We have discussed the three components of wealth over the last few years; they are Protection, Savings, and Growth. The biggest thing about these wealth components is that you cannot look at them in a vacuum. Most of the time when you make a change in one of the wealth components, it can have an effect on other wealth components that you have. We are used to making decisions one drawer or component at a time. The problem is that there is a ripple effect caused when you do one thing, it creates many things that come into play when you make any financial move or commitment. An example of that is Car insurance. Let’s say that you increased your deductible on your car insurance and also increase your liability limits. This can have an effect on your liability insurance, your ownership and regular savings account. You may also decide to put more money into savings to protect yourself for a few years from the higher potential risk of paying more out of pocket to cover the deductible. The people that would be involved in this transaction could be your insurance broker, your financial advisor, and your banker. Another example would be if you increased your contribution to a retirement plan. You would have your Tax deferred component opened up, along with your taxes which would be less initially, but possibly higher later on when the money hopefully increases and you withdraw funds and are taxed on them. Your wills and trusts component would change because there is a beneficiary on your retirement plan. The ownership component would open up also, since the funds are in a government controlled fund that has rules imposed by the government that constantly change. The investments that are part of your retirement plan would be involved and this can include bonds, stocks, real estate, collectibles, and money markets. Purchasing a house would be another example. You would have the Real Estate component opened up, along with Homeowners Insurance, and Liability insurance, along with less in Regular Savings for the down payment, the Tax deductible component would open up along with the Tax Shelter component. Most people usually do not look at how one decision has so many other moving parts that can cost them money or save them money when you make a financial decision. You can see by the above examples that there one financial decision has many impacts. The Car Insurance has an impact on four financial components, the retirement plan has an impact on eight financial components and purchasing a home has a financial
impact on six components. That is assuming that things are operating in a regular way without any complications. If there are complications or extenuating circumstances the number of components starts to expand from there. You need some sort of modeling tool that allows you to see how each financial decision impacts your life. Over the past several articles, we have been using a financial modeling tool that measures Protection, Savings and Growth. The nicest part of the tool is that each financial move can show the ripple effect of that strategy. In other words, it can measure the impact of doing one thing and what type of impact that has on other strategies. You need to see what the short term, mid- term and long term impact is on all of your financial decisions. If you have any questions regarding this please feel free to email me at marcs@equitplanning.com The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a registered investment advisor. US Financial Advisors and Equity Planning are separate entities from LPL Financial.
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