Making Cents

Set Financial Goals Now For Future

It is commonly said in the financial planning world that if you don't know where you want to go, any road will do.

In the past, we've addressed budget creation, retirement preparation and have touched on the importance of what I call “life planning.” What I hear from some readers is that they understand clearly the need to prepare for the future through employer-sponsored retirement programs, money markets, investments, wills, insurance etc. but have some difficulty in establishing what their financial goals are.

Inasmuch as financial goals are as individual as fingerprints, you need to have an honest talk with yourself to identify both short- and long-term objectives.

Maybe it's being able to send your kids off to college without having to resort to eating packaged macaroni and cheese for four years. Or it could be paying off debts, buying a different house or taking early retirement -- whatever mix of financial goals are yours, get them down on paper in complete sentences.

While that sounds easy, it may take you longer than you think to come up with answers that really get you fired up. Next you should look at each goal individually and decide where it fits into your life plan. You'll probably find there are a couple that are short-term, say less than a couple of years, and others that are five-year-plus long-term objectives, and several that fall in between.

Regardless of when you want to these reach goals, you will need to do more than merely hope for the best. Self-education and good advice from a qualified professional planner are your two best tools to achieving these aims. A professional can help guide you through the many options available for financial self-control and growth, but you should take some responsibility by participating in all financial decisions -- and genuinely understand the hows and whys of the many options available to help accomplish your goals.

Once you have a plan in place, do not think that your work is done. Keep a close eye on your progress and an open mind about changes to your short- and long-term financial plans. Like the bumper sticker says, stuff happens, and you will almost always need to modify or change even the most solid of plans. You may find you need more time to fulfill some of those goals or that some of today's goals are suddenly not important to you anymore.

Financial Plan Needs More Than Just Investments

When people think about financial planning, the discussion almost always shifts to the stock market and ailing 401(k) plans. While what happens to the market may affect your financial plan, things besides the market can also mess it up.

Goals and dreams vary for each of us. For some, it may be a comfortable lifestyle or retirement. For others, it may be the education of grandchildren, reducing estate taxes or making sure that their family is financially solvent in the event of a premature death. For many, it is all of the above and then some.

A good financial plan will take a look at six major areas of your financial life.

It will look at your cash flow - income and expenses today and those expected in the future. Cash flow is probably the most significant issue when it comes to planning. In fact, reckless spending or poor income planning has caused just as many problems for Americans as a losing portfolio.

The plan should take a careful look at risk management. What can happen that would really mess up your long-term plan? You could die prematurely or become permanently disabled. Your home could suffer an uninsured or undercovered accident such as frozen pipes, floods or injury to a visitor.

Your plan should address taxes. Everyone thinks they are doing whatever they can to minimize taxes, but I’ve seen some stupid tactics and some of the better ones ignored by people who think they are doing a great job.

Your retirement planning should be addressed well in advance of your planned retirement. This may include how much to save, where to save it or what type of retirement may best suit your needs.

Estate planning is also a must in any financial plan. A good estate plan considers your incapacity or disability - as well as what happens when you die.

And finally, a financial plan does include a thorough review of your investments - including a look at your tolerance for risk, what you need to earn to accomplish your objectives and your exposure to different holdings.

You can do your plan yourself or hire a qualified planner. Don’t kid yourself. Just because you spend Saturdays and Sundays working on your portfolio or have more money than you need doesn’t mean that you have a financial plan.

New Year Brings a Fresh Look at Personal Finances

Each January, New Year's resolutions are made. Some are lasting and life-changing - and others are never implemented. Today, I'd like to offer you the opportunity to take a fresh look at your entire financial situation and evaluate what happened in 2008 and what you'd like to see happen in 2009.

Start with the issue that is probably nagging at you most, those investments in your 401(k), IRA or at your favorite fund company. Don't simply hold on to what you have because it is what you owned last year. I've heard investors say that they aren't selling a certain investment until it comes back to what they paid for it. That philosophy has its pitfalls. The truth is that you don't know when or if it will ever get back to the level that you paid for it.

