Integrated Financial Planning

Consider the financial planning as if it were an annual physical examination.  While you can pinpoint and individually resolve some of your concerns, you may not always grasp how such individualistic resolutions affect your overall financial health.  Regardless of your financial planning purpose, limited or comprehensive, therefore, we always collect your financial raw data as thoroughly as possible, project them into meaningful reports, which usually consist of a balance sheet and a cash-flow statement, and find out which course of action would best meet your goals, needs, and priorities while improving your overall financial health.

Multifaceted Investment Advisory Services

Investment can be tailored to meet your particular goals, needs, and priorities.  Of the factors you should consider before investing, we cannot emphasize too much inflation, tax, and volatility.

Inflation: Your money may lose a purchasing power due to inflation. For example, a cup of coffee today costs $1.00. If there is an inflation of 2% after one year, you will no longer be able to purchase a cup of coffee for $1.00 because it will cost you $1.02.  In other words, if you keep $1.00 for a year, it loses its purchasing power roughly by 2%.

Tax as an Investment Loss: Suppose you invested $1,000.  Unfortunately, however, you lost the investment by 20%, $200, and your current principal becomes $800.  In order to make up the loss, you need to gain $200, but the gain has to be, not 20% of $800 ($160), but 25% of $800 ($200).  Since you must climb a hill much stiffer to return to where you were before, you would be much better off by avoiding or reducing loss whenever possible. 

Consider your income tax rate as an investment loss represented in percentage.  If you are given an opportunity to avoid or reduce income tax, hence investment loss, will you not jump on it?  That is why you should incorporate in your investment strategy tax-advantaged plans that either exempt you from or allow you to defer income tax.

Volatility: Except for cash and cash-equivalents, the other investment vehicles bear risk in that the value of investment fluctuates constantly.  Such fluctuation particularly manifests itself in the stock market.  During the first two decades of the new millennium, for example, we have already witnessed three stock market crashes, which result respectively from the dot-com bubble burst in 2000, the Great Recession in 2008, and the pandemic induced financial crisis in 2020.  While the recovery from each crash had taken a different turn, the stock market had eventually recovered from its catastrophic downturns.  Given such volatility, the question you must ask yourself is “how much volatility am I willing to withstand to obtain the investment growth I require?” (Or you may rephrase it as “how much risk am I willing to take to obtain the investment growth I require?”)

There will always be a trade-off in investment. The higher you require the return, the higher you take the risk.  Conversely, if you refuse to take any risk, you may not reach your investment goal or must adjust it to become realistically obtainable.  Sometimes, a balancing act is needed between growth and risk.

Commonsensical Debt Management

In general, debt management aims either to improve an immediate cash-flow or to reduce a long-term cost.  While the cash-flow improvement allows you to spend more, it may end up costing you much more in a long term.  In contrast, while the long-term cost reduction may not improve but worsen your cash-flow, it boosts the general health of your financial condition by reducing liability. Thus, your debt management strategy needs to be tailored, depending on your goals, needs, and priorities.

Let us briefly examine your decision-making strategies in three common debts -- credit card debts, student loans, and home mortgages.

Credit Card Debts: High credit card debts prove to be detrimental both to the cash-flow and overall financial health. You have no time to toggle.  True, you may utilize credit cards to your best advantage to improve your credit score and accumulate a handsome amount of rewards if you remain disciplined to charge them less than 50% of the allowed credit and pay off the balance on or before each payment due date. Nonetheless, it makes absolutely no sense, except under an extremely extraordinary circumstance, for you to maintain a credit card debt balance, which easily charges more than a 25% interest on a compounding basis.  If you have owned multiple credit cards and maintained a high balance in each or any of them, you MUST find a way to consolidate  the entire debt into a low interest-bearing financing option.

Student Loans: When you take out your student loan from a private lender, the refinancing of your student loan is a simple process that lowers your monthly loan payment, improves your cash-flow, and reduces the total payment of the principal and interest accumulated during the loan term.  If you opt to refinance your student loan from a public funding, however, you may not be able to take advantage of the public service loan forgiveness plan or the income-driven repayment plan.; keep in mind, while the income-driven repayment plan improves your cash flow, it does not reduce but increases the total payment of the principal and interest accumulated during the loan term (your loan servicer would help arrangement without fee).

Home Mortgages: Now that you are ready to purchase your first dream home, you are faced with a number of factors to consider before you decide how to finance it (unless, of course, you purchase it with cash). The adjustable-rate mortgage (commonly known as ARM) is usually suitable for those who plan to move elsewhere within a few years because its interest rate is set pretty low for the initial few years but, then, will be adjusted according to the schedule established in the loan terms. In contrast, the fixed-rate mortgage is suitable to those who plan to stay for a long time to build up equity in their home.

Usually you opt to pay off a fixed-rate mortgage within 15 or 30 years. Your payment schedule (commonly known as amortization schedule) is structured in such a way that you pay only interest in the first few years and, then, start paying the loan principal as well.

