FP - Module Review

Module Review

Let's take a few moments to review some of the topics covered in this module.

Goal Setting

Success in any venture is just a matter of setting goals and working toward them. Successful financial planning requires setting goals that are specific, measurable, attainable, realistic, and time-bound, in a word SMART. Paying off high-interest debt and setting aside money for emergencies should be the first two steps in any solid financial plan. The mixture of savings and investments beyond those steps will depend on an individual's risk tolerance, goal timeline, and stage in life.

Saving and Investing

When choosing saving and investment instruments, an individual must consider the opportunity cost. Opportunity cost is not money per se but is rather the next best thing that must be given up when a choice is made. You will want to choose the choice with the lowest opportunity cost. Investment vehicles fall into three major categories: stocks, bonds, and mutual funds. Stock is ownership in a company. Bonds represent the debt of a company or government. Mutual funds are a mixture of stocks, bonds, and other investments for the benefit of diversification.

Taxes

All saving and investment options have tax consequences. However, understanding these consequences and carefully choosing your options can help you to defer, manage, and reduce the amount of taxes you need to pay. Some options such as interest, dividends, and short-term investments are taxed at your highest rate as ordinary income. Other options such as stock and mutual funds are taxed as capital gains. Having investments in tax advantage accounts such as retirement plans and College 529 plans can help your investments grow tax-free while offering tax deductions for contributions.

Retirement Planning

There are three important parts to any retirement plan: employer retirement plans or pensions, individual retirement savings, and social security. Planning for retirement is important. A good retirement plan will help reduce the uncertainty around employer plans or social security. It can also help with medical expenses and estate planning. Employer plans can be either defined contribution plans where the amount contributed to the plan is known, or defined benefit plans where the amount received is known.

 

 IMAGES CREATED BY GAVS