a healthy level of insurance. We look at how to allocate your assets and more. We also know how tough it is to work through these problems on your own, and it's often even tougher to find a consultant that you can trust. If you find yourself needing help from a credentialed, transparent advisor, call us at 785-235-4426. Without further ado, here's Assets and Taxes. Welcome back to Assets and Taxes. I'm Peter Daugherty, and this is my colleague, Kalen Fitzpatrick. Today, we're going to be tackling the foundations of a financial plan.

So, Kalen, good to have you here. Thank you, Pete. So today is foundations of financial planning. And for some people, this may seem like a 101 course, but I can't reiterate enough how important it is to really nail these basics. Because no matter how complex your plan gets, there's still this solid structure and foundation that runs through your plan. And so the first thing we want to tackle is issues of liquidity. And so, Cale, what's really important about liquidity? Yeah, you know, I really think this is truly one of the foundations of someone's comprehensive wealth plan or financial plan, as we like to call it. So liquidity in general is what's that free cash that you have on hand

that you could spend right now and it doesn't matter that it's gone. So naturally people always think about emergency savings. So what is an emergency savings account or what some people call an emergency fund? That's really going to help us prepare for short-term unexpected events or expenses that we have. Think you'd fall and break your wrist, for example, or you'd slip and hit your head, you need stitches all of a sudden. These are really events that are expected to last less than one year, maybe a few months at most, but are not going to be an extended thing that's going to require a lot of your cash flow or maybe assets. So we want that emergency fund to give us

that cash for these items. That allows us to avoid dipping into other strategies or other accounts. Covers even things like job loss too, right? It was one of the big ones. I think everybody shows to work every day and maybe that's in the back of your mind. There's always some uncertainties. So that's one use of it. And so what would be the right amount ideally to have in a liquidity reserve? This is what some might call the secret question or the secret answer here. And the answer is it depends, like most things in finance. And why I say it depends is because everyone's different. You're going to hear that a lot as well. Now, what the CFP teaches you and I, we've both gone through the coursework here, is, hey, three months for someone who has dual income and stable jobs is probably safe.

For someone who has one source of income, they're not married, or maybe they are married and they are the breadwinner, closer to six months is kind of that ideal area. And when I say three to six months, we're talking about essential expenses, things that you have to pay for on a week-to-week or month-to-month basis that you can't live without. You know, gas for your car, groceries, your rent or your mortgage, for example. These are things that are going to disrupt your entire lifestyle if you can't cover those based on something unexpected. So why I say it depends here is that's typically a comfortable range for people, but some people might be okay with less. Some people might be okay with more. You know, I've certainly had clients that are, you know, what gives them sleep at night is 12 months up to one year. I've actually had someone who was closer to two years. Now, the question becomes, is that smart? Are you

disadvantaging yourself by leaving too much in that liquid aspect or that emergency fund and taking away from other goals that you have? That's where we want to do a deeper review with you. Totally agree. I mean, so much of financial planning is about that emotional aspect and that emergency reserve is really about one of the aspects is helping you sleep at night. So there's a whole range of expectations there, but three months is really kind of the bare minimum. So we're talking about amounts. What's the right location for those types of assets? What are we kind of investing in those? Let would say, number one, get it out of a typical and normal savings accounts. You go to Bank of America online right now, you can see right on

their website what their rates are. For anything 20 grand and less, they're giving you 0.01% on your money, where if you're going to use a high yield savings account, for example, where we're in partnership with Betterment here. They're providing 4.5% with full liquidity, no minimums, no costs. So is it wise to leave it in a savings account because it's comfortable even though you're losing that opportunity cost? A large thing that we saw, particularly when rates were increasing exponentially a couple of years ago, is people were actually flooding out of their savings accounts and using money market funds.

Money markets at the time, some of them were over 5.5% with no fees, no minimums, and they're going to give you daily compounded interest. Some of them actually allow you to swipe a debit card right from that fund, similar to your savings account. So I would say whatever makes you comfortable, what you're familiar with, but specifically for an emergency fund, this is money that's on the sidelines. It's safe. It's preserved. It's only there to be used when and if you need it.

And ideally, we want it to have the most interest possible, so it's compounding. You don't need to add to that over time. What kind of volatility expectations do we have in that bucket of money? There's always volatility expectations. There's risks with any type of investment. If you're using a standard bank account, for example, whether it's high yield or not, you're going to have FDIC coverage.

