The Best Approach to Personal Finance: Understanding Your Options

Hello Linked In friends! With almost 20 years in the insurance and financial services industry, I've seen how different methods work for different people. AND I also see how frustrating and confusing it can be for clients when mixing different methods inappropriately especially if they get bits and pieces from different places. With the intention of giving clarity for your financial journey, today, I'm going to highlight 4 popular and time tested methods for managing personal finances: The Life Cycle Approach, the 3 Panels Approach, the Strategic Approach, and the Cash Flow Approach. Let's dive in, shall we?

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The Life Cycle Approach

Picture your financial journey as a story. Just like any good tale, it has different chapters. That's the essence of the Life Cycle Approach. Here are the phases:

1. Asset Accumulation Phase: Think of this as the stage where you're sowing seeds for your future. You're saving for a home, paying off student debt, or even beginning a retirement fund.

2. Conservation/Risk Management Phase: Now, you're playing defense. You're safeguarding the assets you've accumulated. This is when you need to consider insurance to protect against life's curveballs and start spreading your investments to manage risk.

3. Distribution/Gifting Phase: Time to enjoy the fruits of your labor. You're distributing your wealth during retirement and planning your legacy. This phase is all about making sure your hard-earned assets are passed down and enjoyed.

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The 3 Panels Approach

Imagine your financial life as a triptych - three panels: Protection, Savings, and Growth. The trick is to balance these three areas to achieve financial security and prosperity. Here's some rule of thumbs benchmarks in the financial industry:

1. Protection: Life insurance should be 12-16 times gross pay, if needed. Disability insurance should cover 60-70% of gross pay and be at least guaranteed renewable. Homeowners insurance should cover the replacement cost on both dwelling and content, with coverage for open perils.

2. Savings: Your emergency fund should be 3-6 times the monthly non-discretionary expense. Housing costs should be less than or equal to 28% of gross pay. When you combine housing costs and debt payments, it should be less than or equal to 35% of gross pay.

3. Growth: Aim to save at least 10%-13% of gross pay for retirement (including employer match). For college education funding, save $3,000 / $6,000 or $9,000 per child per year for 18 years in a balanced 60% stocks / 40% bonds portfolio.

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The Strategic Approach

This approach is for those who love to plan ahead. It's not just about day-to-day money management - it's about creating a roadmap for your financial journey. It's like having a GPS for your finances.

You start by setting clear goals - from saving for a dream house to planning for a comfortable retirement. A comprehensive assessment of your financial situation helps you understand where you're starting from. Then, you'll need to manage potential risks - this could mean evaluating your insurance coverage and creating contingency plans for life's unexpected twists and turns. Investment planning and retirement planning help you grow and safeguard your wealth.

Tax efficiency is also key - as minimizing tax liability can help maximize savings and investment growth. Estate planning ensures the orderly transfer of assets for future generations. Regular monitoring and review help you stay on course and adapt to changing circumstances.

The Cash Flow Approach

If you're a person who loves to have control over every dollar, then the Cash Flow Approach might resonate with you. It's all about understanding and controlling the movement of your money.

It starts with a thorough assessment of your income sources and expenses, followed by optimization of your cash flow. This could involve reducing unnecessary expenses or finding ways to boost your income. A carefully crafted budget helps you allocate your income towards necessary expenses, savings, and investment goals.

Building an emergency fund and managing debt are the keys to financial stability. Setting specific financial goals guides your savings and investment strategies. Considering investment opportunities and tax implications helps grow your wealth and maintain tax efficiency. Regular reviews and adjustments ensure your cash flow plan remains aligned with your circumstances and goals.

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So there you have it, friends. Four different ways to approach managing your personal finances. Each has its own merits and might suit one person better than another. Which approach resonates with you the most (at this time in your life)? Let me know in the comments below, and I'll delve deeper into that approach in my upcoming posts.

Remember, knowledge is (potential) power – especially when it comes to personal finance. Stay informed, stay proactive, and make the best choices for your financial future. Until next time, keep striving for financial success!

Cheers,

Phil

PS - Remember, the 4 approaches we discussed today are just that: 4 approaches. There are many more out there that might (or might not) work for different people in different situation and stages of life. But I hope this gives you a clearer picture of your options and some ideas on how to approach your own financial journey.

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Disclaimer: The content provided in this blog post is for informational purposes only and does not constitute financial, tax, or legal advice. It is not intended to be a substitute for specific individualized advice from a professional who is aware of the facts and circumstances of your individual situation. We encourage you to consult with a qualified professional before making any financial decisions. All information is provided "as is", with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied. In no event will Phillip Ngo, his partners, agents or employees be liable to you or anyone else for any decision made or action taken in reliance on the information presented in this blog, or for any consequential, special or similar damages. State Farm, including Phillip Ngo and his team, are not responsible for, and do not endorse or approve, either implicitly or explicitly, the content presented in this blog. Use of this blog does not constitute a relationship of any kind between the reader and State Farm or its representatives.