Your decision to take out a 15- year or a 30-year mortgage depends on what you prioritize. If you prefer to improve the immediate cash-flow, you take out a 30-year mortgage, which carries an interest rate lower than a 15-year mortgage, to maintain your monthly payment low. Keep in mind, since your interest payment will be spread out longer, a 30-year mortgage will ultimately cost you much more than a 15-year mortgage. If you can afford a high monthly payment and prefer to reduce liability quickly, you take out a 15-year mortgage that carries an interest rate higher than a 30-year mortgage. Since your interest payment will be spread out shorter, you start paying the loan principal earlier and reducing liability faster to build up equity.

Prudent Insurance & Risk Management

Disability Insurance: As a high income earning professional, you must have a disability income insurance coverage to protect yourself and your dependents. If you start your career as an employee of a clinic or hospital, you will be given an employee benefit package that often includes a group disability income insurance coverage. If you start your career as a practitioner, you may take out an individual policy yourself.

Keep in mind, though, tax advantage applies to those who pay the premium for the policy. The employer who pays the premium for a group disability income insurance policy will be allowed to deduct the premium payment as a business expense, while its employees will become responsible for income tax on the disability income. When you pay the premium for an individual disability income insurance policy as a practitioner, your disability income will be exempt from income tax.

Life insurance: If you are single without dependents, you may not need it. In general, life insurance should primarily aim to protect your dependents financially. While there are several types of life insurance available, you may want to concentrate on selecting a policy in a cost-effective way. You do not want to confuse insurance with investment. There are life insurance types that serve a dual purpose (insurance/investment), such as a variable or variable universal policy, but you would often be better off by taking out a simple form of life insurance to protect your dependents financially.

Pragmatic Employee Benefits Review

When you receive an employee benefit package from your employer, you may find it daunting to select benefit options suitable for you and your household.  While your decision depends on your goals, needs, and priorities, you should especially consider your disposable income (the total amount of money you may spend after tax), essential expenses, number of dependents, health, and years to retirement.

Let us examine some of favorite options.

Group Disability Insurance: Since a private disability insurance usually costs you dearly, the employer-sponsored group disability insurance proves to be an economic, effective way to protect you and your dependents in case you have become disabled.  Nonetheless, there is one drawback. If you leave the current job that offers a group disability insurance, you may not take it with you; hence, it is not portable.

Group Term Life Insurance: As long as your employer pays for the policy premium, this option provides your loved ones a ready benefit that amply covers funeral expenses after your passing.  If you leave the current job that offers a group term life insurance, you often have an option either to take the current policy with you or to convert it into a personal whole life insurance, while continuing to pay for the policy premium yourself.  Before you select an option for the group term life insurance, however, you should consider its potential income tax consequence.  If the benefit amount of the policy remains under $50,000, the premium your employer has paid will not be construed as your income.  In contrast, if the benefit amount exceeds $50,000, the premium that covers the benefit amount over $50,000 will be construed as your income, and you will be taxed on the excess premium that your employer has paid regardless your loved ones receive the benefit.

Flexible Spending Account (FSA) and Health Savings Account (HSA): Both accounts are great options for you to pay for your medical expenses with tax-free savings.  You make a pre-tax contribution to and withdraw from these accounts to pay for qualified medical expenses with no income tax consequence.  Since the contribution will be excluded from the gross amount in your form w-2, it will become exempt from income tax withholding , Social Security, and Medicare.  Moreover, while the withdrawal may include both the principal contribution and investment gain on it, the total withdrawn amount will become exempt from income tax as long as you spend it for your qualified medical expenses.

You are not allowed to contribute simultaneously to FSA and HSA.  As always, you should carefully weigh advantages and disadvantages of each option to select what would best suit your individual goals, needs, and priorities.  We are inclined, though, to recommend HSA over FSA for two reasons.  First, if you leave your current job that offers an FSA option, you cannot take it with you. And, second, if you fail to exhaust your balance in an FSA each year, the remaining balance will be nullified at the end of year.  In contrast, if you leave your current job that offers an HSA option, you can take it with you.  Moreover, you may keep accumulating the unused balance in an HSA, which may further grow through annual contribution and investment gain on a tax-deferred basis.

401(K) Roth Conversion: Three things must happen in order for you to make a 401(k) Roth conversion.  First, your employer plan allows you to contribute to an after-tax 401(K) account; second, your plan allows you to contribute to a Roth 401(K) account; and, finally, your plan allows you to make an in-plan conversion.  If those three conditions are met, you are ready to make what is sometimes known as a ”mega back-door Roth conversion.”  It is considered “mega” because the annual conversion amount substantially exceeds that of the back-door Roth conversion, which utilizes a traditional IRA and a Roth IRA account.

Foundational Estate Planning

At minimum, you may want to obtain a simple set of estate planning documents, which includes a revocable trust (sometimes called “living trust”), a will, a general durable power of attorney, a health care power of attorney, a living will, and a HIPAA release. This is an easy, economic, orderly way of taking care of your affairs in the event of your passing or becoming mentally and/or physically incompetent.

If you have accumulated substantial assets, complex familial relationships, and/or diverse charity interests, you should consult an attorney specialized in estate planning. We would strongly recommend that, before your first appointment with an attorney, you prepare yourself as much and clearly as possible to address how, to whom, and for what purpose your assets are to be distributed.  This thoughtful preparation will save you time and money dearly.