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Financial Planning vs. Estate Planning


Both financial planning and estate planning can help you reach long-term financial goals. But while they are very different in which aspects of your finances they can focus on, both financial approaches could also complement each other to offer you a healthy balance between growth and protection. To execute either, 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 an estate plan, depending on your needs.

What Is Financial Planning?

Financial planning, at its core, is a strategic approach to manage your personal finances. The process involves analyzing your current financial situation, setting financial goals and devising a plan to achieve those short- and long-term objectives.

As an example, let’s say you want to buy a house in the next five years. A well-structured financial plan can help you reach that goal. First, it will help you assess your current financial situation, evaluating income, expenses and existing debts. Then, it will set up a savings strategy for the down payment, so that you can meet the lender requirements and secure favorable mortgage terms. Moreover, by considering your credit score and debt-to-income ratio, a financial plan could also assist you in optimizing your creditworthiness to increase the likelihood of getting a mortgage loan approval at a competitive interest rate.

A comprehensive financial plan can be broken down into several key components:

  • Budgeting: This involves tracking income and expenses to ensure that money is being spent wisely.
  • Investment planning: This is all about deciding where to put money to grow wealth over time. It’s important to assess your risk tolerance, investment goals and time horizon to make a plan that can work.
  • Tax planning: This involves strategies to minimize tax liability and maximize after-tax income.
  • Insurance planning: This is all about determining the type and amount of insurance you need to protect against potential risks.
  • Retirement planning: This involves setting retirement goals and devising 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 the protection of your assets when you pass away. It involves making strategic decisions about how your assets will be distributed and it should be considered a crucial part of financial management, aimed at protecting and growing your wealth.

Apart from 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 estate.

Furthermore, an estate plan can also help you minimize taxes by using strategies like gifting, establishing trusts and taking advantage of applicable exemptions to ultimately preserve more of the value of your estate for your beneficiaries.

An estate plan isn’t a single document but a collection of legal instruments designed to manage and protect your assets. These will typically include a will, which outlines how you want your assets distributed when you pass away. Additionally, you could create a power of attorney, which lets you designate an agent to make financial and legal decisions on your behalf even before you’re gone.

Other common estate planning tools could include trusts, which are legal arrangements that hold your assets for your beneficiaries. And healthcare directives that specify your wishes regarding end-of-life care and who can make medical decisions for you if you become incapacitated.

Understanding Estate Planning and Its Role in Financial Planning

A senior couple reviewing their financial planning and estate planning strategies.

Estate planning can complement your financial planning in many ways. In addition to creating a structured framework for distributing your estate to beneficiaries, it can play an important role in tax-efficiency.

As mentioned earlier, a comprehensive estate plan can help you minimize the impact of estate taxes, gift taxes and other potential tax liabilities, which would then preserve more of your estate for future generations.

Estate planning can also add an another layer of protection for your assets. Through careful structuring, for example, you could shield your assets from potential creditors or legal claims.

Lastly, if you’re a business owner, estate planning can help you ensure a smooth transition of ownership, while addressing any potential tax implications associated with the transfer of business assets.

So while a financial plan can help grow your wealth, an estate plan help preserve it and pass it on to your beneficiaries.

When Do I Need a Financial Planner or an Estate Planner?

Certain life events could create a need for a financial planner or an estate planner. Here are four common examples when you might need to work with a professional:

  • Receiving a large inheritance or selling a business
  • Significant promotion leading to a substantial increase in income
  • Approaching retirement
  • Planning for future care in old age

This isn’t an exhaustive list. But, essentially, you could seek out the expertise of a financial planner or an estate planner anytime you grow your wealth and want to protect it.

Bottom Line

A senior couple meeting with an advisor to review their financial plan and create an estate plan.

Financial planning and estate planning can be important in maintaining your overall financial health. Both provide a comprehensive and strategic framework to manage and protect your assets throughout your lifetime 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.

Tips for Financial Planning

  • A financial advisor can help you create a plan to grow and protect your estate. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started 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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