Financial Planning. Financial planning is an essential part of life management as well as of practice management. It must be instituted early in a career and given priority. Planning is facilitated by the setting of goals (short- to long-term); for financial planning these goals concern:.
Financial planning is an essential part of life management as well as of practice management. It must be instituted early in a career and given priority.Planning is facilitated by the setting of goals (short- to long-term); for financial planning these goals concern:
The process of planning begins as well as of practice management. It must be instituted with the calculation of net worth on a financial statement. Assets and liabilities are listed, and a “bottom line” result is obtained that, for many beginning practitioners, is humbling.However, this is a necessary step to recognizing where priorities must be directed (e.g., payment of long-term debt) and where assets are needed (e.g., cash for purchase of a home).
Assets as well as of practice management. It must be instituted include cars (usually), professional equipment, books, instruments and so forth.
Other assets include whole life insurance policies (cash value), the income produced by working spouses, any part-time employment, scholarships or awards, and any sources of contingent income (e.g., the beneficiary of a parent’s retirement plan or insurance policy).
A first goal in financial planning is to develop a as well as of practice management. It must be instituted budget; income should be monitored, as should fixed and discretionary spending (limited to 6% to 8% of monthly income); debt service (e.g., educational loans, mortgage) should be less than 30% of income.Once a debt is paid, that income should be directed at savings or investments rather than at increases in the standard of living. Budgeting is the best way to ensure that income is used as needed rather than wasted on unnecessary expenditures.
The most important budget item for students is usually an as well as of practice management. It must be instituted educational loan.
Remember: money borrowed in school and paid back within 5 years after graduation still costs 150% as much.
Prompt payoff saves money!
Statistics show that repayment of educational loans by students varies:• within 5 years—49%• within 5 to 10 years—20%• more than 10 years—14%• don’t know (!)—17%Consolidation of loans, deferment during residency training, auto-payment when employment is obtained, and avoiding an extended repayment period are steps that can be taken to facilitate payment.
Be realistic about students varies:debt repayment. The average indebtedness of UAB Optometry School graduates is approximately $93,250 (Class of 2008).Educational loan interest rate: 6.80%If repaid in 5 years: $1,837 per month for a total of $110,260.If repaid in 10 years: $1,073 per month for a total of $128,775.
Credit students varies: must be controlled. 75% of Americans have a recorded credit history (that totals 225 million citizens).There are three national credit bureaus:Equifax: 800-685-1111 (www.equifax.com)Experian: 888-397-3742 (www.experian.com)TransUnion: 800-888-4213 (www.transunion.com)The median credit score is 720.The highest score is 850.The individuals most likely to charge off debt or file for bankruptcy have scores below 600.
The Fair Isaac Corporation (FICO) created the first credit score in the 1950s, as a measure of individual creditworthiness. The FICO score is based on individual credit history, calculated from 5 categories:
The FICO Score is adversely affected by: score in the 1950s, as a measure of individual creditworthiness. • late payments• uncollected debt• high debt• high potential debt• frequency of applications for credit• frequency of inquiries about creditAnother important goal is a solid debt-to-income ratio (less than .40 percent). This is achieved by paying debt and working full-time.
Every practitioner must have a basic knowledge of score in the 1950s, as a measure of individual creditworthiness. taxes, both for personal and business needs. Personal income is taxed at federal rates of 10%, 15%, 25%, 28%, 33% and 35%, with the mean income for self-employed optometrists ($131,197) taxed at 28%. Business income determines Social Security/Medicare taxes, which are 15.3% for self-employed individuals, and tax-deferred retirement plans are tied to business income as well.
There are also tax issues that arise when making taxes are a gifts and that are imposed on estates at death, key considerations for estate planning purposes. Tax advantages may be made use of (e.g., credits), while disadvantages may be avoided (e.g., non-deductible expenses) by the knowledgeable practitioner. There is a basic level of understanding that every practitioner must have, because tax planning inevitably begins with an individual rather than a financial advisor.
In addition to retirement funds, the taxes are a sale of a primary residence can be used for retirement purposes, for when children are grown a large house may no longer be necessary and, if owned for many years, substantial equity may have accumulated. Current federal tax law permits a couple to sell a primary residence and exclude from taxation the gain, up to $500,000 ($250,000 each), and this income can be used as needed for retirement.Example: a couple who purchased their home for $150,000 sell it 20 years later for $550,000; there is a $400,000 gain that is excluded from taxation.
