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With the possible exception of public speaking or April 15th, no two words spark more dread than financial planning. The International Association for Financial Planning reports more people would rather have a root canal than create a financial plan!
Too bad. Taking control of your financial life is not nearly as painful as a root canal. And there's so much more at stake.
Even assuming no dramatic change in your fortunes, you're going to earn a fortune. Say you and your mate are 25, and your family income is the U.S. median, last reported to be $53,091.
If you both work until you're 65, even if you never get a raise, you're going to bring in over $2,000,000. If your salary goes up just 3% a year, you'll earn over $4 million. If you land a promotion, you'll rake in even more. Welcome to the millionaire's club!
| Annual Raises & Cost of Living |
40-Year Income Totals |
| 0% | $2,123,640 |
| 1% | 2,595,426 |
| 2% | 3,206,802 |
| 3% | 4,003,128 |
| 4% | 5,045,000 |
| 5% | 6,413,381 |
| 6% | 8,216,468 |
| 7% | 10,598,828 |
- Spend less than you earn
- Avoid debt, and
- Stick to these ten steps:
Don't even think about traditional investment strategies if you have huge credit card debts hanging over your head. Paying off your expensive debts is one of the highest-return, safest investments you can make. Start with your high interest credit card bills. When they're paid off, pre-pay your auto, student, and home loans -- the highest interest first.
Step 2: What Do You Really Want?
Spending more time with the kids may mean switching to part-time work, or hiring someone to clean the house. Losing weight may mean joining a gym, or eating out less often.
Step 3: Focus on What's Most Important
After you've had a chance to really think about your goals, decide which ones are serious and admit which ones are just wistful fantasy (the boat that would be fun to have, but a pain to keep up and a huge money drain). Then put a price tag on each of your goals. For retirement planning, see Issue #10 of The Pocket Change Investor, or you can take advantage of one of those magazine articles, books, or mutual fund brochures that offer worksheets to help you plan ahead.
But if the number that pops up leaves you gasping for air, remember ... Rome wasn't built in a day, and your future won't be either.
Set priorities. Adjust your expectations. Revise your time schedule. Seek out alternatives. Be creative. The idea is to get your heart and mind thinking in ways other than pure dollars and cents. If you're very clear and focused on a goal, you may find solutions falling right into your lap. But you have to ask, and be ready to seize opportunity when it comes your way.
Step 4: Pay Yourself First and Stick with It
You may think it's a clichè, but paying yourself first will put you on the fast track. Choose a comfortable amount to put away each payday, even if it's just pocket change. Don't wait until the end of the month, then save whatever's left, if anything.
Set a specific goal. For example, saving 10% of your pay. But if that sounds too steep, try 5% and build it up 1% at a time. You can do it!
Wherever you start, put your savings and investment plan on autopilot. Have your financial institution or mutual fund company deduct payments directly out of your bank account. After a couple of months, you won't miss it.
Step 5: Start Now!
Whether you're 25 or 55, once you've set your goals and figured out roughly how much you need to get there, starting now is the key.
The sooner you begin, the more time you'll have to take advantage of compound interest's "magic."
But be forewarned: there are very few legitimate you-must-act-immediately, once in a lifetime investment opportunities.
Step 6: Choose the Right Places
There are risks in every kind of investment, except paying off those expensive credit cards. We just can't find a downside there! The risk in parking your stash in super-safe investments like CD's, is that your money won't keep pace with inflation. Stocks are among the riskiest of investments, although when the Dow is on an upswing, it's hard to remember that what goes up often does come down.
In brief, a high-return, low-risk investment is an oxymoron, with the exception of paying down credit card debt, of course. You want to take appropriate risks based on your comfort level, your time frame, and the nature of your goals.
If you have a short time before you will (or might) need the money, don't put it in high-risk securities. It may not be there when you need it. On the other hand, if you're saving for a far-off goal, you can afford bigger gambles.
Step 7: Diversify to Limit Risk
Don't put all your money in one place. Spread it out among several different investment options.
And stay in for the long haul. Once you've made your choices, don't micromanage your money. When you focus on the short term, you're apt to panic at temporary market dips and switch your money around, missing out on market rallies, and paying an awful lot of commissions in the process. If you've chosen your investment allocation wisely, your portfolio should be able to keep going ... and going ... and going for years, with just periodic tune-ups.
Step 8: Get Smart
A little time spent learning basic financial strategies can go a long way toward making you more confident, and richer. Just don't try to digest everything at once, or you will feel ill. Pick the topic that's of most interest, or of the greatest urgency, and start there. For example, let's say you want to open an IRA and invest it in mutual funds.
Start by reading about IRA's and mutual funds in a few books, such as: Terry Savage's New Money Strategies for the 90 's, The Dun & Bradstreet Guide to Your Investments (updated annually) by Nancy Dunnan, The Truth About Money by Ric Edelman, or The Only Investment Guide You'll Ever Need by Andrew Tobias.
At least a few of these titles should be at your library. (Or you can order them through us.)
While you're at the library, look through recent issues of personal finance magazines like Kiplinger's, Money, and Your Money for articles on IRA's and mutual funds. Also review personal finance articles in BusinessWeek, Forbes, and Fortune.
Look at their mutual fund ratings and pick a few whose goals (long term, short term, bond, stock, options, foreign) match yours. Don't be surprised to discover some contradictory advice. If the market weren't full of differing opinions, there'd be no one to buy when you wanted to sell, and no one willing to sell when you wanted to buy. Listen to the experts, then go with what makes sense to you.
Be sure to comparison shop. Always ask about expenses, such as commission costs, marketing fees, and administrative charges. Get them in writing.
Step 9: Protect Yourself and Your Family
Besides saving and investing, there are a few other important parts of a financial plan you must take care of, like life insurance, a will, and possibly an estate plan. They're not fun details, but they're essential to your peace of mind, and the future of those you love.
For some of our pearls on the will subject, see Issue #6. If you want to create your own will, get the WillMaker Software, from Nolo Press (800-992-6656 or www.nolo.com).
The best resource on insurance questions is Smarter Insurance Solutions, by Janet Bamford.
If you don't have a will or adequate insurance, get it taken care of now!
Step 10: When You Need Help, Get It!
We encourage you to learn as much as you can. But you might want an expert's personalized advice to:
So how do you find a financial advisor? First you have to know what you want. The more specific you can be, the better. You also have to choose the kind of planner you want.
There are a few ways that financial professionals get paid:
On the other hand, fee-only financial planners can be expensive and out-of-reach for someone starting out, or with a modest amount to invest. The truth is, there are good advisors in all of the camps.
There are four primary sources for financial planners, each one of which offers useful, free brochures and referrals:
Ask about their experience and credentials, and speak to at least three client references. (Just don't expect them to talk to you about their money.) Ask to see a sample financial plan and ask how the planner would tailor it for you.
Always check out backgrounds before handing over your money. You can get a free disciplinary report that will tell you about most securities violations from the National Association of Securities Dealers (800-289-9999).
Or you can order a more comprehensive disciplinary report from the National Fraud Exchange, which searches disciplinary records in the securities industry, plus real estate, banking, and more. (The fee is $39 for the first search, and $20 for additional searches ordered at the same time: 800-822-0416, ext. 34.)
If what you really want is for someone else to manage your investments, call AdvisorLink (800-348-3601) which can refer you to a money manager who'll handle accounts as small as $15,000. Ask for its free investor kit.
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