Look at your whole portfolio as if it were all cash today, and give yourself permission to rebuild the portfolio from that hypothetical all-cash starting point. If that outcome differs substantially from your actual holdings today, you should seriously consider moving things around.

Use this same approach with all of your financial issues. With life insurance, for example, don't just pay that premium because the notice came in. Evaluate your coverage: see if you have the right amount of coverage, if the beneficiary election is still appropriate, and if the policy is the best deal for you. You can use this approach with all types of insurance, such as property, auto or long-term care coverage.

With interest rates on the decline again, it soon may be time to think about refinancing your mortgage. I know that rates are only one side of the equation. The other side is your ability to qualify and the lender's willingness to make the loan. I see this loosening substantially over the next few months with money available at many local institutions.

In short, don't ever do anything financially just because that's the way you've always done things. The one thing that is certain in the world of personal finance is that things change.

Reflect, Re-evaluate and Act

As we look back on 2008, it will go down as one of the most difficult years in modern history.  We saw record volatility in the financial markets, more business closings than any time since the great depression and more crushed dreams and visions than most of us can remember.

 

While 2009 may not be any better, let’s take a journey of trying to figure out what all this means to you specifically.  To begin this process, you need to update your financial plan for the reality of 2008.  If you never had a plan, there is no time like the present to create one.

 

What I mean by a plan is the process of evaluate your goals, objectives and top priorities for you and your family.  Perhaps you feel a bit different about that list today than you did a year ago.  Then you attempt to manage your financial resources through the constant of changing circumstances to stay on a course that you believe will get you where you want to be

 

Next, look at the resources that you have to fund those goals.  That would include the value of your assets, your costs of living, income and job stability.  Does it all still fit and get you where you’d like to be when you wanted to be there?  For many, the answer will be no.  This wake up call may put a realistic light on issues like how much you can afford to spend for a house, when you may be able to retire or what college your children will attend.

 

At first, this may seem like an act to deepen your already sunken heart, but actually, it is the start of lifting your spirits to new highs that can propel you into doing what needs to be done.  By learning that you may not retire until age 75 or that you won’t be getting that vacation home anytime soon is better than the anxiety caused by wondering or guessing about it.  Before the exercise, you were in doubt.  After the exercise, you know exactly where you stand.  There is peace to be had in knowing where you stand.

 

As you focus on the goals and life plan, you will begin to get energized about these plans.  After all, this is your life and you have the freedom in this great country to do whatever you can legally do to make that happen.  As the energy appears, the opportunities for you to make it happen begin to surface.  You’ll wonder if it is time to change jobs, or obtain a second job, or sell the second home.  You’ll re-consider your spending habits and ask whether these current costs are really important compared to your long term goals and life plan.

 

And do remember this, as fast as some dreams disappeared in 2008, new ones will appear in 2009 and beyond.  They may even be the same old dreams resurfacing because of very favorable results.  Isn’t it possible that your future will include greater earnings, more savings, greater growth in your 401K and an invigorating list of goals and priorities that make your life exciting and worth living?  Of course it is.  And I’ll be here every week to help in any way that I can.  Happy 2009! 

What is the impact of financial turbulence on your life?

The turmoil in the financial markets made for some bumpy rides over the last two months. I have heard from nervous and frightened investors asking me what to do.  My response is about the same every time; if I knew which way the markets were headed - I would be in my comfy place under some palm tree.

Anyone with a pulse and a breath of air is willing to give you their feelings about where the market is headed, so I will not do that.  But what I would like to talk to you about is far more important.  What does all of this mean to you?

For some, it will mean shattered dreams.  No normal person likes to see or hear of other people’s dreams getting shattered.  So I must ask - why didn’t anyone clue them in sooner that their goals were perhaps unrealistic in the first place?  Did you really think that you could sustain withdrawals in excess of 10% of your financial holdings and never run out of money?  What did you expect to earn on your investments?  What did you expect your cost of living to increase by? The answer invariably is:  I had no idea.  In most cases, these people are armchair investors, folks that think building portfolios is easy, and something that should be a do it yourself project.  These Monday morning quarterbacks of their own personal financial destiny would never dream of paying real money to a financial planner for something that they can do themselves.  Why not?  Do you feel different now?

