top of page
Search
  • Writer's pictureJiayi (Kristy) Xu, MBA, CFP®

What else can contribute to your financial success other than your investment portfolio?


When most people are first beginning to think deeply about their finances, they tend to focus on their investment portfolios to the exclusion of other important topics. An effective and comprehensive financial plan will provide a financial road map for life that takes into account not only your present circumstances but also your future needs and goals. I want to help you learn about some of the other financial topics that will come to play an important part in your future financial success. In this post I will introduce a few common financial planning subjects and why they may be relevant to you.


Managing debts and cash flow


At different points in your life, you may acquire several types of debt such as mortgages, credit card debt, or student loans. A debt management plan will help you determine which debts should be paid off first and how your debts should be repaid to minimize borrowing costs to maximize the potential for you to reach your financial goals. For example, someone who only has mortgage debt may find it advantageous to refinance the loan to reduce monthly payments and transfer the savings into tax-deferred retirement plans and IRAs. On the other hand, if you have sufficient cash flow, you may wish to make extra principal payments to reduce the balance of the loan and increase your equity. Of course, the decision must be made based on your specific situation and we can develop a debt management plan together. A cash flow management plan helps you reduce unnecessary cash outflows through budgeting, reducing taxes and restructuring liabilities. Carefully managing your cash flow will help you fund planned expense such as a mortgage down payment as well as provide stability during unexpected life events that require immediate cash outlays.


Here are some basic benchmarks for assessing liquidity (having adequate income to cover expenses) and solvency (assets adequate to cover liabilities) that you can use to do a self-evaluation:

  • Current ratio (current asset/current liability) >1

  • Debt ratio (total liabilities/total asset) <40%

  • Emergency fund ratio (current assets/monthly living expenses) >=3-6 months

  • Saving ratio ((personal savings + employment contributions)/annual growth income) >10%

  • Credit usage ratio (total credit used/ total credit available) <30%

  • Long term debt coverage ratio ((annual gross income – tax)/ total annual long-term debt payment)>2.5

  • Debt limit ratio (monthly non-mortgage debt payments/total monthly take-home pay) < 15-20%

  • Debt-to-income ratio (annual consumer credit payments/annual after-tax income) <15%

  • Front-end mortgage ratio (annual mortgage principle, interest, tax, and insurance payment/ annual gross income) <28%

  • Back-end mortgage ratio (annual mortgage principle, interest, tax, and insurance payment+ credit payment/ annual gross income) <36%

If you believe you have significantly deviated from any of the above benchmarks, please let me know and we will come up with debt and cash management plans for you to bring your liquidity and solvency to a more desirable level.


Identify and manage risks


Unexpected economic losses have occurred throughout human history. Therefore, both the identification of risk exposures and the proper management of risks that might potentially affect you, your family, and your career are essential aspects of financial planning. You need to know which risk exposures you want protection against and which risks you are willing to retain and self-insure against. For example, many people’s objective is to support and maintain their family's current lifestyle in the event of premature death or incapacity, protect their property interests from major losses, and ensure their family’s healthcare needs are met. Once risks are identified, the right types and amounts of insurance coverage should be obtained to help minimize those risks. (*Note that as a as a Fee-Only Registered Investment Advisor (RIA), Global Wealth Harbor does not sell or profit from insurance products, but I can advise you on the coverage you need for your specific situation.) Before purchasing any insurance products, you need to evaluate and compare different policies so that you select products that are both affordable to you and can provide adequate coverage.


These are some of the different types of insurance that might be relevant to you:

  • Basic medical expense insurance generally provides the first-dollar coverage with no deductible provision for expenses of hospitalization and doctor's service.

  • Major medical insurance provides coverage for potentially large medical expenses rather than paying for the first dollar of loss. This coverage provides valuable family protection but can be expensive.

  • Disability income insurance is designed to provide monthly benefits to replace lost income when the insured is disabled as a result of sickness or injury. It is useful for maintaining one's standard of living at an acceptable level in case of disability.

  • Medicare supplement insurance, also known as Medigap insurance, is designed specifically to supplement benefits provided under the Medicare program. This coverage typically pays for such things as the various Medicare deductibles, additional expenses when Medicare coverage ends, and the difference between the "reasonable payment" provided by Medicare for a physician's services and the amount actually charged by the physician.

