Financial planning means something different to everyone. For some, it's about getting by on their paycheck, for others it's about watching the stock market each day.Unfortunately, very few of us feel prepared to meet our ongoing financial obligations and objectives. Worries about money have become one of the greatest anxieties of our day.
Because our lives and goals are so different, there is no turn-key solution for managing ones finances and meeting financial goals. We can, however, identify several steps successful people take in planning for and meeting their financial goals.
We call these steps "Life Cycle Planning" because each step can be tied to the attainment of certain life defining events that almost everyone goes through.
Development of Human Capital
Human Capital is a person's ability to turn their skills and abilities into a livelihood. The development of these skills and abilities helps us maximize our income potential in a competitive marketplace.
In our early years, usually between age 19 and 25, we set ourselves on a course that largely defines our Human Capital potential. Each of us makes an investment in Human Capital, whether we realize it or not. For some this is an investment of time, gaining experience and skills on the job. For others it is an investment in trade school or college.
It should also be noted that although our greatest focus on Human Capital development is in our early years, this is an investment we should continue to make and assess throughout our working careers.
Management of Expenses, Budgeting
Once our "Human Capital" investment begins to pay dividends in the way of earnings, we must begin to develop and apply management skills to our new found earnings.
Without managing our expenses, our wants and needs will invariably outpace our ability to earn. By implementing some form of budgeting we can begin to set our sights on saving and meeting our longer term financial objectives.
A beginning budget can be as simple as setting aside a predetermined percentage of our earnings each month for saving, spending what is left until it is gone, then spending nothing more until next month.
Adequate Liquidity
As our budget begins to pay off in a healthy savings account, we begin to wonder how best to apply our limited savings to our unlimited needs and wants.
Without exception, the first financial need we should meet is to have an emergency fund. An emergency fund allows us to cover unexpected short term needs using cash instead of leveraging our future earnings through costly loans.
As a general rule of thumb, your emergency fund should be adequate to maintain your standard of living for six months.
Adequate Insurance Protection
A major disability, the loss of a family breadwinner, a fire in your home, and a major medical problem for a family member... the most dramatic emergencies can seldom be planned for through personal saving.
Although such tragedies can create devastating individual financial hardship, the financial risk of such events can be shared by very large groups of families and individuals through insurance.
Life insurance, disability insurance, property and casualty insurance and major medical insurance all have a place in our Life Cycle planning.
Long-Term Funding Objectives
Once we have accumulated sufficient funds to cover our emergency needs and purchased protection against financial risks, we can begin saving for our long-term goals in earnest.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with
individual professional advice.
Personal financial statements are the road map that guides us from where we are today, to where we want to be tomorrow. They also provide fixed points of reference from which we can measure our progress over time.
Personal Financial Statements
There are two basic personal financial statements that everyone should prepare, or have a financial advisor prepare, at least once each year; the cash flow statement and the balance sheet.
This process is a critical first step in financial planning. Tracking your financial position and progress gives you a great feeling of control -- you know where you are going financially. It helps you to make wise decisions about financial matters.
Cash Flow Statement
"Cash Flow" is how you spend your money. A cash flow statement is an ongoing financial document which tracks sources of income, uses of income, and the difference between the two (surplus funds which should be invested towards future financial objectives.)
If you keep a budget, you are, in essence, keeping a running cash flow statement. By tracking your cash flow on a monthly basis you will be better prepared to meet your financial needs:
Balance Sheet
Your balance sheet is a snapshot of your personal net worth.
Total Assets less Total Liabilities equals Your Net Worth
Total Assets: A list of current estimated value of your assets might include the following: cash in banks and money market accounts, cash surrender value of life insurance policies, IRA & Keogh accounts, pension and 401(k) accounts, real estate, and personal property. Add them up and you'll have a figure that represents your Total Assets at the moment.
Total Liabilities: Next, make a list of your liabilities, which might include the following: mortgage, bank loans, car loans, charge accounts, taxes owed, college loans, etc. Add these up and you'll have a list of your Total Liabilities. Hopefully, it's less than your assets!
Your Net Worth: Your personal net worth is the difference between your total assets and your total liabilities.
Conclusion
As the control you gain through cash flow management turns into increased savings, your success is reflected in an increasing net worth.