That's up to $250,000 per bank for cash balances. Now, there's also, in the essence of Betterment here, they use what's called a sweep account. So they themselves are actually not holding that balance for you, though it's reflected in their system. They're actually sending that money to, I believe, eight different banks overnight, whoever's going to give them the highest overnight rate. And what that does is it actually spreads the FDIC insurance coverage out. So instead of $250,000 per bank, now you have up to $8,000. You actually get about $2 million per account in betterment of FDIC coverage. Now, when we commented on money market funds as well,

money markets are a little bit different. They're not covered by FDIC. They're actually covered by SIPC. Not to get confused with all the acronyms here, the limits and the insurance protection are the same, $250,000 per account, however. Now, that's a difference with brokerage houses and banks. Banks, the coverage limits are per bank, no matter how much you have in there. Brokerage firms, it's per account are those limits. So you can still house multiple accounts in a Fidelity or Charles Schwab to name some of the big guys. And that's going to increase your coverage that way, as opposed to spreading it out across multiple different banks or even using a sweep account like Betterment.

Perfect. And so all of these points drive to the idea that not every safe investment is as safe as you might believe. So we do a lot of work here to make sure that if something is parked there, that it's going to be there under all conditions. It's protected by either FDIC, SIPC. They're tricky. It's a little tricky sometimes. There's a lot of acronyms. But that's the work that we're doing here to make sure our clients have their money in a safe place and so that it's there when they need it.

Hey, we want you to do as little work as possible if you can. We want your money to work as hard as possible, however. So this kind of builds off of the idea of liquidity, which is protection, because liquidity is a form of protection and protection also provides liquidity in certain circumstances. What would you say is the importance and role of protection in a plan? Yeah, so I love the lineage of this conversation as well with liquidity leading into protection. I think don't even explore protection until you've taken care of liquidity there, specifically with the emergency savings. That's how you're going to erode credit card debt,

for example. It's how you're going to, like we've talked about before, protect yourself from those unexpected events and make it so you don't have to dip into some of these other strategies or accounts that you have. So protection is a very broad term. It can really mean infinite different things depending on who you're talking to. So I actually like to break protection down into a couple different categories just to make it easier to think through. The first of which here is what I call market protection. Now, why I say market protection, another way to frame this is volatility protection, is protection doesn't necessarily mean it's money that you need right now. Maybe it's just helping you sleep at night. So hypothetically, say you for emergency

savings or any very short-term expenses within the next three years, you needed about $100,000 parked on the sidelines. Great. Check the box for liquidity. Does that mean every other penny that you have, you're comfortable exposing to the risks of the market or various investments? For some, it's not. During COVID, we saw quite a lot of volatility, to put it lightly. People just wanted to make sure they had something left behind if the market went very down, especially as they're retiring. Volatility protection in general might be, hey, we want to make sure that we're parking this in a fixed type asset, whether it's a bond, for example, a bank product like a CD, a treasury, for example. Even certain types of annuities are going to

guarantee that your principal is safe, but you're earning interest and have, in some cases, options on the back end of those. Well said. I mean, market protection is protecting from volatility. Again, building off the idea of liquidity, right? Making sure that those funds are there when you need them. The next one is really tax protection. And some people might say, do I really need protection from tax? Well, it's, you don't want to have unexpected taxes. You don't want to pay more tax than you need to pay. So what are some of the ways that we protect people from taxes? Yeah, you know, I think there can be some confusion around the tax word or just Uncle Sam

in general here. Though we certainly have strategies where we can eliminate or even reduce your taxes, that's not always the ultimate goal. You know, you'll hear the term, we don't want to tip Uncle Sam, or we don't want to pay more than our fair share in taxes. I don't know anyone who is okay doing that. So when we talk about tax protection, this is not one decision that you're going to make. It's a series of decisions that you're going to make across your entire plan. So very simply here, one form of tax protection is how do we defer taxes? That has to do with how and where you are saving. Are we saving on a pre-tax or deferred basis? Are we saving in a Roth manner that you're paying the taxes up front but might grow tax-free and benefit you later in

life? What makes more sense? There's different types of accounts as well, even a health savings account, for example, my personal favorite. Money goes in tax-free, money grows tax-free, and money comes out tax-free as long as you hit a few qualifications there. So deferring taxes, I would say, is very important, but are we doing it up front or are we doing it on the back end? Well said. I mean, there's all sorts of different ways to protect against taxes and, you know, bracket management for one. So if you're in a high bracket now, can we defer and potentially push you into a lower bracket later? Sometimes we want the opposite. Sometimes we want

