So, you want to get your goals on track, get your finances in order, save and invest (without loosing too much sleep), keep track of your goals and progress and know more about your options out there without dealing with your average go-getter, commission-based financial advisor? Well, you bought the right book. Being that the main problem is lack of information. Knowledge empowers you to make a decision without doubting yourself. Remember that there is no right or wrong decision, just the consequences of them. This process will help you know the options and their consequences so you can act accordingly, in order to accomplish your personal goals. By no means have I disregarded the advantages of advice and consulting, successful people often spend good amount of time and money getting advice from others. However, at certain stages of your life all you need a good foundation of information that will allow you to get further at a safe pace and come out in better shape than the current average person. This book will give you that. This book will provide you the tools so you can lay down the basic foundation blocks to build your future on. It will also show you the steps to follow so you can complete those goals and dreams with the least amount of bumps. I will not lie to you, it will take time, discipline and yes, some sacrifices on your behalf; but at the end progress will be measurable, clear and rewarding.
Financial Planning on Your Own
"The simple way to gain control of your money and financial independence"By David Mndez V.AuthorHouse
Copyright © 2009 David Mndez V.
All right reserved.ISBN: 978-1-4490-3109-1Contents
PREFACE.................................................................................................XIACKNOWLEDGMENTS.........................................................................................XVABOUT THE BOOK..........................................................................................XVII2009 VERSION UPDATE.....................................................................................XIXINTRODUCTION TO OUR PRODUCTS............................................................................XXICHAPTER I The Financial Planning Process...............................................................1Introduction............................................................................................1The Financial Planning Steps (Figure 1).................................................................2A Basic Four-Step Process...............................................................................2Figure 1................................................................................................4Useful Facts............................................................................................4CHAPTER II Goal Determination and Gathering Data.......................................................7Determining Goals and Expectations......................................................................7Statement of Financial Position (Balance Sheet; Assets, Liabilities, and Net Worth).....................7Table 1.................................................................................................8Table 2.................................................................................................9Cash Flow Statement (Inflows and Outflows; Expenses vs. Income).........................................9Employee Financial Benefits.............................................................................10Time Horizons...........................................................................................10Tax Situation...........................................................................................10Table 3.................................................................................................11Figure 2................................................................................................12CHAPTER III Goal Strategy and Planning.................................................................13Cash Reserves and Short-Term Savings....................................................................13How Much Is Enough?.....................................................................................14Building Your Cash Reserve..............................................................................14Thirty Commonly Overlooked Deductions...................................................................14Where to Keep Your Cash Reserve.........................................................................16Setting Up Your Cash Reserve............................................................................16CHAPTER IV Risk Management (Insurance).................................................................19How Much Life Insurance Do I Need?......................................................................20Which Life Insurance Is the Best for Me?................................................................21Figure 3................................................................................................22Figure 4................................................................................................23Disability Insurance....................................................................................24Table 4.................................................................................................24Long-Term Care Insurance................................................................................25CHAPTER V Education....................................................................................27Life Insurance..........................................................................................28Federal Aid Programs....................................................................................28Coverdale IRA...........................................................................................28Roth IRA................................................................................................29529 plans...............................................................................................29Early Start Is the Key (Table 5)........................................................................29Table 5.................................................................................................30CHAPTER VI Retirement..................................................................................31Income Needs............................................................................................31The Right Saving Tools..................................................................................32Pension Protection Act of 2006..........................................................................34CHAPTER VII Asset Management...........................................................................37Know Your Risk..........................................................................................38Risk-Tolerance Questionnaire............................................................................39Table 6.................................................................................................47CHAPTER VIII Estate Planning...........................................................................49Objectives of Estate Planning...........................................................................50What Is an Estate?......................................................................................50CHAPTER IX Implementing and Monitoring Your Financial Plan.............................................53CONCLUSIONS.............................................................................................55DISCLAIMER..............................................................................................57ABOUT THE AUTHOR........................................................................................59FINANCIAL GLOSSARY......................................................................................61NOTES...................................................................................................87CD INTERACTIVE PRESENTATION COUPON......................................................................97
Chapter One
The Financial Planning Process
Introduction
Today there are more financial products and services than you can count. If you plugged the words "investments" or "financial planning" into Google you would receive millions of hits. The problem today is not in finding information, it's sifting through all of the information available to find the specific products or services that fit your needs, goals, and values.
