Financial Planning

When Was Your Last Financial Checkup?

Nearly everyone has heard their doctor preach, at one time or another, about the need for routine checkups. Yet, how often do you consider the need for a review of your personal finances? By asking yourself the following questions you may determine that the time has come for a financial checkup.

• Do you have financial goals? If so, are they in writing and do they include deadlines?
• Is your debt under control? Do you pay off your credit cards each month?
• Have you reviewed your investment portfolio recently? Are you comfortable with the level of risk associated with your current investments?
• Are you satisfied with the rate of return that your investments are generating?
• Have you started a retirement fund yet? If so, will your current rate of savings provide an adequate fund to meet your future retirement needs?
• Have you reviewed your tax situation recently to see if there are ways to reduce your tax liability?
• Have you started a savings program to meet the cost requirements of your children's college education? If so, will your current savings rate be adequate given the effects of inflation and rising tuition costs?
• Have you reviewed your life insurance coverage recently? In the event of an untimely death, will your current policies provide adequately for your spouse and/or children?

If you are not satisfied with your answers to any of these questions, contact your financial advisor today. Together, you can work on getting your finances on track.

Strategies Designed to Meet Your Financial Goals

Close your eyes and visualize your dream vacation or the shiny new car that you've always dreamed of having. Sure, looks great! Unfortunately, for many of us the planning stops right there. With a little planning and discipline the likelihood of achieving our goals can be dramatically improved. Consider implementing one, if not all, of the strategies listed below to improve your financial picture.

• Write down your financial goals and objectives and include deadlines. This will help you stay focused.
• Use credit cards as little as possible. Financing your lifestyle with credit cards is a trap. Reach for your checkbook instead.
• Payoff your credit cards each month. A minimum payment on a $2,000 credit card bill at 18% interest will still leave you paying 19 years from now. The interest will cost you over $4,200 on the $2,000 charge.
• Spend a little, but save a little more. As your debts are paid off, save the "extra" cash each month. Many people are tempted to overspend with the "extra" cash.
• Go for steady, consistent, long-term growth in your investment. By the time you read about a "hot tip" it's usually cold.
• Invest for retirement. At best, Social Security will cover only a fraction of the money you will need for retirement. Talk to your financial advisor about preparing for a comfortable retirement.

Financial Planning Rules of Thumb

How much my net worth be?

As an estimate, your net worth should equal your age times your pretax income divided by 10. That number, less any money you inherited, should be your net worth for your age and income. So if you're 40 and make $75,000 a year, you should have a net worth equal to (40 x 75,000 / 10) $300,000, assuming you have no inheritance. If you want to secure your position as wealthy, your net worth should be double that number.

(Your accountant would tell you, your net worth is your Capital (assets minus liabilities), and those assets include cash, retirement plan, investments, personal property, and home equity.)

Realize this is a gross over-simplification. For example, a 30-year-old with large student loans from graduate school making $75,000 a year might have a hard time coming up with a net worth of $225,000, and a 70-year-old who has a paid off mortgage on his home, owns all his furniture, owns 2 cars, has an large retirement plan, health plan, and insurance, and whose kids have graduated college; could feel that they are well-off even with a net worth of $300,000.

How much should I save?

In addition to putting the maximum each year into your retirement plan, you should try to save at least 10 percent of your take-home pay for other goals, such as an emergency fund, college or a new home. While this "10 percent" rule is commonly accepted for people who started saving when they were young and have continued through the years, if you're middle aged and are just starting to save, you should consider raising up that to 30 percent of your take-home pay.

This does not include the money you are investing for income generation, etc. but is your basic savings account for long term items (down payments, etc.) and your emergency account for those frequent necessities in life that we all experience.

How much house can I afford?

If you're buying a home and don't want to be constrained by high payments for years to come, the home shouldn't cost you more than two-and-a-half times your gross income. As in our example above, if you are making $75,000 a year this would be $187,500. While that's hard to do in high-priced cities like New York and San Francisco, you might try to save an extra-large down payment so You won't have to carry such a big mortgage and your monthly payments would be close to what you'd pay if you'd purchased a less expensive home.

How much debt can I afford?

Your total monthly long-term debt payments -- including your mortgage, credit card payments and loan payments -- should not exceed 36 percent of your gross monthly income. In our example above, at $75,000 a year that would be $27,000.