to pay the tax now in exchange for never paying tax again. Sometimes we have opportunities where we can take a clean win and lower our taxes today and have that money in our pocket for reinvestment in other ways. It doesn't always have to be complicated. It doesn't always have to be. So those are quite sophisticated conversations, generally speaking. There's a few that everybody knows about, but then there's a lot more kind of unique strategies that we have access to, which we should probably talk about in another episode. But the next level of protection is insurance. And what's the importance of insurance in the plans that we deliver? I think insurance in general gets a bad rap. You know, there's in some cases some bad actors out there who are selling insurance who might

not always have your best interest in mind here. Insurance also has many different types of products. I like to say insurance is a little bit of a blanket term as well. You know, there's a difference between property and casualty insurance versus life insurance versus different products an insurer can provide, such as annuities, for example. So when we think about insurance, life insurance versus annuities, I'll make this comment with. I like to say that annuities are protection in case you live too long or longer than expected. Life insurance is really protection in case you die too soon. That's a very simple way to think about it. But realistically, everyone is going to need some form of insurance, whether it's against your car, your property. Some people even insure tuition

payments for college in case they pass away and they don't want to leave their family with debts that way. So it can be a way you can also leave tax-free money or create an estate that you might not have been able to leave otherwise. A lot of cool cases in insurance. It can get very complex. There's a lot of bad actors, but I would say it's one of the necessities here. Yeah, I think it's, you know, insurance is also a tax protection tool. I mean, if you look at long-term care insurance, those benefits, if structured correctly, come out to you tax-free.

Life insurance gets paid out tax-free. Disability insurance gets paid out tax-free when structured under an individual policy. So these are efficient ways to access capital in some cases, in some of our planning cases that most people don't consider. I mean, you know, I think insurance does put up some red flags for some people, but it's absolutely, when structured correctly, a very powerful tool for estate planning, for planning for long-term care, for planning from disability, providing that sense of liquidity when you need it in a tax-efficient way so that your dreams and your hopes and your life goals, whether it's for your family, for you personally, for

a charity you support, all of that stays intact kind of no matter what happens, whether you become disabled, whether you die early, whether something else. That's where I see it as being critically important as part of the plan. I think another part of it is insurance can be extremely customizable as well. There's not always a one-size-fits-all, even though you might see a menu on some of insurers' websites or even brokerage firm websites. There's a really cool case that I'm working on with a client right now, actually. This individual needs about $20 million of life insurance. He's not going to be able to afford $20 million of life insurance based on his and his spouse's salary. Based on leverage or creative

ways that you can actually obtain these custom policies, those policies will actually pay for themselves over time, and you might not actually need to use your own cash flow. So upfront, this individual might need to be paying a premium that is more expensive than he would ever explore beyond our conversations. However, when you look long term at what this is going to provide, he's not only going to be able to leave his children $20 million tax-free, excluded from estate tax, income tax, inheritance tax, et cetera, but it's also a net zero cost to him over a 30-year time period. So you can get very creative in this space here. And this is right. That's exactly how we turn protection into something that has an offensive capability as well and helps us in that growth. And if you do the numbers, they can be really quite attractive, especially when you couple that with some of our private equity investment opportunities outside. You can stay invested in your business and

generate far excess returns. Jumping ahead now to the income side. So how is income a part of our protection strategy? as well. And it doesn't have to come through the form of insurance. It doesn't have to come through the 4% withdrawal rule as I think that's become popularized over the last couple of years here. It can come from other areas as well. Maybe it's a business that you have on the side. Maybe it's something creative like driving for Uber or delivering Uber Eats. There's a few different ways you can look at this, but when we look at the granular aspects of someone's income, we don't want to see it erode over time. And what I mean by that is we want their yield or their distribution rate to ideally be higher than the rate of inflation or even their own lifestyle inflation, which is another popularized term we've heard lately. So that

could be through annuities. Do you want to sign up for your own self-created pension as a way to think about income-specific annuities? Do you want to have distributions? Are you looking to not be a landlord, but you want to maintain the income, for example? There's strategies and options there. Certainly part of it will be the 4% withdrawal rule, or I know some people even like to rely on dividends or distributions from things like REITs. So this can be a very complex space. To make a comment similar to what I made when we were talking about tax protection, this is not one decision that you're making in your plan. This is also a series of decisions that you're making across the full board here so takes a deeper examination and

this I would say is where most people are gonna look extremely different so we've now covered two very important topics liquidity and protection and we're gonna move on to the third topic which is the one that most people think about when they talk about financial planning and it is a little bit more fun and exciting sometimes but you'll see think, in our conversation how this really builds off the work that you do in steps one and two, which is growth. Absolutely. So I like to say that growth, you know, of our three components here of liquidity, protection, and growth, growth is typically the largest component that we view with people, especially on the younger side