  • Long-term care insurance promises to pay expenses incurred if the insured is unable to engage in certain day-to-day activities. The individual's inability to engage in such essential activities requires that someone provide care, either in-home or in an institution such as a nursing home.

  • Life insurance policies provide protection against the financial problems associated with premature death.

  • Personal property insurance is purchased to protect real and personal property interests and provide liability coverage for bodily injury or property damage.

  • Umbrella insurance is extra insurance that provides protection beyond existing limits and coverages of other policies. It can provide coverage for injuries, property damage, certain lawsuits, and personal liability situations. Umbrella insurance may provide coverage when your homeowners, auto, and boat insurance policies limits are exhausted.

  • Annuities are contracts issued by life insurance companies. They can be used to accumulate funds to a future point in time when the assets can be converted to a stream of income. This income stream can be designed to pay out over the annuitant's lifetime, for a set period of time such as 20 years, or over two lifetimes such as for a husband and wife. Essentially, annuities can provide an income that cannot be outlived.

Fund educational needs


Education planning should be a part of an overall financial plan for clients who have or want to have children. An education funding plan can help you determine the most appropriate way and the most tax-efficient manner to save for you children’s education expenses. There are many different factors that you should considered when determining the amount you need to save for your children’s education, including

  • The age of your child today and the age at which their education expenses will begin

  • How long your child is expected to attend school

  • The type of school a student is most likely to attend (private primary or secondary schools, public or private university, graduate or professional degrees, etc.)

  • Whether your child will attend a school located in their state of residence or an out-of-state school

  • The expected annual increase of tuition (which is usually higher than the inflation rate)

  • The average cost of tuition, room, board, fees and expenses in today's dollars for the type of school a student plans to attend

  • The predicted rate of return of the education portfolio you established for your children

Once time frames and total amount for education goals have been established, the next step is to calculate the total amount the family needs to save (total amount and/or annual contribution) for each child to attend the school of their choice. After that task is complete, I can help you analyze your financial situation to evaluate to what extent the savings goals can be met by your income, assets, and available resources. Most importantly, don’t undervalue the time value of money. The best way to pay for a child's education is to start saving when a child is young, which will allow compound interest to grow your savings over time and to withstand any downturns in the market. A well-diversified mix of stocks and bonds, with a higher concentration of tax-efficient growth stocks, is best for younger years and a more conservative mix of bonds, cash, and cash equivalent investments is more appropriate when a child gets older.


Common educational funding options include the following:

  • Section 529 saving plans is a qualified tuition program that allow you to either prepay, or contribute to an account established for paying a student's qualified education expenses at an eligible educational institution. Qualified tuition program can be established and maintained by states (or agencies of a state) and eligible educational institutions.

  • Coverdell Education Savings Accounts (ESAs) were designed to help low and middle-income taxpayers save for their children's future educational expenses. They are tax-deferred savings accounts that can be opened for any child under the age 18.

  • U.S. Series EE bonds are issued by the Treasury with low denominations and fixed interest rates. Principal is guaranteed if held to maturity, and they are backed by the U.S. government. Interest and principal on Series EE bonds may be exempt from federal income taxes if used to pay for qualified higher education expenses for the owner, spouse or dependents.

  • Uniformed Gift to Minors Act (UGMA) & Uniformed Transfers to Minors Act (UTMA) are custodian account where the contributor (donor) makes an irrevocable gift to a minor (beneficiary). The account is controlled by the custodian for the benefit of the child. Upon reaching the age of majority (age 18 or 21, depending on the state), the child assumes control of the account. They are much less expensive and easier to establish than a trust. A portion of the income from interest, capital gains, and dividends is taxed at the child's tax rate, which is usually lower than that of the parents. Brokers and mutual fund companies can accept UGMA/UTMA funds. UGMAs authorize the purchase of stocks, bonds and mutual funds. UTMAs allow greater investment options than UGMAs which include transfers of real estate, partnership interests, and oil and gas interests.

  • Trusts are another type of vehicle that parents can give money or property to their children so that the children will not have control over the assets. A trust is a legal entity that holds property for beneficiaries and is administered by a trustee according to the terms of the trust documents.