However, if you don't have a mortgage, that's not a license to load up on credit card debt. Most Financial Planners would recommend you pay off your credit card debt as quickly as possible since interest rates and fees are high, payments are not tax-deductible, and often you end up spending far more on a purchase than its sale price.

How much life insurance should I have?

A good rule of thumb is if you are average, married with kids, you need a policy that covers far more than that provided by your employer; typically two times your salary. In our example above that would be 2 x 75,000 or $150,000.

Generally speaking, if you have young kids or teenagers, you'll need a policy that covers between 6 and 10 times family income and possibly more, depending on your family's expenses and how much your surviving spouse can earn. Exactly how much depends on how big your mortgage and other debts are, how old your kids are, and whether you intend to put them through college, etc.

Families with one working partner and young kids also should consider buying life insurance on the non-working partner because that person contributes economically to the family, and the surviving spouse likely will have to pay for child care and related expenses.

How much should I have when I retire?

By one rule of thumb, your nest egg should be approximately 20 times your annual expenses not won't be covered by your retirement plan or Social Security payments. That should enable you to withdraw 5 percent of your savings each year without tapping much of your principal. The other rule of thumb is to assume you'll need between 70 percent and 100 percent of your income every year in retirement. Given rising medical costs and longer, more active lifestyles in retirements, increasingly planners assume clients will need 100 percent of their current income in retirement.

In our example, assume your retirement plan and Social Security will pay you $50,000 a year and you think you'll need $25,000 a year on top of that (20 x 25,000) or $500,000 saved when you retire.

Having a baby?

With the prices of nursery furniture, sports equipment and the eventual cost of college, new parents are faced with a significant financial challenge. The birth of a baby usually makes a big impact on Mommy's & Daddy's lifestyle and the shortage of money can rank right up there with sleep deprivation for the unprepared.

The expenses of raising a child from diapers to college loom quite large. The U. S. Department of Agriculture has estimated that a family with an annual income of around $54,000 will spend almost $193,000 to raise a child through high school graduation. Some items that should become priorities for the new parents are:

• BUDGET

  This is where the scrimping and real savings take place. Eating in restaurants or traveling are no longer a big part of your family's life. If Mommy returns to work, 10 to 20 percent of your salary can end up going toward child care. Knowing where your dollars are spent is half the battle.

• HEALTH INSURANCE

  Sufficient coverage is important before you become pregnant! Recent figures for delivery were $6,500 - $11,000 according to a Metropolitan Life Insurance study. An HMO membership can make giving birth and going to the pediatrician more affordable.

• LIFE INSURANCE

  You will need coverage equal to at least six to ten times your annual income to provide for your family's needs. Disability insurance should not be overlooked and should replace at least sixty percent of your income in the event you are incapacitated. Remember, the bills don't stop working when you do.

• SAVINGS

  It's very difficult to start saving early, especially for your child's college, when under the burden of current costs. But you need to have a short-term emergency fund first (enough to cover your expenses for up to six months) and then get going as soon as possible. Contribute the maximum allowable into tax-deferred, employer-matched retirement vehicles. Then consider putting more away into an IRA. Consult a financial planner about setting up a separate college fund.

• WILL
  

  Have your will updated or draw up a new one. Name a guardian and an alternate, plus someone to manage your child's assets. Also, consider placing his or her inheritance in a trust. This is a good tool that is no longer used only by the wealthy.

Special Issues for Women

Women are no longer just a powerful force in today's economy. It is estimated over 60% of the nation's wealth is controlled by women. Some may have inherited wealth and may or may not be employed. Some are corporate executives, entrepreneurs or middle management. They may be single, married or divorced. They may or may not have children. A woman's financial situation is often unique, and an individual approach to financial planning is essential. However, areas of common concern do exist.

Many women work outside the home. If so, they may have income tax problems, especially if they face higher taxes because they are single and unable to file a joint return. To address these problems, women should consider the following areas: the role of tax-advantaged investments to reduce their tax burden; the taxation and treatment of executive perks from their employer; the effect of age-related tax and Social Security provisions; and the tax problems of a small business including choice of organization, the selection of a retirement plan and the taxes upon disposition of their business interest.

