Personal Financial Planning
November 10, 2015
Periodically, folks will ask me investment oriented questions. My first response is that I'm a tax advisor. I make tax specific recommendations and I avoid making specific investment recommendations. Sure, I'll tell a younger person that they shouldn't keep their money under the mattress or a person on social security that they should scale back their emerging market holdings, but generally speaking, I'm doing no favors by offering my senes of the market.
That said, I have some general guidance for you. Before investing anything, make sure you have between 3-6 months of on hand cash reserves for what life can throw at you. This will allow you the peace of mind if you have a change of employment or an unexpected life event.
Then contribute into your retirement accounts. Go first to where they match. If you receive 401K matching, do that first. You can invest up to $18,000 per year on a normal 401K plan. For entrepreneurs, you can go up to $52,000 on a 401K plan with a profit sharing kicker or a SEP IRA. You can also contribute into an old school pension plan (defined benefit) plan. How much you can contribute varies by age and income, but you can go well above the $52,000 number yielding some very significant tax deferrals.
After contributing to your retirement plan, you can then save for college. College always comes after retirement since you can ultimately easily borrow for college. The same cannot be said for retirement. As cold as it sounds, there is no signed accord that says you will pay for your child's college education, no matter where they choose to go. There are all flavors of creativity here, but you should not automatically assume that college is your financial burden.
After having contributed to college and retirement, you can simply play the market. Nonqualified investments are available as you need it.
Charitable endeavors represent an awesome opportunity to be altruistic and selfish at the same time. Giving to others can also help yourself. Charitable lead trusts are a tax favored way to offset the impact of a one-time bump in compensation such as when you cash out a bunch of options or other windfall.
Beyond charitable endeavors lies the world of offshore, alternative assets and captive insurance companies. All of these opportunities are strong tax savings vehicles, but the general rule of thumb is that you need to have excess cash on hand to lock up in order to avial yourself of these deduction opportunities. You can't just fabricate a deduction. I only wish I could. But if you are living well below your means, then why pay tax on the income?