Prepare for retirement


It is incredibly easy to avoid thinking about retirement when you are young. However, saving for retirement is not a natural wealth accumulation event and it must be deliberately planned. When developing a retirement plan, we must first identify and evaluate the assumptions used in analyzing retirement needs including age at retirement, cash inflows and outflows in various stages of retirement, goal priority and importance, longevity, rate of investment return, market volatility and effects of inflation. Second, we account for the potential sources of retirement income such as Social Security, employer plan benefits, personal savings and investments, individual retirement plans, and employment income. Then we can calculate the appropriate savings needed to fund a plan that maximizes the probability of achieving the client's goals and mitigating longevity risk. Then we apply statistical and probability techniques in calculating retirement funding and income distribution plans and analyze the effects of withdrawals, rollovers and annuity payout options on retirement plans. I will monitor the plan and discuss any changes or updates during our periodic review meetings.


Please note that not all investments are appropriate for a retirement plan. Although a retirement plan needs to offer a wide range of investment types, you should not select holdings that will cause your account to lose its tax benefit or expose you to undue risk. For example, investments that provide tax benefits, such as municipal bonds, are unsuitable for inclusion in a retirement plan as their yield is lower due to their tax-advantaged status, while higher yielding bonds would be better in a retirement account as the plan already provides tax deferral or sheltering of interest income. You should not invest in niche products intended for speculative trading or have a concentrated allocation for your retirement account. Examples of these types of investments include products such as single sector or single country funds, single commodity funds, inverse funds, as well as highly leveraged investment vehicles. These types of investments would not be suitable for the vast majority of retirement plan participants, and are not in keeping with the balanced long-term approach advocated by modern investment theory.


Address estate and legacy matters


Many people are reluctant to do estate planning and often intend to “deal with it later”. Estate planning provides planning for incapacity, personal protection and financial security for you and your family by providing care and support for surviving family members, and ensuring that estate assets are properly distributed upon death. Estate planning is a process that utilizes financial and legal methods to accomplish your estate goals. As your financial advisor, I will coordinate with attorneys, trust officers, accountants, life insurance agents, and other relevant parties to help you plan your estate.


The following summarize the objectives an estate plan can help you achieve:

To designate the person(s) who will manage affairs and assets in case of your legal incapacity or death.

To provide financial security and protection to family members.

To control the passing of property interests to desired heirs - an estate plan can transfer particular assets to named beneficiaries, bequeath general legacies or sums of money to beneficiaries, and determine how and when the heirs may use the assets bequeathed to them.

  • To provide a stream of income to the surviving spouse and minor children during the probate process. A properly planned estate can help avoid intra-family disputes or contestation of your will.

  • Trusts, guardianships, and conservatorships, all part of estate planning, can ensure that provisions have been made for minor children. Additionally, proper estate planning can ensure that family assets are preserved and managed for the benefit of the children and their needs, and for other heirs as well.

  • To provide income in the event of a disability, or in other emergency situations. For example, providing a stream of income for the lifetime of the surviving spouse, providing for payment of medical expenses or other debts, and providing for the benefit and welfare of any minor children or other family members.

  • To minimize the time and expenses associated with the probate process and reduce or even eliminate probate expenses through the proper titling of assets or trusts.

Wealthier individuals often have additional tax and nontax reasons to develop an estate plan:

  • Proper estate planning can minimize, or in some cases eliminate, taxes such as income, estate, gift and generation skipping transfer taxes. By doing so, the client will be leaving a greater amount of property to their family members or other heirs.

  • If the client owns a business, proper estate planning can lay the foundation for a business succession plan or the sale of the company.

  • Proper estate planning is necessary to guarantee that the person's estate has sufficient liquidity to pay for post-mortem costs such as debts, estate administration fees and taxes. If the estate has insufficient liquidity, major illiquid assets such as real estate or assets that have sentimental value for family members may have to be sold to satisfy creditors, pay estate taxes, or pay for other administrative expenses.

  • To achieve charitable objectives through tax-efficient measures

  • To provide for professional management of property interests and investments through trusts

  • To shift income to family members in a lower tax bracket

Not all of the topics above are of the same importance to clients in different stages of their financial life cycle. I can help you prioritize your financial goals and concerns and come up with a plan to address them in a reasonable order. Please remember that planning ahead will help you avoid future problems. I would love to discuss any of the above financial planning topics in more detail in our future meetings.


If you would like to discuss any of the above topics with me but are new to my firm, let’s set up a free introductory call!

Recent Posts

See All

New Office Locations for In-Person Meetings

Starting February this year, we are adding new office locations for in-person meetings for our Bay Area clients and prospective clients! When you book your introductory meeting or review meeting on ou

bottom of page