Leveraging the 3 D’s of Financial Planning

Oftentimes when you’re assembling your financial plan, you’re not just preparing for your own financial security—you’re investing in the future of your family, business, and employees, too. That said, you want to make the most of your effort, so it’s important to talk with an expert who has your best interest in mind and understands complex financial topics. As a financial educator passionate about helping business owners, we’re sharing an overview of three topics you should consider as you manage your business and personal assets.

Deductions: Invest in Your Future

Any time you pay unnecessary expenses, it’s like throwing money away. You don’t often get to see or reap the benefits of paying unexpected emergency expenses or taxes that you could have avoided. On the other hand, any time you intentionally spend money on something that provides value to your business, you’re investing in the future.

You’re always going to have to pay taxes, but it’s important to talk to a professional to ensure you don’t overpay.1 Tax planning can get pretty complicated for business owners, but here’s something you should consider when managing your business’s finances—rather than paying hefty taxes each year, you can make investments in your business that allow you to deduct those expenses on future tax returns. While that might mean you pay more money up front, remember this—that’s money you’re investing in the future of your business, your family, and your employees. As your company grows, you increase its ability to support and provide for more employees and families in the future. And at Financial Literacy, we believe it’s always a good thing to invest in the future.

So rather than overpaying in taxes, talk to a professional about what investments you could make in your business that would qualify as deductions later.

Deferral: It Pays to Save

As you already know, paying taxes is inevitable. But that doesn’t mean you don’t have a choice in how or when you pay them. Investing your money in a tax-deferred account—one that allows you to pay taxes on your money earned after you withdraw it from an investment account, rather than when you earn it—might allow you to alleviate your overall tax burden.

Consider this when developing your savings strategy: if you earn $100 and you’re in a tax bracket that requires you to pay 30% of your income, you now owe $30 in taxes, leaving you with $70 to save or spend. But if you invest that $100 in a tax-deferred account like an IRA, you get to add that additional $30 to your investment account, meaning you earn interest on the $100 rather than the $70. You’ll still have to pay taxes when you withdraw the money later (it’s tax-deferred, after all, not tax-free), but you have the chance to earn more in interest over time.

The other thing to consider when creating a savings strategy is what you might be paying in the future compared to what you pay in taxes now. Tax rates can change over time, and the quantity of your income that you keep now can affect your tax bracket. If you take more of your income now, you might be in a higher tax bracket—but if you invest more now and withdraw the money in smaller amounts later, you could potentially pay fewer taxes, or at least not have to pay a large sum all at once.

Again, tax planning is no small feat, which is why it’s important to talk to a professional about what’s best for you and your business.

Diversion: Scatter Your Eggs

You’ve heard the phrase, “don’t put all your eggs in one basket.” If someone steals your only basket or you drop it, all of your eggs—everything you’ve worked so hard for—is in someone else’s frying pan. Or broken on the ground—either way, it’s no longer in your hand.

It’s a silly analogy, but it’s a lesson many business owners ignore. As business owners, we have a tendency to want to pour everything back into our company—we often view our work and start-ups like our babies. But while it’s important to invest in your business, it’s also important to use your business’s success to support your family in a wise way—and that means investing some of your earnings into resources outside of your business. Business owners also tend to be risk-takers—it’s what allowed you to take that leap of faith and create success for yourself. But there are good and bad ways to approach risks when it comes to your wealth.

We never recommend throwing all your money at one stock or industry because if something goes wrong with that portion of the market, you’ve lost everything. If the coronavirus pandemic or September 11 have taught us anything, it’s that the world can change in an instant. What seems viable and profitable now might not be tomorrow. There are always factors outside of your control, and if you don’t take time to talk with an advisor about calculated risks, you might as well be purchasing a lottery ticket. Taking risks is a good thing, but the definition of a “smart risk” will vary depending on your age and stage of life. That’s why it’s good to find a balance with your investment strategy—placing a few eggs just beneath the moon, a few right above the sewers, and some in between. You want to scatter your investments so you have a balance of high risk/high reward and low risk/low reward.

It’s also important to diversify your assets between your business and personal life, and we’ll discuss why in our next blog, The Importance of Diversification for a Business Owner.

We Get It

We know there’s a lot to consider when it comes to preparing for your future, and that’s why we’re here. We want to help you understand all the aspects of your financial picture and help you create the best possible outcomes. If you have questions about how to best prepare for the future or want guidance with your strategies, give us a call. We’d love to help you.

1 Financial Literacy LLC, nor New York Life or its affiliates, provides tax advice. Please consult your own tax advisors for tax advice.

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