Even with the abundance of information available on personal finances and money management, many people don't understand that financial independence is a goal they need to achieve. One thing that you must consider is that everybody out there in the financial industry has one goal and one only ... to sell. Eventually we all have to use a financial instrument to achieve a certain goal, but with this information at least you will understand the options and consequences of using each instrument.
Your financial future highly depends on the decisions you make today. Financial planning is a long, personal process that you create and adapt over time based on your needs, your values, and your present situation. Financial goals for many people are similar: savings, retirement, risk management, children's education, pursuing leisure, passing on wealth.
How can you get to where you want to go? By identifying and prioritizing the things that are important to you, in the present and for the future; by constructing a plan and developing the strategies to execute that plan.
There are several financial phases in our lives, and as our priorities change, some financial goals become more significant:
At the accumulation phase, the thirty- to forty-year period prior to retirement, people are more focused on mortgage financing, managing their cash flow, saving for their retirement, and/or funding a college education for their children.
The distribution phase begins at retirement. Our focus is now on having an appropriate strategy for retirement, managing risk, reducing taxes, and maintaining our standard of living.
Further into retirement the preservation phase begins, and the focus shifts to asset management and protection to have an adequate income by reallocating your assets and dealing with the impact of inflation.
The transfer phase is the last stage of retirement, when you start thinking about how to pass on or transferring wealth to the next generation to leave a legacy.
The Financial Planning Steps (Figure 1)
A Basic Four-Step Process
I. Establish Goals
Everyone has different goals, and it is always good to determine them and prioritize them (because you cannot always fund all of them). Here are some examples:
Short-term goals: building up savings for some expense (a vacation trip or a car) or as an emergency fund
Medium-term goals: college savings for a child or saving for a down payment to buy a home
Long-term goals: retirement, vacation home, or having capital available to establish your own business
II. Gather Data
Assets, liabilities, insurance protection, and tax data are necessary to make a good analysis. As far as information goes, the more the merrier.
Build a budget.
III. Devise a Strategy or Plan
Write down the specifics of how to get there, how to accomplish those goals, and what changes you need to make in order to get all the way to the end.
Research options and establish a plan of action to bring out all those ideas.
IV. Implement your Plan ... Take Action!
Make the necessary changes and be sure to monitor the progress of each one at least every six months.
Useful Facts
Inflation Adjusted Yield:
[(1 + investment return)/(1 + inflation rate) - 1] * 100 [(1 + i)/ (1 + r) - 1] * 100
This formula gives you the real rate of return you are getting from a fixed investment like saving accounts, money market, etc.
Many people realize that they are actually "losing money" (purchasing power) when they put their local bank savings account through this formula.
Request a Credit Report
This will allow you to have a better picture of how well balanced (or not) the liability side of your equation is.
There are three major credit-reporting services:
* EQUIFAX (800) 685-1111; www.equifax.com
* EXPERIAN (888) 397-3742; www.experian.com
* TRANS UNION (877) 322-8228; www.transunion.com
Chapter Two
Goal Determination and Gathering Data
Determining Goals and Expectations
Goals must be specific and prioritized (event, time, and amount).
Statement of Financial Position (Balance Sheet; Assets, Liabilities, and Net Worth)
Assets are all you own, paid in full or not, cash equivalents (checking and savings), invested assets (stocks, bonds, IRAs, and real estate), automobiles, furniture, artwork, jewels, etc.
Liabilities are all your debts, credit cards, bank loans, mortgages, car loans, etc.