The process of preparing personal financial statements will bring you closer to controlling your personal finances and accumulating sufficient assets to meet your objectives.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.
Once you have decided to try to sell your home, the next big decision you will face is whether you want to sell it yourself of go through a real estate broker. The broker usually charges 5% to 7% of the selling price for her services. However, realtors know the local market, can help you determine a reasonable selling price, and save you a lot of the hassle involved if you sell it yourself.
In selecting a broker, invite several real estate brokers to tell you what they would deem to be a fair selling price and explain their commissions and fees. They'll probably do this for free. You will also want to ask about their past experience in the area.
Most home sales are through agents and brokers. But if the market is a "sellers market", if your home is sharp, perhaps you will want to try selling it yourself.
Is Fix-Up Necessary Before Listing?
It doesn't hurt to do minor repairs and cosmetic touch-ups prior to showing your home to potential buyers. We hear a lot about "curb appeal" -- how a house appears from the street. Is it attractive enough for a buyer to even want to come in and look? If there are major repair problems, you may have to lower your price in the end. Maybe what you think is important to do to fix up the house will not appeal to the buyer -- she'd rather do it to suit her own taste.
How Much Should You Charge?
By definition, the value of any asset is whatever a buyer and seller can agree upon when both parties have access to all the relevant facts. With homes there are several ways to get a "starting point" from which to begin this process.
A good first step is to see what similar houses in similar locations in your community have sold for in the recent past. A local real estate agent will also have a lot of information about recent sales in your area. Don't be overly impressed by the "asking price" of comparable homes, look to actual "sales prices" as your best guides. You may also want to enlist the help of a professional home appraiser -- for a cost of between $200 and $400 an appraiser will prepare a detailed evaluation of the estimated value of your home.
What If Nothing Happens?
If it is the economy -- national or local -- you can't do much about it. If no one is expressing any interest in your home, or it simply does not sell, you could consider the following:
Selling your home may take time and patience, but it deserves your most detailed attention as it is one of the largest transactions you will undertake in your financial life.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.
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Credit cards were first introduced to the public just over 40 years ago, in 1959. With the introduction of credit cards, consumers were given new choices in how to pay for costly purchases that they had previously had to save for and pay in cash. Using credit cards allowed people to purchase goods without having sufficient funds immediately on hand, and without reaching new terms every time they wanted to purchase on credit..
Credit cards didn’t create credit; they just simplified the process of receiving credit and made credit available to many more individuals.
Terms to Receiving Credit
When paid off monthly, credit cards become simply a means of consolidating purchases into a single location, and paying for them in a single payment to the credit card company. Although a small annual fee may be required, such arrangements avoid any interest charges or card usage fees.
When credit cards are not paid off monthly, they become similar to loans from the bank in that they carry interest charges, minimum monthly payments, and a term for paying off the balance completely. Many credit cards charge interest rates around 18% for outstanding balances.
Though this rate is higher than most loans offered by a bank, a credit card offers a great deal of flexibility that other credit vehicles do not. A credit card, for example, may have a maximum limit of credit to be extended to you, but until you reach that limit, you may purchase virtually anything you would like using your credit card, so long as your minimum monthly payment is being made on time.
Costs to Consider
In selecting, or keeping, a credit card, make sure you know and understand all the costs, rates and fees attached to the card.
Annual fees. Many credit cards charge an annual, fixed fee just for the privilege of having credit extended to you from the company sponsoring the card. Annual fees can often be avoided entirely by shopping for a credit card that guarantees no annual fee.
Finance charges. Finance charges vary widely. If you plan on maintaining an outstanding balance on your credit card, you will want to make sure you find the best interest rate on a card that meets your needs.
Income Tax Treatment of Interest Paid
Interest deductibility can significantly reduce the total cost of paying off debts. Unlike the interest paid on most home mortgages, second mortgages, and some home equity lines of credit, the interest paid on credit cards is not income tax deductible.
Watch For:
Credit cards come in many “shapes and sizes”. Some credit cards are targeted at groups with specific spending habits, payment habits, and credit histories. With so many credit card plans available, you must review the terms of your credit card options carefully. Many credit cards offer you a low “teaser rate” for the first six months to a year, and then increase the rate you pay on outstanding balances dramatically. Some base your minimum monthly payment on a loan term that if the minimum payment is made consistently, could keep you in debt for 40 years or more.