I don’t mean to imply that if you had a financial planner that you would not have lost money.  But if your financial planner is doing any financial planning with you, you should understand the consequences of the performance inside your portfolio.

Today, stop worrying about things out of your control, and get a grip on what you can do to rationally assess the damage and create a plan to address the consequences.  I want you to now know how many more years that you’ll have to work to maintain your standard of living.  I want you to know what your portfolio needs to earn for you to accomplish your financial objectives.  I want you to know what college your young child must go to.  I want you to know what type of travel and entertainment you can afford.  I want you to know if you are on track – or just how far off track you sit.

Of course, a financial plan does not guarantee success or accomplishment of your life dreams and goals, but it sure beats flying in the dark.  Knowledge is power when it comes to understanding your situation, and what you may do to improve it.  If I were you, I’d start talking to people just like you.  Ask them if they have a planner.  Ask them if they understand the consequences of the financial meltdown to their life plans and dreams.  Interview some financial planners and see if you like what you see and hear.  By the time you have done that, I’ll have some more details up on this blog about how to find and judge a good financial professional.

Financial Planner vs. Wealth Manager: Same sheep, different color?

With the alphabet soup of credentials and advisors out there, people are confused.  Who is a financial planner?  As we have all found out - often the hard way - there are some sellers of financial products out there who still call themselves a financial planner.  Their real goal is to sell you insurance or mutual funds, with little intention of ever going down the planning trail in great detail.

Now there is this being called a “Wealth Manager!"  We don’t need more confusion.  How about some clarity?

Let me start by saying that the product salesman disguised as a financial planner is becoming a rarer bird.  I’ll be happy when they are totally extinct.  I would only work with someone who is a CFP® (Certified Financial Planner—certified by the CFP Board, a nationally recognized organization) and who promises to uphold the standards and ethics of this great profession, and create a comprehensive plan for you.

Your plan can be done in a one shot fashion, based on a few meetings, a bunch of data and a pertinent qualitative questioning from the planner.  From there you may implement the recommendations or not.  You may implement them with the planner, on your own or with someone else.  The important point here is that there is no obligation or perhaps even no expectation on your part to ever work with that planner again. 

Wealth Management, on the other hand, is the manifestation of a financial planning engagement into a pro-active and holistic relationship for an indefinite period.  By its very nature, it is ongoing and you should expect to pay ongoing fees or retainers.  Wealth management will most definitely have a heavy dose of life planning - proving that the relationship is about more than just the numbers.   

In your dealings with financial professionals, was there any discussion on your part or the advisor's part about the ongoing nature of the relationship?

Was there any doubt on your part about your desire or the planner’s commitment to deliver that ongoing service?

Why would someone want this close, ongoing relationship?

Why would one avoid that type of relationship?

What is a reasonable fee to pay for this type of relationship and advice?

Financial plans: Do you need or want one? (cont.)

Last time we looked at why people don't hire a financial planner or create their own sound financial plan.

Many who hire a financial planner are confused about what the service is and how the planner gets paid.  According to the financial planning association, financial planning is the process of wisely managing your finances so that you can achieve your dreams and goals—while at the same time helping you negotiate the financial barriers that inevitably arise in every stage of life.

The association goes further, and states:

Financial planning can help you:

• Set realistic financial and personal goals
• Assess your current financial health by examining your assets, liabilities, income, insurance, taxes, investments and estate plan
• Develop a realistic, comprehensive plan to meet your financial goals by addressing financial weaknesses and building on financial strengths
• Put your plan into action and monitor its progress
• Stay on track to meet changing goals, changing personal circumstances, changing stages of your life, changing products, markets, and tax laws

If you are getting, or could get all of these services from one trusted professional, would you do it?

