Friday, September 28, 2007

Creating Your Plan

Now that you have your values in place you can begin to set goals. I want you to think of this creation as if you were planning a trip and using a financial advisor as a travel agent. First, you need to know where you are in order to find out the best way to get you to your destination. Do an inventory of your assets, liabilities, income and expenses to give you an idea of your net worth (which is your assets minus your liabilities) and your net income (income minus expenses). I will discuss later in more detail how to increase both of these.

Tell your financial advisor where you wish to go in terms of two variables, time and money. "I want to retire at age 62 and have $60,000/year in today's after-tax dollars as my income goal." In this example, if you had $50,000 already invested at age 30 for retirement, you would need to add about $1,100/month total to hit $4.2 million at age 62. This would give you $172,000/year after taxes which equates to $60,000 today. If that scares you , IT SHOULD!

I know there are some people out there who will say that you never need to save as much as advisers tell you, but I have never heard anyone say they "regretted" saving and they wish they had less money.

So find out what you need to do to hit all of your goals and hopefully you have enough in your cash flow to do all of them. If not, then you'll need to prioritize or sacrifice something today.

I believe having a financial plan is the largest factor in determining your success or failure financially. You know where you started from and where you need to be each and every year. People who have a financial plan tend to be more proactive. If they find they're a little short one year they generally try to make up for it and make certain they hit their mark annually. People with no plan tend to be reactive. They react to interest rates going up or down, the economy, the markets, politics, etc. Reacting has never been the best way to get ahead financially. So sit down today and begin to plot out where you are and your final destination. I'll do my best to give you some good advice to help you get there.

Tuesday, September 11, 2007

Where to Begin???

David Bach's bestseller "Smart Couples Finish Rich" has a chapter on values. I'm not so sure he came up with the idea himself as there is a book for financial advisors called "Values Based Selling" by Bill Bachrach which educates financial advisors on the ways to sell by using people and their values. Either way, David's book is well done and very helpful in my opinion.

He states that in order to get ahead in life financially a couple needs to find out basically why money is important in their lives? Once they find this out they should choose goals that will fall in line with these values. I couldn't agree more.

When we sat down with our financial advisor he asked us values questions? "What's important about money to you?" The answers he was looking for need not be confused with goals. For example, money is important because I want to retire at 65 is not a value it is a goal. Things like freedom, security, peace of mind, family time, marriage, health, making a difference and independence are values.

Before my wife answered, I had this macho chauvinistic attitude that I needed to work 90 hours per week to make a ton of money to buy her things. I was dead wrong. She stated she wanted to have the freedom to have more family time, be secure, have peace of mind and she would be truly happy. She also said money was not that important to her and she didn't need "things". WOW was that an eye opener to me. Had I not known this, I would have worked and worked and worked to try to buy her thing she really didn't care about and creating a lot of tension in our marriage by not being around.

I also said I didn't need a lot of things, but really needed security and peace of mind. Also, I found I didn't want to work 90 hours per week. I WANTED to be with my family.

So we began our journey of financial planning by focusing on goals that would make us feel secure and have our peace of mind. We began by getting a large enough cash reserve to make us both feel comfortable. While many financial advisors tell you 3-6 months of your committed living expenses is acceptable, we wanted a year's expenses in cash. You know, if you have a year in cash and you lose your job, or your income drops unexpectedly you have enough flexibility to ride out pretty much anything. This made both of us feel secure and sleep better at night.

Next we began on our retirement. This was pre-child days, so we wanted to make sure we had the freedom to retire and have fun later in life. We began saving at least 20% of our gross income into my wife's retirement plan and Roth IRA's.

I could go on and on, but you see the point. First, ask yourselves, "Why is money important to you?" Security. "Why is security important to you?" Security gives us peace of mind. "Why is peace of mind important to you?" Peace of mind gives us the freedom not to worry and spend more time with our family...and there is nothing more important than that.

Think about it as a pyramid and when you get to the point where you say to yourselves, "There is nothing more important than this", you are done with the first step.

The next step is to identify some goals that fall in line with these values. Security-you may pay down debt or establish a cash reserve. Freedom-you may begin or increase your 401k plan. You get the idea.

So that's where I think everyone should begin. I hope this helped.


BY THE WAY...NEVER FORGET 9/11