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Young Volunteers


Create Wealth That Addresses Budgets and Entertainment

Updated: Jul 6, 2023

People want not only to live above the poverty line, but also to accumulate wealth that can be achieved through effective financial planning - defined as a way of overcoming threats to your monetary security and taking advantage of numerous financial tools that help with wealth accumulation.

Financial planning addresses cash flow planning, insurance planning, retirement planning, and estate planning. These long-term goals focus on helping people achieve their wants and needs. Cash flow planning is key. Your personal finances need to be solid - there are different ways to develop strong finances.

Tactics for Wealth Accumulation

One approach involves the 50 30 20 rule. This rule addresses loans, wants and savings - apply 50% of your gross monthly income towards needs, use 30% for wants, and apply 20% towards savings and investments. Essentially, you need to assess your financial goals. What are the characteristics of wealth accumulation?

This rule demands that consumers analyze monetary inflows and outflows, identify overspending, and create long-term financial stability. There are seven primary revenue streams: employment, capital gains, interest income, dividend income, rental income, business income, and royalty income. All of these streams can be applied towards your successful, long-term financial plan.

Capital gains – anything someone purchases for investment purposes - can be an important stream of revenue that addresses short-term and long-term objectives by paying dividends or selling at a higher face value. These gains are taxed when you sell an investment for a profit. Investments sold for a loss can be offset by up to $3,000 of lost income per year.

Interest income and dividend income can be effective. Considering interest income, an investor can put money into a product such as a tiered money market and earn as much as 5.50% on their investment. On the other hand, when addressing stocks, an annual return on investment (ROI) ranges from 7% to 20%. The average ROI in the stock market is about 10% per year.

So consumers need to take a comprehensive look at their financial situation to create a realistic plan based on their cash flow. Retirement planning will make the latter years of your life more enjoyable. If you plan effectively, you can leave the workforce in your younger years and take vacations to tropical islands with the bluest of waters and whitest of sands.

How Healthy is Your Debt-To-Income Ratio?

Consumers need to have a solid debt-to-income ratio (DTI). Analyze your DTI to avoid overextension. For example, you could have a monthly debt of $2,600 while achieving a gross monthly income is $5,500. To determine your DTI, divide your debt by your income. In our example, the consumer would have a DTI of 47%.

This number is too high and it indicates that you are not setting aside 20% for retirement. A safe DTI is 36%. This leaves you with enough money for emergencies, savings and investments. What happens if you have no savings when you retire? Your lifestyle will be impacted. You might have to scale back your wants to provide for your needs.

You might be forced to move into a smaller home and forgo extras such as cable television. Roughly 27% of the population 59 years or older have no retirement savings, according to one survey. Also, Social Security will be exhausted by 2034. This will cutback benefits by 23%. How do you plan for retirement?

Stick to the 20% rule and follow these suggestions. Determine your retirement needs. Contribute to your employer’s 401(k) plan. Ask about pensions. Diversify your investments. Put money into an Individual Retirement Account (IRA). Determine your Social Security benefits. Consult with an advisor. If you adhere to the 20% rule and don’t pull money from your retirement accounts, you will be able to maintain your existing lifestyle in retirement.

The Necessity for Different Types of Insurance

The next category addresses insurance coverage – including auto insurance, homeowners insurance and life insurance – that determine monetary considerations upon the utilization of a policy. These are three primary types of coverage. There are more policies that are important. Health insurance is essential, and disability insurance is vital as well.

Short-term and long-term disability constitute insurance offered by employers. These plans pay around 60% of your gross income. All insurance, disability policies contain an insuring agreement. Policies might not be comprehensive, so policy holders need to know the coverage that applies to their circumstances. All policies contain exclusions, conditions, and definitions. Read your policies carefully.

How Do You Handle the Unexpected?

The final category addresses estate planning. What constitutes estate planning? A will or trust is an important part of this process because it directs the distribution of your assets and property.

We take for granted our ability to go to work, handle our investments, pay our debts, and balance our checkbook. What do you do when we’re unable to meet these needs? You need a durable power of attorney to help you with your legal and financial affairs. A durable power of attorney allows you to name a trusted individual to handle your estate whether temporarily or permanently.

Another important component addresses the need for health care power of attorney. This trusted individual will specify your medical care if you are unable to make these decisions. This person - your agent - will make decisions about the type of medical treatment you should receive. The tools in this article will help you ensure long-term financial success and plan for unpredictable circumstances.



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