Tax Planning

Financial Planning for the Young, Single Person

Welcome to 2004! We hope you will accept our good wishes that you will have a wonderful new year. We are certainly going to do our part to help you along on the path to a successful year and one of the things you must think about is a financial plan for the coming year – a plan that lasts far longer than just 2004.

What’s so important about planning? Well, let’s take a simple little example. If you are young and just starting out in life, you may be looking at purchasing a new car. How are you going to afford that car? Do you have enough for a down payment? If not, will the dealer let you buy with no money down? Oops, what’s that you say…you have no credit record? How will the lender make a credit decision on you? If you don’t have a credit record, how are you going to get a good rating built up?

Get the point? Just about everything in life takes planning. Whether you are married or single, rich or poor, starting out in life or nearing retirement, you have to take stock of where you stand, where you want to go and how you will get there. Let’s talk about a few things you should include in your first plan or budget.

Debt
Let’s first look at where you stand in the personal debt ocean. Are you just wading in it a little, or is it about to drown you? Either way, one of your first obligations to yourself and to your creditors is to work out a plan to pay off your debt. The general rule is that you should pay off any high rate credit card balances, if any, as quickly as possible. If you have any student loans or secured debt, most likely your creditors will have already scheduled out your monthly payments. Be certain to make these payments on time since timely payment of debt will have a significant effect on your credit rating in the future. This, in turn, can affect your ability to secure more credit, and can even affect auto insurance rates in some cases.

Retirement Savings
In forty years or so you will probably want to retire. Where will the money come from to do that? If you work for a company that provides a retirement plan, that’s great, but often, the retirement benefit will not allow you to live the way you want during the golden years. Even worse, most small businesses cannot afford to pay for a defined benefit pension plan (one where you get a specific benefit on retirement) and often rely on some sort of defined contribution plan that requires you to save money and may put in an employer match or other profit sharing contribution. You will likely see jargon like 401(k), SEP, SIMPLE or 403(b) if your employer offers one of these. You should plan to take advantage of these accounts for three reasons: 1) you avoid immediate tax on the contribution, 2) earnings on contributions grow tax-free and 3) amounts in a qualified plan are out of reach of most creditor claims.

Health Insurance
Most likely, you’re in good health and probably never had much more than a cold or broken arm. While that may be the normal situation for younger people, the fact is life is uncertain. You never know when a major medical bill may crop up and you need to be prepared. If you work for a company that provides insurance, by all means, take advantage of it when the cost is reasonable. If you are not able to acquire insurance through your company, look into a personal policy. Even a high deductible policy is worth the money when a catastrophic accident or illness occurs.

Disability Insurance
Some form of short or long-term disability insurance would help you cover living expenses for the period you are out of work. Depending on what you are willing to pay, you can often replace up to 60% of the earnings you lose due to disability through a disability income insurance policy.

Life Insurance
Look into some form of permanent insurance or at least a low cost term insurance policy for a fixed term. The simple fact is that the younger you are, the cheaper the insurance will be, assuming you’re in good health. If you ever plan on marrying, having a policy at low rates can ease the budget burden when you wish to provide for dependents down the road. For a young, single person, life insurance is an option, not a necessity in most instances, but still worth looking into.

Wills
If you are young and single, you probably don’t think you need a will. That’s fine if you want the state to decide where your estate goes. Much of the headache can be eliminated with a properly prepared will.

Investments
After you have provided for all of your needs and the necessities mentioned previously, assume you still have money to spend. Where do you put it? Should you put the money into the market and watch it grow beyond all expectations? Should you stay liquid? In the main, this will be one of your more personal choices because it depends in large part on what keeps you awake at night (i.e. your risk tolerance). One thing we will say, it’s wise to keep at least six month’s expenses in reserve in case you are disabled or do lose your job.

Conclusion
A wise man once said that the only thing certain in life is death and taxes. While we won’t dispute that, we will add that another thing that seems certain is the better you plan, the better your chance of achieving your goals. This applies to just about every area in your life and at every stage of your life. How is your financial plan? Does it need a major overhaul or perhaps a simple tune-up? Why not give us a call and let us see if there are areas you might look at to make your life a little easier? After all, that’s what we are here for.

For More Information Contact:

Bucheri McCarty & Metz LLP
2366 W. Boulevard
P.O. Box 2147
Kokomo, IN 46904-2147

Telephone: (765) 236-2300
FAX: (765) 236-2333
Internet: info@bmmcpas.com