here. You know, we're not only trying to keep up with high inflation, we're trying to grow our money. Some people are trying to get rich. And like we just commented on, maybe you have to take income from it as well when your salary drops off. So it's a very, very critical component, particularly for the long term in almost everyone's lives. Growth can also be, hey, how are we growing in inheritance? How are we supporting future family or organizations, charities come to mind there? But when we think about growth, there's some basics here as well. There is a reason that portfolio and investment managers have a career. It takes time. And outside of time, it also takes the will and the skill to do it. If you don't have

one of those three, the will, the skill, or the time, it probably makes sense to get some help behind the scenes, whether you're hiring someone or bouncing ideas off someone like you or I here. So growth always starts with your risk. What's your strategy, what's your asset allocation for our jargon industry term there. And this is really going to define what your expectations are, what you should be expecting, not only in a long-term rate of return, but also the types of movements and volatility you might experience. So asset allocation is really the foundation of growth, I would say. And so, I mean, a big part of that is figuring out what you're investing for, right? So it's goals-based investing, figuring out your investment

horizon, how long, when do you need to draw on this money? What's the purpose of saving and investing this money, right? So can we talk a little bit more about that? Yeah, absolutely. So I think there's going to be some disagreements here with our listeners as well. Me saying that, hey, your strategy and your risk are going to dictate your outcome more than you finding that next NVIDIA or that next Bitcoin, for example. I want to reference what's called the Brinson study here. So this was a long-term study, easily accessible on Google here. Essentially what it examined, and it was about a 60-year period, is it took a look at the largest pension and endowment plans in the United States, Harvard University, Citibank, ExxonMobil,

some of the names in that study. And the end goal of this hypothesis here is what drives your long-term performance or your long-term total return more? Is it your strategy? In other words, your asset allocation, or is it specific market timing and fund selection? What that concluded is over, it was actually almost exactly 94% of the time, your asset allocation was the one that actually dictated your long-term results. Only about 7% to 8% of the time, market timing or specific fund selection caused that outperformance there. So asset allocation, the bread is in the pudding there. It is going to be your driving factor. When you mention different goals, you know, different goals are going to look different for different people. They're also going to have different time frames and different purposes.

You know, buying a primary home if you're in your 20s, maybe that's a short-term goal, for example, where someone who's in their 40s, maybe they're looking at a vacation home or maybe they are looking to sell their home because they already have it. Maybe their goals are different because they're looking at kids' education as opposed to saving for a down payment. So you really got to examine not only what is the goal and what do you need for it, or at least to feel comfortable to go after it, but also how quick do you need that? I think fundamentally, a lot of people are conditioned to think of savings as being strictly for retirement. And it's like, oh, well, I'll pile money into my 401k.

Well, that's one location to have your savings, and that's one purpose to be saving for. But how about education? How about that vacation home? How about the next car? How about everything else that you want to achieve in your life? Those all have different investment horizons. They're not 30 years from now. They're not 30 years from now. They're not 40 years from now.

It could be 5, 10, 15 years or shorter. And each one of those investment targets has certain investment decisions that you can make, a bucket of money, a location, an investment choice that you can make to line up with that. Absolutely. Anything, I'd say five years or less, we want something that's going to be fixed and stabilized.

Anything five to 15 years, maybe you're taking on some element of risk depending on what it is. Anything longer, whatever makes you comfortable. All right. So I think at a high level, that pretty well encapsulates the growth planning side of things. I mean, there's certainly a lot of things we can talk about there. Is there anything else in particular that we think we should hit on before we exit today?

I would say just to make a final comment with growth, we mentioned asset allocation as being the foundation. In other words, your strategy being the foundation. But there's layers to it as well. There's also how do we use leading and lagging indicators to make decisions, a.k.a. the business cycle? How do we maintain this? Is it tax management?

Is it rebalancing consistently? Is it reallocating, which might be a new term for most? So there's layers to all of what we're going through. What you commented on is this is very high level. And to all our listeners out there, this is a rough, very basic foundational structure to a comprehensive plan. Everyone is going to look different. We want to speak to you. We want to go through this as well. You know, it's free to speak with us for a discovery call. And during that call, we're going to poke holes in what you have. You know, it doesn't matter if you're already working with an advisor. We love working with

advisors because we can teach them strategies that they might not be aware of or even have access to. So we want to talk with everyone. Book a meeting with us. We have a link in the description and we'd love to talk to you.