I recently spotted an interesting question on Yahoo! Answers: With an extra $1,000, should one hire an estate planning attorney or a financial planner? This post will borrow from both disciplines to provide more specificity regarding many ways you can either begin to build or add to your solid financial foundation.
To properly answer, we must consider that financial and estate planning are not necessarily mutually exclusive of one another. Instead, financial planning can generally be viewed as a compendium of five broad topics: Investments, Insurance, Taxes, Retirement, and, our specialty, Estate Planning.
For general financial health, certain basic strategies should be implemented in each of these five areas before moving into anything more complex. For example, setting up a dynasty trust before, say, buying auto insurance is not recommended since a car accident could greatly reduce the funds available for the trust.
Therefore, the proper answer to the Yahoo question should be more based on what is already in place rather than on which process should be deemed “more important”.
Below, we list no less than 19 ways to apply an extra $1000. The first 12 are foundational strategies upon which you should build your financial and estate plans. The next four are based around important personal decisions you might make. The final three involve hiring professionals to help you choose from and implement all the other choices:
- Pay Down Debt – limit consumer debt and instead use tax-deductible sources
- Emergency Fund – several months expenses set aside in a liquid account
- Put Into Savings for Future Goal – such as education, a down payment, etc.
- Diversify Investments – invest with short, medium and long term goals in mind
- Buy Life Insurance – enough to cover your most important priorities
- Get Other Coverage – look to insure home, car, health and potential disability
- Make Charitable Donation – the more taxes you save, the more you can give
- Pay Additional Creditable or Deductible Expenses
- Add to Retirement Plan – maximize funding for highest tax savings
- Set Up and Fund Personal IRA – as a backup plan or for further tax savings
- Get or Update Will or Trust
- Get Ancillary Documents – Powers of Attorney, Advance Medical Directives, etc.
- Familial or Other Obligations
- Start a Business
- Hire a Financial Planner – The financial planner is basically the generalist who balances your needs and goals and educates you about ways to fulfill them. However, you must monitor and implement the planner’s recommendations, or your money and the effort will be wasted. Additionally, implementation usually results in having to hire other professionals, since most financial planners cannot draft estate planning documents or prepare tax returns.
- Hire an Estate Planning Attorney – As discussed throughout this blog, the lawyer is more of a specialist in estates and potentially taxes as well. Your estate plan must be monitored and revised when necessary due to changes in life or in the law. Most attorneys do not sell investments or insurance products, but may be qualified to recommend appropriate options.
- Hire an Accountant – The accountant is mainly a tax specialist, but more and more are becoming lawyers and/or financial advisors as well.
Which of the 19 options is best for you? This obviously depends on what you already have in place, but for simplicity’s sake, you might simply choose the individual item(s) that gave you the most powerful emotional response.