One of the fundamental requirements of financial (and estate) planning is adequate, affordable insurance coverage. Life insurance can be used to pay debts or create money for an estate in the event of premature death, disability insurance can protect against loss of income from long-term injury or illness, professional liability insurance can provide coverage for malpractice claims, and health, automobile, and homeowner’s insurance can offer financial protection for families and their most cherished possessions. These and other types of insurance are necessary but must be wisely purchased to be affordable.
Investments estate) planning is adequate, affordable involve speculation with money, through the purchase of capital assets (e.g., stocks, bonds, mutual funds) that it is believed will increase in value over time. Income from investments is used to improve lifestyle or to support retirement.There are also annuities, which are very popular and are used to provide retirement income. Conservative or volatile investments (e.g., high risk) may be selected, depending on the willingness of an investor to risk a large loss to hopefully achieve a large gain.
There is a simple way to determine the growth or potential growth of investments.The "Rule of 72" is a rule of thumb that is used to compute when an investment will double at a given interest rate. It is called the “Rule of 72” because at 10% interest, money will double every 7.2 years. Example: If an investment earns 6% and that rate stays constant, the investment will double in value in 12 years (72 ÷ 6).
A key reason for investing in stocks, bonds, mutual funds, and the like is the preferential income tax treatment that they can receive. These assets can be used to earn capital gains. If a capital asset is held for more than a year and is sold for a profit, the gain on the sale is taxed at special rates (0% to 15%), because it is considered to be a “capital gain”. Thus the gain on the sale of investments can be substantial, because the capital gains tax is lower than the tax on ordinary income.
Capital gains taxes are highly favorable at the moment (2009):For taxpayers in the 10% and 15% brackets, the capital gains tax is zero.For taxpayers in the 25%, 28%, 33%, and 35% brackets the capital gains tax is 15%.Example: 1,000 shares of stock are purchased for $50 a share and held for more than a year by an investor in the 28% tax bracket, after which time they are sold for $60, a capital gain of $10,000; the federal income tax on the gain is $1,500 (15%), not $2,800 (28%).
If the goal of investing is to provide (2009):income at retirement, long-term estimates of increases in the cost of living and of inflation (which decreases the buying power of money) will be needed. A rule of thumb is that a retiree will need 80% to 100% of the retiree’s current living expenses, adjusted for inflation, to enjoy an equivalent standard of living. Example: if $100,000 a year is thought to be needed at retirement in 20 years, and annual inflation is estimated at 4% over the 20 years, the retirement fund will need to provide $220,000 per year for each year of retirement (about 18 years on the average).
The usual means of estimating retirement costs is the (2009):cost of living index. It measures changes in the prices of goods and services over periods of years, and thus is used to determine the amount of money needed to maintain a specific standard of living. Example: $100 in 1980 is equivalent to $263 in 2010 (a 163% change over 30 years). A similar index is used to measure changes in consumer purchasing power (the relative value of money in relation to goods and services); it is called the consumer price index. Example: $100 worth of goods purchased in 2000 cost $126 in 2010 (26% increase in 10 years).
Another important use of the CLI/CPI is to determine “real” growth in income.For example, the net income of optometrists increased from $74,846 in 1990 to $138,846 in 2000. Although this is an 185% increase, the cost of living increased by 32% over this period, and thus by 2000 $98,611 had to be earned to equal the $74,846 of a decade earlier. Therefore, the “real” growth in income was about 140%, which represents income growth after increases in the cost of living have been taken into account.
Social Security “real” growth in income. is a large source of mandatory contributions to retirement, but the viability of the system has been questioned and its long-term outlook is such that many financial planners do not include it (in 30 years it is estimated that twice as many older Americans will be drawing benefits as today). For persons born in 1960 or later, full retirement age is currently 67. Retirement income under Social Security is based upon the years of contribution and the amounts contributed, but the current annual benefit for most retirees is less than $20,000 per year. Therefore, it will likely not be a significant source of income even if it is viable in 30 to 40 more years.
The ultimate goal of financial planning is to build an estate, and the term estate planning is often used to describe the means and methods devised to accumulate one. Estate planning requires a stepwise approach to financial goals, beginning with the four fundamentals—an income, a home, a cash reserve, and adequate insurance coverage. When this is achieved, investments can be added, and the gradual accumulation of an estate begins.
Tax issues are also a significant part of estate planning, although recent changes in federal tax law have greatly diminished the impact of estate taxes by increasing the size of an estate subject to taxation (for 2009) to greater than $3.5 million dollars. Still, it should be the objective of anyone wishing to build an estate to raise it to a level at which these laws become a consideration. Because estate planning includes the legal and tax issues that affect the passing of an estate to another generation, it is the ultimate endpoint of financial planning.