Tax returns: a good starting point for financial planning

March 11, 2016

After filing your tax returns, don’t just breathe a sigh of relief and forget about taxes for another year. The information you gathered to satisfy Uncle Sam might be just what you need to begin addressing your financial goals and dreams.

In medicine, it is said that diagnosis is half the cure. Well, in financial planning, getting your information together is a fundamental step in developing a financial plan. Since you’ve already gathered much of the information you’ll need to develop a financial plan, why not take a few extra steps and get the rest. What else will you need?

First, you will need a list of assets and liabilities – account statements usually contain what you need. You’ll also need copies of recent pay stubs (they contain a lot of information), tax returns, insurance policies, wills, trusts, and pension plans. These documents contain information that will enable you to know where you are in your financial life before you plan for where you want to be.

From the above, you can create a cash flow and statement of net worth. As the heart and circulatory system are at the core of the human body, so too is cash flow the core of financial planning. Cash flow is what is left (or missing) when you subtract expenses and taxes from income. We’ll assume that you are still working and that you have an extra $10,000 left over at the end of the year. What do you do with it? The decision comes from a review of your net worth statement. Net worth is simply a number you get when you subtract liabilities from assets. The number, itself, doesn’t mean much but you can learn a lot from a study of the items that produce it – assets and liabilities. Since you have them spread out, you can decide where to potentially put your $10,000 surplus.

If you have liabilities that carry high rates of interest, e.g., credit cards, it may be wise to use your surplus to pay down your debt. It makes a lot more sense for some individuals to lessen a 17 percent-plus interest payment than to collect a nominal interest rate But the point is, once you’ve spread out and studied your assets and liabilities, you can make intelligent decisions on how to manage them. The second step in the financial planning process is identifying both financial and personal goals. The three objectives that I hear most often are security in retirement, providing for children’s education, and developing an estate plan. While these are a little vague, they’re a start.

The third step is identifying problems that might prevent financial independence. The talking heads on television talk about investment risk, but there are some other risks as well; they’re just not as sexy. What can happen to you? You can become ill or disabled. You can die, your property can be damaged or destroyed, somebody can sue you or you might wind up in a long-term care institution. What are you doing about these risks?

Now, we are at the heavy-duty stuff. You’re not going to find solutions to these kinds of problems on the Internet. It’s time to call in the cavalry. It is important at this point to have a financial advisor assist you in developing a plan. A professional advisor can provide objectivity and expertise. It’s hard for people to be objective regarding their own finances, and most do not have the financial experience necessary to make wise decisions.

The fourth step is structuring a plan to meet financial needs and objectives, followed by implementation of agreed-upon recommendations. A financial advisor can help develop and implement the plan, but the decision to implement, modify or reject recommendations remains the individual’s ultimate responsibility. Many advisors provide a checklist to help clients implement their plans themselves.

A final, and often most important, step is periodically reviewing and revising the plan to account for changes in personal and economic conditions. The advisor and client can then review goals and problem areas and fine-tune the plan as needed.

Be sure to discuss with your financial advisor about how your tax return can serve as your starting point and progress report on achieving your financial planning goals and dreams.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. No strategy assures success or protects against loss. Randy Neumann is a financial professional with and securities offered through LPL Financial, member FINRA/SIPC.