ACHIEVING YOUR GOALS

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ACHIEVING YOUR GOALS

Published by sam - 09/11/07 - 05:11:46 am

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Fine-Tuning Your Budget

Once you have reached agreement on your goals and their timing, your next step is to examine your current budget to see whether your spending pattern is likely to lead toward their realization, even though they may be years away. Usually some changes are necessary. If, for example, a young two-income couple plans to buy a home in five years but is currently saving nothing, both should cut down on some of their expenditures.
Although adjusting your current budget will not by itself enable you to realize your long term goals, it will certainly move you in that direction. And if you make these adjustments and as some of your expenditures decrease, you will be well on your way—provided, of course, that your goals are reasonable and possible to achieve.

Calculating Your Net

Once you have made adjustments in your budget, your next step is to calculate your net worth—that is, the amount you have left after subtracting your liabilities (everything you owe at the moment) from your assets (everything you own).
Your purpose in calculating your net worth determine how much money you actually have, how much of it can be dedicated to the achievement of your goals, and whether that money is at all times earning as much as it can earn without undue risk.
You may discover, as many people do, that you are keeping too much money in a low-interest savings account for the sake of its liquidity. Once you realize that most of the emergencies you contemplate are covered by insurance or can be met temporarily with a credit card, you may decide to transfer your emergency fund from the savings account into a more profitable form of investment that is as liquid as a savings account but pays a higher return. Similarly, you may discover that you are overpaying for life insurance policies your agent assured you were a splendid investment. By changing your insurance program, you may be able to invest the overpayment more profitably.

Investing Your Liquid Assets

If your calculation of your net worth indicates that you have liquid asset distributed across a number of investment that made at random or on impulse or for the sake of convenience—savings account, certificates of deposit, a mutual funds—you should set out deliberately to maximize your yield on them, in the form of dividends, appreciation, or both. This is the juncture at which many people, confused by the alternatives available and understanding little about any of them, are tempted to seek the help of a financial planner.

If your liquid assets do not amount to a substantial sum, you won’t have enough to use the more sophisticated types of investments. More important, no investment counselor or stockbroker will welcome you as a client because the commission to be earned on your small account will be negligible. At this point, your best plan might be to put the money into one or two conventional investment—a money market fund or a certificate of deposit—and, while it grows through further deposits and interest payments, to familiarize yourself with the basic principles of investing and the various alternatives open to investors. Since no adviser, broker, or Investment Company has been able to demonstrate consistent outstanding performance over the long term, you may be encourage to undertake a do-it yourself investment programs.

Managing your own investments does require you to apply yourself and to monitor them closely and regularly. Here again, people with neither the time for this nor a head for figures may consider delegating responsibility to a professional financial planner.

During the past several years, the proliferation of investment opportunities—life insurance, annuities, mutual funds, certificate of deposit, tax shelter, and a confusing variety of securities—has led to a parallel growth in the population of professional planners. Unlike medicine or law, this profession is almost entirely unregulated and in many states virtually anyone can adopt the label of financial planner, no matter how flimsy his or her qualification.

Financial planning has become a popular occupation because the incomes of many planners include not only from the various financial products they incorporate into their client’s plan. Planners who work for financial commissions on sales of those products stand to make more money by steering you toward investments that reap them commissions. An informed consumer can almost certainly find for himself or herself better financial products at a lower costs than one sold by a planner whose income derives partly or wholly from commissions.

Planners who are unconnected with any institution and rely entirely on clients fees are more like to be unbiased but you pay for protection against bias in the form of more expensive hourly charges.

If your income is in the middle range, an affordable and reliable planner may be hard to find. Until recently, financial planning was used only by the very rich, and consequently many of the most experienced and sophisticated planners are accustomed to dealing with sums of money far beyond the dreams of the people who are now seeking their services. Some of these planners refuse to deal with people with annual incomes of less than $100,000. Others cater to those with incomes of $25,000 to $90,000, but this range is so broad that only the most exceptional planner is likely to serve the needs of every client who falls within it equally effectively. Some firms attempt to resolve this difficulty by providing computer generated plans that are activated by the financial information the individual inputs. These are generally without value.

For the consumer, then using a “professional” financial planner usually involves a choice between a luxurious service for millionaires and financial products marketers with misleading titles.

In fact, few people need a financial planner. Setting goals, revising them as needed and investing assets according to sound principles is safer and more sensible for most families.

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November 9, 2007 | Financial Planning |

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