Your net worth is calculated by adding all your assets minus your liabilities. It is a benchmark of your financial strength.
Use the "Net Worth Calculator" spreadsheet to have a better idea of where you presently stand. (Table 1&2)
Cash Flow Statement (Inflows and Outflows; Expenses vs. Income)
Inflows are all your income, salary, and bonuses; all that comes in regularly (weekly, monthly, quarterly, or annually).
Outflows are all your expenses, bills, payments; all that goes out regularly (weekly, monthly, quarterly, or annually).
One of the first steps in achieving financial independence is to effectively manage your cash flow. Most people spend first and then save whatever they have left.
A budget helps you leave a fixed amount of money to use toward your goals. This will give you an idea of what you have at hand and where to trim; most importantly it will give you a balanced household budget.
As painful and scary as it sounds, it is something that has to be done.
Employee Financial Benefits
Use the statements you get from your employer to gather this information.
Time Horizons
Based on your age and your goals this can be one to three years, three to seven years, seven to twelve years, twelve to eighteen years, and eighteen-plus years.
This becomes very useful when it comes to deciding on the amount of funding and investment choices.
Tax Situation
It is always recommended that you seek advice from a CPA or an accounting firm (like H&R Block) on this matter; your taxes can be a big ally or work against you if you are not careful.
Knowing your "Effective Tax Bracket" is very important.
One of the most complex systems developed in human history is the IRS code. There are usually two thousand to six thousand changes implemented per year, so it is difficult to catch up. But there are three simple rules to follow that will help you determine where to put your money in order to manage your income tax today and to set it up properly for future income (retirement). These are known as the "tax control triangle" or "tax buckets." (Table 3) (Figure 2)
We do not know exactly what the tax rates are going to be when we retire five, ten, or thirty years from now, and since financial planning is based more on science than luck, we will not try to guess the future here. One thing we can do is to set up our money in a way such that we can control (hence the name) how much taxes we pay in the future depending on from where we withdraw our money.
It is always advisable to consult an accountant or tax advisor before making any big decision, but the rules are very simple: try to keep all sides of the triangle balanced.
Inside the circles, or "buckets," are examples of investments/accounts that can be used for that tax purpose, and the box on the side explains the effects and pros and cons of this "bucket."
Chapter Three
Goal Strategy and Planning
Cash Reserves and Short-Term Savings
The secret of saving is very simple: pay yourself first.
Pay outstanding debts as soon as possible, but keep saving at the same time. If you are laid off, having debt and little-to-no savings could be a terrible combination.
Set aside money for bills that are due later in the year. For example, if you have to make an annual insurance payment for your insurance of $600, include saving $50 per month in your budget for this and it will be easier to pay.
When you finish paying a debt-for example, a car loan-keep saving that money if possible or use it to pay outstanding debts. (You were already living within that budget !!!)
One of the biggest mistakes people make with money is that they start spending it in their minds before they get it. So if you have a purchase in mind, include it in your budget and save for it. That way you don't go into debt when you purchase it.
Don't be afraid to make a budget. People who have one often save two times as much as those who don't.
In these times of crisis, you don't want to be picking up pennies from phone booths, and having a financial safety net in place keeps you protected when an emergency arises. One way to accomplish this is by setting up a savings or cash reserve.
How Much Is Enough?
Most financial professionals suggest that you have three to six months' worth of living expenses in your cash reserve. The actual amount, however, should be based on your particular circumstances. It depends on the amount of money you can free in your budget from those non-vital expenses (discretionary expenses) and whether you have any disability or unemployment coverage at your current job.
Building Your Cash Reserve
Budget your savings as part of regular household expenses; reduce your discretionary spending (eating out, movies, etc.).
Free some money from taxes. It is very easy to know if you are overpaying your taxes: if you are getting a return at the end of the year, you are overpaying your taxes.