Closely related to income tax planning for women is investment planning. Investment selection and asset allocation involve much more than tax considerations. There are various questions women should consider. Do investment objectives line up with financial resources and needs? Is the investment advice they are receiving objective, reliable and in line with their goals, time horizon and risk tolerance? Will a trust help with their investment planning? Women who are too busy or unable to oversee the day-to-day management of their investments should consider a trust. A trust may provide the comfort that comes with knowing that financial affairs will be properly handled in all eventualities.

Estate planning, like tax and investment planning, depends on individual circumstances. Whether a woman has built her own estate through work investments, or a business, or whether a woman has inherited a husband's estate is irrelevant. What matters is that she is aware of the estate planning options that are available. Unmarried or widowed, a single woman might use lifetime gifts to reduce her estate tax burden by using the gift tax annual exclusion and lifetime unified credit. Trusts may also be useful in a program of lifetime gifts, particularly where minor children or grandchildren are involved. Estate plan coordination, charitable contributions and life insurance can also be extremely important toward achieving estate planning goals.

For those women working for a large employer or inheriting their spouse's retirement plan, they will frequently be faced with decisions affecting retirement benefits. Those decisions may have a significant impact on their financial situation the remainder of their life. Critical questions may arise such as: which of the several distribution options provided by an employer's qualified retirement plan is best; will their retirement nest egg be adequate to maintain their present lifestyle; and what benefits will they be entitled to from Social Security, Medicare, and employer-sponsored plans?

No two women are alike nor are the financial predicaments in which women are likely to find themselves. As anyone can see, there are a variety of issues, problems and solutions to consider. Adopting a systematic and individualized approach with the aid of financial planning professionals can help to address and solve these problems while achieving a woman's investment, retire.

Other Types of Families

The 90's have seen the further evolution of the definition of the "family." Demographics have forced a change in the perception of what exactly is an American family. Single parent households, unmarried couples, individuals living alone and other alternative lifestyle arrangements are becoming the norm rather than the exception. Each of these social units presents unique financial planning problems that do not fit into "cookie cutter" recommendations.

Single parent families face many of the same financial problems that are posed for traditional families, yet with an added level of urgency. Disability planning for such parents is crucial because there is no live in back-up to rely on for a source of income in the case of an event where the single parent is unable to provide. Durable powers of attorney for property management and health care directives as well as adequate insurance coverage can be saviors in such events. Trusts with reliable successor trustees can also be useful tools to address potential problems. Adequate life insurance should be present to provide for future educational, child care, home and health care expenses of the children.

The financial planning challenges that confront the long-term bachelor\bachelorette are similar to those of the single parent. Disability planning is a primary consideration. Yet, basic estate planning is also important. Without a will or other tool to provide direction in the distribution of a single individual's estate, the deceased's property will pass according to the respective state laws of intestacy. This may be wholly opposite of the deceased's wishes.

In the case of unmarried couples, these problems are especially prevalent. Neither state laws of intestacy nor the Internal Revenue Code recognize or offer any benefits to "life partners." For example, despite the fact that local law may recognize the concept of life partners (heterosexual or not), the tax code does not provide transfer tax "marital" deductions based on these relationships. There is no such thing as leaving all to your pseudo-spouse tax free as with traditional married couples. Thus, life insurance can play an even greater part to meet potential estate taxes.

Further, in cases of incapacity where property and health decisions must be made, or where property is distributed away from a decedent's immediate family, advanced financial planning can ward off upset family members.

Many of these unusual financial planning problems arise because of decisions made by some to promote the husband-wife lifestyle above all others with laws and preferences. But many arise due to chance or fate. Yet, the basic financial goals are the same. Each of these groups must balance their current lifestyle and finances with their future goals and needs. Each must invest their assets effectively to accomplish set goals. Each needs to protect against emergencies and hardships. Finally, each needs to decide what they want to leave behind, to whom they want to leave it, when to leave it and the most effective means of doing so. Many traditional techniques need to be modified and adapted to achieve these goals. Yet, eventually this boils down to adopting a systematic, detailed and individualized approach. Such an approach, and working with experienced professionals, is essential to effective financial planning to provide for whomever you choose to call a "family."

Fail to Plan or Plan to Spend

At the end of each month, many Americans ask the following question: What happened to the money that I was going to save? One of the best ways to gain control of your money is by developing a written spending plan.

