Both financial and estate planning can help you achieve long-term financial goals. But while they are very different in what aspects of your finances they can focus on, both financial approaches could also complement each other to give you a healthy balance of growth and protection. To do both, it’s important to understand how financial planning and estate planning are applied to your finances.
A financial advisor can work with you to create a financial plan and estate plan, depending on your needs.
What is financial planning?
Financial planning, at its core, is a strategic approach to managing your personal finances. The process involves analyzing your current financial situation, setting financial goals, and developing a plan to achieve those short- and long-term goals.
For example, let’s say you want to buy a house in the next five years. A well-structured financial plan can help you achieve this goal. First, it will help you evaluate your current financial situation by evaluating your income, expenses and existing debts. Then, he or she will set up a savings strategy for your down payment so you can meet your lender’s requirements and secure favorable mortgage terms. Additionally, by considering your credit score and debt-to-income ratio, a financial plan could also help you optimize your credit score to increase your likelihood of getting approved for a mortgage loan at a competitive interest rate.
A comprehensive financial plan can be broken down into several key components:
- Budgeting: This involves tracking your income and expenses to ensure that money is spent wisely.
- Investment planning: It’s about deciding where to invest money to grow wealth over time. It’s important to evaluate your risk appetite, investment goals, and time horizon to come up with a plan that will work.
- Tax planning: This involves strategies to minimize tax liability and maximize after-tax income.
- Insurance planning: This involves determining the type and amount of insurance you need to protect yourself from potential risks.
- Retirement planning: This involves setting retirement goals and making a plan to achieve them.
By engaging in financial planning, individuals can take control of their financial future, potentially leading to a more secure and comfortable life.
What is estate planning?
Estate planning is a comprehensive process that covers protecting your assets when you pass away. It involves making strategic decisions about how your assets will be distributed and should be considered a crucial part of financial management, aimed at protecting and growing your wealth.
In addition to establishing a clear distribution of assets, estate planning can also help your estate avoid probate. This is an often lengthy and expensive legal process in which a court validates and administers the distribution of your assets.
Additionally, an estate plan can also help you minimize taxes by using strategies such as gifts, creating trusts, and taking advantage of applicable exemptions to ultimately preserve more of the value of your estate for your beneficiaries.
An estate plan is not a single document but a set of legal tools aimed at managing and protecting your assets. These typically include a will, which outlines how you want your assets to be distributed when you die. Additionally, you could create a power of attorney, which allows you to designate an agent to make financial and legal decisions on your behalf even before you leave.
Other common estate planning tools might include trusts, which are legal arrangements that hold your assets for your beneficiaries. And health care directives that specify your wishes regarding end-of-life care and who can make medical decisions for you if you become incapacitated.
Understand estate planning and its role in financial planning
Estate planning can complement financial planning in many ways. In addition to creating a structured framework for distributing assets to beneficiaries, it can play an important role in tax efficiency.
As mentioned above, a comprehensive estate plan can help you minimize the impact of estate taxes, gift taxes, and other potential tax liabilities, thereby preserving more of your estate for future generations.
Estate planning can also add an extra layer of protection for your assets. Through careful structuring, for example, you could protect your assets from potential creditors or legal claims.
Finally, if you are a business owner, estate planning can help you ensure a smooth transition of ownership while addressing any tax implications associated with the transfer of business assets.
So, while a financial plan can help you grow your wealth, an estate plan helps preserve it and pass it on to your beneficiaries.
When do I need a financial planner or an estate planner?
Certain life events may create the need for a financial planner or estate planner. Here are four common examples where you may need to work with a professional:
- Receiving a large inheritance or selling a business
- Significant promotion leading to a substantial increase in income
- Retirement is approaching
- Planning of future care in old age
This is not an exhaustive list. But, essentially, you may want to seek the expertise of a financial planner or wealth planner whenever you are growing your wealth and want to protect it.
Financial and estate planning can be important in maintaining overall financial health. Both provide a comprehensive, strategic framework for managing and protecting your assets throughout your life and beyond. While financial planning can help you set and achieve financial goals, estate planning could complement that strategy by minimizing taxes and protecting your financial legacy.
Financial planning tips
- A financial advisor can help you create a plan to grow and protect your wealth. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory call with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you reach your financial goals, start now.
- Part of any long-term financial plan should involve a plan to grow your wealth. You can use a free investment calculator to help you estimate how much your money could grow over time.
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