Fortunately, there is a great deal of regulation of credit cards requiring full disclosure of all relevant credit terms being extended by the card issuer. Be careful to review all credit documentation thoroughly before selecting a credit card for regular use.
Debit Cards
One alternative to credit cards is what has become known as “debit cards.” A debit card is not a credit card at all. Rather than offering you credit (a loan based on predetermined terms), a debit card simply gives you card-based access to your bank account, or other account where you have an existing balance. A debit card gives you the convenience of not needing to carry cash, or even checks, but you must be mindful that when used your purchases are being deducted directly from your existing account – once the account is empty, the card has no purchasing power until you make another deposit!
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.
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Like auto insurance coverage, it is sometimes difficult to see the true value of life insurance coverage until you actually need it. In the meantime, the only way you will feel comfortable with your life insurance policy is if you understand, and agree with, the reasons you bought it in the first place.
There are many reasons for an individual to own life insurance coverage. Perhaps the most compelling reason is to purchase a death benefit which will provide for the financial needs of their survivors.
Determining how much life insurance coverage you need is a four step process:
Determining Your Total Short Term Needs
Short term needs are financial obligations and/or expenses arising within six months of death. Examples of short term needs include expenses you pay now such as:
Add to these current expenses any death-related expenses which must be paid in the short term:
And if you don't already have one, your survivors should be left with a liquid emergency fund sufficient to get them through any unexpected financial needs, perhaps six months worth of living expenses.
Determining Your Total Long Term Needs
In addition to covering your survivors' short term needs, some level of monthly income will be needed to maintain their standard of living and meet financial goals you have made together. These long term income needs include:
The value of these future obligations is discounted back to present value amounts. This gives us a single dollar amount which, if invested, could provide funds for all of your long term goals.
At this point, we have a pretty good idea of what your total cash need would be in the event of your untimely death. With any luck, you have already begun to set money aside to cover some of these costs, and the government has a plan to help you as well.
The value of these future resources is discounted back to present value amounts. This gives us a single dollar amount which we can use to offset your total needs.
Providing Funds to Cover a Shortfall
When we compare our total needs to our total resources, most of us will find a shortfall. A shortfall situation means that our survivors will be left with the choice of either finding additional resources that we have not been able to identify, or do without many of the financial needs that you hope to cover.
Life insurance is uniquely suited for covering such a shortfall. It is a means of sharing the financial risk of premature death with many, many others who have similar concerns.
You pay a relatively small premium to an insurance company in exchange for their promise to pay your beneficiaries a specified death benefit in the event of your death. A financial need that arises from your
death can be eliminated by a financial resource that is created upon your death.
Factors to Consider When Selecting Life Insurance
In an ideal world, we would each carry sufficient life insurance to continue to provide a lifestyle for our survivors similar to what they enjoy now, with us here. We cannot always afford to fully cover our survivor needs, particularly in our early years.
However, life insurance comes in many shapes and sizes. By carefully considering the type and amount of life insurance that best meets your needs you can ensure that you have provided for your family's monetary needs, even if you are not here to do the providing.
Fill out our Needs Analyzer to get an idea of how much you may needs.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources
believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.
Once you have determined that you need life insurance, and calculated how much coverage you require, you will have to choose between several types of life insurance. There are two very different types of life insurance contracts -- term and permanent.
Permanent Life Insurance Overview
As the name implies, permanent (cash value) insurance is best suited for the individual with a long term (often indefinite) need. A permanent policy is really a combination of "pure insurance" and an investment element. Premiums are considerably higher than term rates in the beginning years, and may include an increasing death benefit, a "cash value" associated with the policy, and tax-advantaged borrowing privileges against your cash value.
There are two unique types of permanent insurance. Each has its own benefits and disadvantages which must be weighed carefully.
Whole Life Insurance
This type of coverage covers you for as long as you live. Usually, this type of policy has a level premium for the life of the policy. Initial premiums are high, compared with term insurance premiums, but eventually they become lower than the premiums you would pay if you had kept renewing a term policy.