• See where your money goes.
• Reduce unnecessary expenses.
• Evaluate needs and wants.
• Locate money in your budget for large expenses, emergencies and long-term goals.

• Discover where your money goes. For one month make notes of all expenditures. Get out last year's checkbook register to determine what you paid for those items that are not predictable on a monthly basis (entertainment, hobbies, travel, etc.)
• Categorize your expenses by areas (i.e. food, clothing, child care, utilities, and transportation). Write down everything, even the popcorn you had at the movies. You'll be surprised where those hard-earned dollars go.
• Prioritize your financial goals and determine how much you'll need to save each month. Think long-term and short-term goals.
• Bring your goals in line with your income (i.e. new car, less expensive car, wait another year for a car). Putting off a purchase is called "delayed gratification."
• Make the written plan realistic. Over a few months time you can get your spending on track and make progress toward your specific financial goals.

Tax Returns Can Help Develop Financial Plan

With tax returns completed and mailed, most people breathe a sigh of relief and forget about the IRS for another year. However, the information you gathered to satisfy Uncle Sam may be just what you need to begin realizing your financial dreams.

Developing a personal financial plan begins with accumulating much of the same data needed to prepare your income taxes. It is the perfect time to start on a financial plan. Taxpayers can use their income tax information to form the plan's foundation.

1. First, you will need lists of assets and liabilities, copies of tax returns, insurance policies, wills, trusts and pension plans. This involves getting a handle on where you are in your financial life before you plan for where you want to be.
   
   
2. The second step in the financial planning process is identifying both financial and personal goals. The three objectives cited most often are security in retirement, providing for children's education and developing an estate plan. While these are a little vague, they're a start.
   
   
3. The third step is identifying problems that might prevent financial independence, such as too little or too much insurance, a high tax burden, inadequate cash flow or current investments that are losing money. It is important at this point to have a financial advisor assist in developing a plan.
   A professional advisor can provide objectivity and expertise. It's hard for people to be objective regarding their own finances, and most do not have the financial experience necessary to make wise decisions.
   
   
4. The fourth step is structuring a plan to meet financial needs and objectives, followed by implementation of agreed-upon recommendations. A financial advisor can help develop and implement the plan, but the decision to implement, modify or reject recommendations remains the individual's ultimate responsibility. Many advisors provide a checklist to help clients implement their plans themselves.
   
   
5. A final, and often most important, step is periodically reviewing and revising the plan to account for changes in personal and economic conditions. The advisor and client can then review goals and problem areas and fine tune the plan as needed.

Be sure to check with your financial advisor how your tax return can serve as your starting point and progress report on achieving your financial planning goals.

Credit Card Relief

Recent economic reports have observed that Americans are reverting to the credit-dependent trends of the eighties. Apparently, the nation's populace hasn't heeded the warnings regarding carrying too much debt. Unfortunately, this statement could be applied to the federal government as well.

For families grappling with swollen credit card balances, professional financial advisors offer a three-step strategy for coping with year-end bills and avoiding future troubles. The International Association for Financial Planning (IAFP), recommends:

• understanding the credit terms of card issuers,
• learning how, and whether, cards should be used, and
• developing an aggressive plan for paying off debts.

Consumers should find out the conditions and policies of their lenders, such as length of grace period, whether the interest rate is fixed or variable, and how much is charged for cash advances.

A recent study by Princeton Survey Research Associates found that 76 percent of card holders do not know their credit cards' payment terms. Most people have too many credit cards and are surprised at just how high a price they pay for the convenience of the card.

Most consumers only need one major credit card that is universally accepted. For people who have the cash flow to pay off balances each month, a charge card - rather than a credit card - is a better choice. If credit is needed, choose a card with the lowest available interest rate. Often, people with one or more credit cards should look for a card that charges less interest and transfer all of their debt to that one card.

Ultimately, the way to bring credit card debt under control is with an aggressive plan to pay off existing balances. After consolidating as many credit card bills as possible, tackle the card with the highest interest rate first. Pay as much as possible toward the principal each month, while paying the minimum required on any other cards. As you eliminate the balance, begin paying more toward the principal on the others.