• If no, why not?
• If yes, how much are you willing to pay for this service?
• Do you feel good about a planner who will do the plan for free, and make money from commissions from investments or insurance?
• Have you ever hired a planner?
  • What was your experience?

Let us know your experience...

Financial plans: Do you need or want one?

It breaks my heart every time that I hear of a situation where even lousy financial planning would have helped tremendously.  Every day, thousands of people are devastated from being poorly invested, underinsured or without wills or trusts.  I know that there aren’t many who set out to fail financially or intentionally neglect something that could cause irreparable harm in the future.  Yet it happens every day.

On the flip side of the coin, you have financial companies spending millions on network TV, dinner invitations from well meaning advisors arriving in your mailbox daily, and friends referring you to their trusted advisor.  And you still do nothing or think that you are doing a wonderful job yourself. 

You may be doing a part of the job wonderfully.  You may really be able to use Morningstar to build your portfolio and feel that you know deeply why you own this or that instead of any of the other 20,000 choices available to you.  You may be an insurance expert, and own the right amount and type of life insurance, disability insurance and asset protection insurance (aka liability or catastrophic coverage).  You may even be as good as the Supreme Court justice who drafted his own will, only to have it leave a sloppy, expensive mess.

Here are some questions to consider and feel free to let me know--these aren't at all rhetorical.

• Why do people avoid financial planning?
• Do you think that you can do an adequate job integrating all of the components?
  • Cash flow and retirement analysis
  • Tax planning
  • Investment Management
  • Insurance analysis and risk management
  • Estate planning
• Who do you trust most to do your planning?
  • Yourself
  • Accountant
  • Financial planner
  • Other… and please elaborate

NEXT TIME--How a proper financial plan can help you

Have ‘The Talk’ With Your Parents

Unless your parents have kept you in the loop about their finances, you may end up with a surprise down the road - and it might not be a good one.  You need to know if your parents can support themselves now and in the future.  And it's not just a matter of keeping abreast of day-to-day expenses.  Keep in mind that there may be medical bills or other debts you will have to take care of.   You might begin the discussion by talking about your own retirement plans and see where the conversation goes.

Do your parents have a will?  Who is the executor?  Ask for any pertinent information, such as the name of their attorney and where their important documents are kept.  Long-term care insurance can be a good option if they don’t have it already. 

Appointing a durable, general power of attorney can be unappealing if your parents enjoy good health and a fair amount of independence.  In that case a “springing power of attorney” can be the right choice.  This document becomes effective only when triggered by a particular event such as an illness, death of a spouse or the onset of dementia, but be forewarned, you will have to go through legal proceedings just to prove that your parent is not capable of acting on his or her own behalf.

A health care power of attorney should be addressed during your “talk”.  Different from a living will, which essentially deals with life support concerns, a health care power of attorney holder can make medical decisions if your parents' ability to do so is impaired.  A springing health care power of attorney can be set up, similar to a springing financial power of attorney.  A copy of the health care power of attorney should also be maintained in the files of your primary care physician and your attorney.  If possible, try to open up the discussion to more routine financial issues, too, like bill-paying or budgeting.

If any or all of the above topics are too sensitive for your parents to address with you, suggest that they look into working with a financial planner or another professional they trust.

Recession?

Does anyone doubt that we have been in a recession for several months now?  I learned of the looming recession from a food server at the Legal Sea Foods restaurant in Braintree, MA last November.  A typically packed lunchtime spot for us fish-eating New Englanders was notably empty and slow this Thursday afternoon.  I asked what was up, and my server, Mary looked at me and said, “If anyone should know, it’s you.  It’s the economy.  People are afraid of losing jobs, rising gasoline prices and falling real estate values.  Hopefully the holidays will boost attendance and revenues.”  Duh!  Of course, the holiday shopping season did pack the house in this suburban mall location for about three weeks, then in January attendance fell off of the table again according to the professional wait staff.