Universal Life Insurance
With Universal Life coverage, which also covers you for as long as you live, you can vary your premium payments and the face amount of your coverage. Most of your premium payment goes into an account, which earn interest. You may borrow against the cash value, but eventually, if the balance continues to drop, your coverage will end. To prevent that, you would have to start making premium payments again, increase your premium payments, or lower your death benefits. Generally, your policy will state that it will pay the premiums from the cash value of your policy.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.
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Once you have determined that you need life insurance, and calculated how much coverage you require, you will have to choose between several types of life insurance policies. There are two very different types of life insurance contracts -- term and permanent.
Term Insurance Overview
Term life insurance is often referred to as "pure insurance" because it involves only the payment of a premium in exchange for a promise to pay a death benefit in the event of your death while the
contract is still in force.
Term life insurance provides protection for a specified maximum period of time and is usually renewable at the end of each period at progressively higher premiums. As you get older, your risk of dying increases, so the cost of term insurance goes up. Term insurance carries no cash value element, making it less expensive than permanent alternatives.
Annual Renewable Term
Annually renewable term (sometimes called Yearly renewable term, YRT, ART) is an example of a term insurance policy which has a constant face value and premiums that are adjusted upwards each year to reflect the increasing probability of your death in any given year.
Decreasing Term Insurance
Decreasing term insurance refers to a type of annual renewable term life insurance policy with a decreasing death benefit (face amount) and level premiums. Decreasing term is ideal for insuring a liability that is gradually being paid off, like a home mortgage.
Five, 10, 15, 20 and 30 Year Level Term
If you prefer, you may select a "level term" policy which guarantees you a level premium for a number of years (usually 5, 10, 15, 20 or 30) and a level death benefit for the same period.
The longer the guaranteed term, the greater the initial premium, but the longer the premium stays fixed. In most cases, if you know you will need your term insurance for a long period of time, a level term policy will prove less costly than an annual renewable term policy.
As the name implies, permanent (cash value) insurance is best suited for the individual with a long term (often indefinite) need. A permanent policy is really a combination of "pure insurance" and an investment element. Premiums are considerably higher than term rates in the beginning years, and may include an increasing death benefit, a "cash value" associated with the policy, and tax-advantaged borrowing privileges against your cash value.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.
Budgeting is the systematic allocation of one's limited resources (income) to a potentially unlimited
number of needs and wants (expenses.) Budgeting your income, though oftentimes tedious and difficult to maintain, can help you better control how your income is being spent.
Some form of budgeting is a necessity if you hope to meet long-term financial goals. One’s ability to
control debt is often a good measure of the success of their budgeting methods. For some, a budget is a detailed process of tracking each source and use of their money. For others, it is as simple as setting aside their savings first, then using the remainder for day-to-day living expenses.
If I Just Had Another 10 Percent!
For years, studies have been undertaken by all manner of institutions to find out if people feel like they are able to live within their means. Virtually every study has shown that in our society we not only are not comfortable living within our means, but that the vast majority of us feels that we would need just 10% more income to do so. If we just had that extra 10% we would save for our children's college, we would save for retirement, we would prepare for tomorrow. Perhaps the most interesting revelation from these studies is that how much money we make does not impact the results of the surveys. The person earning $10,000 per year feels they need just 10% more, the person earning $100,000 feels they need just 10% more. The key is not in how much we earn, it is in how we use it.
Defining the Target
Our money is like arrows that we can shoot at targets. We pick the targets we shoot at, and then decide afterwards whether or not we picked the right targets. Hopefully, over time, we begin to get a good feel for which targets we would like to hit with our arrows. The sooner that we learn that we have a limited number of arrows; the better we learn to select meaningful and lasting targets. Short term targets like expensive clothes, cars and vacations must be balanced against long term targets like college funding for our kids, an emergency fund, and retirement saving.
As our stage in life changes, our targets should change as well. No one can tell you which targets are right for you, but there are several principles that should be followed by every wise individual. Principles like:
Reasons People Miss the Mark
Everyone knows what it feels like to spend unwisely. Our feelings of regret are strangely absent when we first make the unwise purchase, or the investment we don’t understand. But we soon know with a certainty that our hard earned resources would have been so much better used elsewhere.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.
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