Is my current financial plan built to last?

Sustaining Wealth Over a Lifetime

Hi. Thank you for tuning in to today's Emerald Gem, which stands for Get Educated in Minutes. I'm Laura Russo, senior Wealth and Fiduciary Planning Analyst for Wilmington Trust's, Emerald Family Office and Advisory, and your host for today's podcast in today's gem, I'm going to answer the question is my current financial plan built to last.

Oftentimes, financial conversations may focus on wealth accumulation, but sustaining wealth is a different challenge and an important piece to consider at each stage of your financial life. Sustainability depends on the foresight of planning ahead, the discipline of following a budget, and the ability to adapt your plan as your life changes.

While it can sometimes feel like the answer to sustainability is just accumulating more assets. The reality is that attention needs to be paid to sustainable financial habits at all levels of wealth. This podcast will take you through three fundamental financial habits and the three levers of wealth sustainability.

There are three fundamental financial habits that can be a good starting place to think about when reviewing your holistic financial plan, budgeting, debt management, and savings. Let's start by creating a budget. In creating a budget, try to start by making an honest assessment of how much your life costs.

This can be easier said than done, so one way you could get started is by creating broad categories of your necessary expenses. Things like housing, utilities, groceries, clothing, transportation, your discretionary expenses. This might be things like your hobbies, vacations, dining, entertainment, et cetera.

And finally, your savings. Then try to estimate how much you spend or allocate towards each category on either a monthly or annual basis. And over the next few months, try to review your spending and see how it actually aligns with the budget categories that you created. It's important that your budget accurately reflects your spending habits.

One word of caution is that it's difficult to track spending with cash or cash apps, so try to figure out a method that helps bring you transparency into how you're spending your money. Once you have this honest assessment, you may consider imposing any spending limits to help breach your financial goals.

Ultimately, you want to be sure that you are living within your means. This can be a good indicator of short-term sustainability, and it means making sure that your income is sufficient to meet your expenses and savings goals. As with any financial plan, a key element is ensuring that your budget is flexible and can be updated to reflect any changes in your life or financial situation after creating a budget.

The next piece of the fundamental financial habits is beginning to think about strategies for debt management. Proper guidance debt can be used strategically as part of a holistic financial plan. Remember that not all debt is created equally, so you will wanna try and be selective about using debt, being mindful of the interest rate you are incurring on your debt, and whether your interest paid is tax deductible.

When utilizing debt, it's important to ensure that you have a plan for repaying the debt, that you are not over leveraged, and that you try to avoid higher interest debt when possible. Now that we've discussed budgeting and debt management, let's turn and think about savings. I think about savings in two buckets.

First is savings for an emergency fund, which should cover about three to six months of your typical living expenses. An emergency fund can help provide liquid cash for unforeseen circumstances without having to disrupt your longer term savings. This brings us to the second bucket, long-term savings.

This is meant to be used for a large future purchase or much later in retirement. The earlier you are able to start saving, the better. If you are able to invest over a longer term, it gives you more time to weather any market volatility and more time to harness the power of compounding returns. When possible, you may want to try to maximize tax advantage savings opportunities such as contributing to a qualified retirement account like a 401k or IRAA health savings account, or a 5 29 plan for education savings.

These could be helpful ways to work toward your financial goals while receiving a tax benefit. These tax advantaged accounts could provide a current tax benefit, like an income tax deduction in the current year, a future tax benefit, like tax-free distributions of account funds, or in some cases even both.

The topic of tax implications is beyond the scope of this podcast, but in general, it's important to try to be tax aware across your financial strategies. Also beyond the scope of this podcast, but important to keep in mind is how your savings are invested. But that brings me to the next section of our podcast about the three levers of wealth sustainability.

Once you've built fundamental financial habits, you might start to think about your long-term sustainability. Sustaining wealth comes down to the interplay of earned income. Spending and investment allocation. You can think of each of these elements as a sliding scale. Adjusting one affects how the others must perform to maintain sustainability for long-term success.

Each of these elements should be in balance with one another. Let's first look at the earned income piece. Generally, as earned income increases, sustainability increases. However, it may not always be this straightforward. Take a look at the different sources of your income. This may include wages or salaries, business, cash flow, and eventually in retirement, social security or pensions.

In addition to the amount of each, think about the stability and the reliability of each. Does your earned income fluctuate with the hours worked, changes in the economy, or is it predictable and steady? If you were to change jobs, would you still be able to receive the same amount of earned income? When thinking about your income in relation to sustainability, try to take a review over a longer time horizon rather than just your current state.

Now that we've talked about cash inflows with earned income, let's look to cash outflows. Our second element spending as spending increases, sustainability generally decreases. While spending can be the element over which you have the most control, there could be some unconscious factors that impact your spending habits.

First, try to pay attention to the after tax cost of your lifestyle. A dollar spent costs more than a dollar earned after accounting for taxes. Instead of matching your expenses with your pre-tax income, try to budget to your after-tax income. Two items which are important to keep in mind when looking at your spending involve increasing costs of living.

First is inflation. While inflation may be out of your control, it can still impact your sustainability and spending. For example, your groceries next year may cost more than your groceries this year. Second, be wary of lifestyle creep. This is a phenomenon that can happen when income increases. As people earn more, they may subconsciously adjust their standard of living and begin to spend more to keep up with their new lifestyle.

This is where that fundamental practice of budgeting that we discussed in the first half of this podcast can be incredibly helpful. While some standard of living improvements are to be expected, be mindful to evaluate your spending with your long-term wealth, not just your current income. Being mindful of inflation and avoiding lifestyle creep can help you have more funds available for savings and allow you to accumulate a larger nest egg over time.

Finally, now that we've talked about the inflows and the outflows, let's discuss the third element of sustainability, which is your return on investments. You may choose to invest your savings and any excess cash you have remaining after paying your expenses. The key component to investment returns is how your funds are allocated, while investment allocation itself is outside the scope of this podcast.

The key elements to keep in mind are your financial goals. How much you need to make from your investment, your time horizon, and your risk tolerance because of the complexity of investment returns. Make sure to consult with your advisor whenever possible to ensure that your savings are invested in a way that aligns with these three elements.

Sustaining wealth over a lifetime depends on having a holistic forward-looking financial plan utilizing the three fundamental financial habits. And understanding the interplay of the three levers of sustainability. It's not about making as much money as possible. It is about the alignment between how you earn, spend and invest.

Revisit your plan regularly with your trusted advisors, with the right planning and habits you could reach financial sustainability for your lifetime and beyond at any level of wealth health. Thanks again for joining us today. Please contact your Wilmington Trust advisor if you have any questions about whether your current financial plan is built to last.

We would be glad to help you. See you next time.

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