Check your paystub and make changes through your payroll department to free some cash. It is advisable to consult a tax specialist, but here are some examples.
Thirty Commonly Overlooked Deductions
1) Contribution of to the IRA of a non-working spouse
2) Forty-five percent of health-insurance premiums if you are self-employed
3) Auto license and registration fees (if they are based on the value of your car)
4) Car expenses @ 49.2 cents a mile plus parking and tolls
5) Clean fuel vehicle deduction
6) Cost of childbirth classes and birth control pills
7) Cost of commuting between your home and a temporary place of employment
8) Dues to professional groups or unions
9) Early-withdrawal penalties on a CD
10) Education cost to maintain or improve your job skills
11) Eyeglasses, hearing aids, and contact lenses
12) Foreign taxes on stocks, bonds, bank accounts, and mutual funds
13) Gambling losses from lotteries, raffles, bingo, and casino wagers
14) Home improvements made at a recommendation of a doctor to alleviate a medical condition (if they do not add value to your home)
15) Incidental travel expenses
16) Interest of up to $2,500 on student loans
17) Jury duty payments remitted to your employer
18) Legal fees related to collecting income or tax preparation
19) Lodging costs up to $50 when traveling due to medical treatment
20) Medicare part B as a medical expense
21) Mortgage interests, points, and real estate taxes you may pay when closing or selling a home
22) Parent's medical expenses if you provide for more than half of their support
23) Personal property taxes paid on cars, boats, etc.
24) Prepayment penalties and late fees on your mortgage
25) Rsum costs, postage, and travel; costs of job hunting in the same line of work
26) Safe deposit box rental
27) Small tools for your job
28) Special clothing required for your job
29) Subscriptions to professional journals or magazines
30) Tax-preparation fees
Note: Your credit line can be a secondary source of funds in a time of crisis. Borrowed money, however, has to be paid back (often at high interest rates). As a result, you shouldn't consider credit except as a last resource.
(More information about this can be found in the All about Credit, Mortgages, and More kit.)
Where to Keep Your Cash Reserve
You'll want to make sure that your cash reserve is readily available when you need it; this is called liquidity.
However, an FDIC-insured, low-interest savings account isn't your only option. Money market accounts and short-term CDs typically offer higher interest rates than savings accounts, with little (if any) increased risk. There is the downside of significant penalties for early withdrawals. So if you're going to use fixed-term investments as part of your cash reserve, you'll want to be sure to ladder their maturity dates over a one- to six-month period. This will ensure the availability of funds without penalty.
Setting Up Your Cash Reserve
There are several ways to do this, but usually we like to stagger the money in order of need. Basing the decision on the liquidity needs, we recommend using a three-tiered approach.
The first-tier account manages cash flow in case of something unexpected and is totally liquid; for example, your regular checking and savings accounts, and also high-yield savings accounts with check or debit card access. This is the first place the money goes in, and once it is fully funded you'll start the next tier. It is recommended to have 20-25 percent of your cash reserve here.
The second-tier account's goal is to earn a little more interest so you can balance the effect of inflation from the first tier. It may remain in a reasonably liquid account that has no penalties even if access requires a three- to five-day wait. You can use money market accounts or bank CDs. Once this tier is fully funded, you'll start the next tier. It is recommended to have 25-30 percent of your cash reserve here.
The third-tier account is usually a more investment-like account and is less liquid. You really don't need that money immediately, since you have the first two tiers as a cushion. A bond mutual fund or a brokerage account can be used for this. Remember to have little or no risk, and always use fixed-term investments. These same accounts can be used for other short-term goals and will give a decent amount of return without too much risk. Once this tier is fully funded, you can start to save on other goals in your plan. It is recommended to have no less of 40 percent of your cash reserve here.
Note: Be sure to use FDIC-insured financial institutions.
(Continues...)
Excerpted from Financial Planning on Your Ownby David Mndez V. Copyright © 2009 by David Mndez V.. Excerpted by permission.
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