Credit cards sometimes make sense for smaller or short-term needs, but for major purchases, a home equity line of credit might be a better choice since the interest is lower and is usually tax deductible. Understanding the proper use of credit cards is an important part of the overall financial planning process. Be sure to check with your financial advisor to see what alternatives are available to you.

Keys To Debt Management

Debt can be a valuable and useful component of an individual's finances, if used efficiently and in moderation. For many individuals debt is a necessity in their every day lives and, unfortunately, often inappropriately handled. But there are certain "keys" an individual should consider that might open the door to proper and efficient use of debt within their financial lives.

• Liquidity Is Key. Keeping the proper amount of liquid assets is vital to managing the current level of your debt. Debt has traditionally hurt very few individuals; it is the lack of liquidity and cash flow to manage the debt that has hurt individuals financially.
• Keep Debt Service Predictable. Try to avoid repayment schedules that require the debt to be repaid all at once at a future point in time, such as balloons. If adjustable-rate financing is used try to negotiate interest-rate caps on your debt balance.
• Do Not Accelerate Debt Payments. Not until you have sufficient liquid savings and pay off non-deductible interest debts first. And then only pay down your debt if you are fully funding your retirement plans, such as 401(k) and IRAs.
• Try To Have Interest Deductible. Slash those non-deductible credit card balances as much as possible. While you hear this often, it can't be emphasized enough. Consider using second mortgages, business loans, etc., to keep interest on debt deductible.
• Hold Debt Service Payments At Less Than 25% to 33% of Gross Income. As a general guideline, if you are exceeding this range your progressing outside the safe limits of debt management. Try to renegotiate terms of your debt to get fixed payments to the 25% to 33% level and do not acquire additional debt.
• Use Credit Cards Only As A Convenience. Do not use credit cards to finance long-term purchases or items you cannot currently afford. Save for those items or use alternative forms of debt that are more efficient, such as deductible debt.
• Protect Your Credit. Personal credit is extremely important - don't abuse it. Get into the habit of making payments on time. Establish a good credit history early, as soon as you start your career or right out of school. Use credit cards in moderation to establish a good track record of prudent debt management. If you are, or going to be, in trouble, be proactive and talk to your bank or credit card company as soon as possible to work out a repayment schedule.
• Pay Cash For Purchases. Don't finance or use credit cards unless it is absolutely necessary. Set a goal of paying cash for purchases and do not acquire them until you have saved enough, assuming no emergencies pop up. This is commonly referred to as "delayed gratification" and it is a financially sound concept to follow.
• Review Debts Annually. Make sure your debts are as efficient as possible, this means making sure the interest rates you are paying are low and competitive given changing market conditions. Also, check out the option of refinancing if it will save you money.

Bankruptcy Alternatives

Fortunately, not all-financial difficulties result in bankruptcies. Financial problems are typically created when expenses and obligations consistently exceed income and the ability to make payments. Individuals can avoid a lot of grief by knowing some basic facts about the alternatives available to a person with serious financial difficulties.

The first step to repair your financial house is to make a simple statement showing the money that can be spared for loan payments and the total monthly payments that must be made. This statement will clearly reveal where you stand with respect to outstanding debts.

If normal debt service payments can no longer be made, an informal arrangement should be made with the creditor that can be settled out of court. Creditors may be willing to defer payments or refinance debt to reduce the size of monthly payments. If informal arrangements fail to resolve the overextended debt problem, it may be possible to find a lending agency that could arrange for lower monthly payments over a longer period of time.

The last step before filing for bankruptcy is the wage-earner plan, a form of debt consolidation allowed under Chapter XIII of the Federal Bankruptcy Act. Under this plan, with the guidance and protection of the Bankruptcy Court, and the assistance of an attorney, the debtor draws up a budget for paying all the debts along with meeting the normal living expenses for a period of three years. If this plan meets the approval of the court and creditors, interest and late charges on the debts are suspended. Each month the debtor turns over to a court trustee the predetermined installment payments for distribution to the creditor. The important feature of this plan is that the consumer does not give up any assets and a bankruptcy is not declared.

If you are having difficulty meeting your debt service payments or feel uncomfortable with your current level of debt, credit counseling may be in order. Such a service provides expert, confidential guidance for little or no charge. These services can be located through the National Foundation for Consumer Credit - 8701 Georgia Avenue, Suite 507, Silver Spring, MD 20910.