FINANCIAL PLANNING
Everyone has financial goals. To help ensure that you achieve those goals, you should understand the financial planning process. To get you acquainted with the topics, we've included several articles:
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If you have any questions or would like help with your
financial plan, please contact us at:
1-800-553-6700 or CSIC@CapitalSecurities.com
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Topics
A
Road Map to Your Goals
What are you doing to help ensure that you are making progress toward your financial goals? Developing and following a written financial plan will give you a road map to help keep you on track. The steps involved include:
1. Assess your current financial situation.
This involves preparing a net worth statement and an analysis of how your income is spent. A net worth statement lists your assets and liabilities, with the difference representing your net worth. Periodically preparing a net worth statement will help you assess whether you are making progress toward your goals.
Even if you don't feel a need for a budget, you should analyze how your income is spent. The analysis can help you find ways to reduce spending and increase saving. See the article "Planning Your Expenditures" for more details.
2. Establish written, specific financial goals.
Your goals should be defined in specific, quantifiable terms, so you have a means to measure progress. Also attach a timetable to each goal. If you have several financial goals, you should prioritize them so you devote resources to those most important to you. The most common long-term objectives include:
 | Financial independence (at retirement or sooner)
| College education for children
| Paying off debt
| Supporting a desired lifestyle
| Owning a business
| Major charitable giving | |
3. Develop a detailed plan, with specific strategies and timetables.
Your financial plan should coordinate strategies in several important areas:
| Investment strategies - Your
investment strategy determines which investments should be utilized for your
savings. Develop a strategy you are comfortable with, that takes into
account a tolerable risk level and your time frame for investing.| Tax planning strategies - Strategies
that help reduce income taxes can give you more funds for saving. While tax
considerations should not be your sole consideration, they should be
considered before implementing any options. | Debt strategies - While debt may be
necessary to help you achieve some goals, such as purchasing a home, you
should develop strategies to avoid incurring excessive amounts of debt. | Risk management strategies - To ensure
your plan won't be derailed by catastrophes, assess your life, health,
disability income, property, and liability insurance. | Estate planning strategies - Proper
estate planning helps ensure that your wealth is distributed according to
your wishes at a minimal estate tax cost. | |
4. Implement your financial plan.
While a financial plan can be prepared in a short time period, implementing the plan requires a lifetime of discipline and dedication. Make saving and investing part of your monthly routine so they become strong habits. Don't become overwhelmed by the amounts you need to save, since it often takes years to see substantial progress toward your goals. Don't try to accomplish too much at once or you may become disillusioned with your entire plan. Strive to make slow and steady progress.
5. Monitor your progress.
At least annually, review your progress toward your goals:
| Update your net worth statement and analysis of spending.
| Evaluate your investment performance.
| Rebalance your investments if changes are needed to maintain your desired
asset mix.
| Decide if any changes should be made to your financial goals. | |
Developing a financial plan is a complex process that requires coordination of all your finances. But the process can be well worth the effort, giving you a means to help achieve your financial goals.
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Planning
Your Expenditures
Analyzing and budgeting expenditures is often a dreaded exercise. Yet many people find that inefficient and wasted expenditures are major obstacles to saving for financial goals. To get the most benefit from the budgeting process, follow these steps:
1. Figure out what you earned last year and how you spent that income, breaking the expenditures out by category. Looking back over an annual period will help you identify normal monthly expenses as well as irregular, periodic expenses, such as insurance premiums, tuition, and gifts. Canceled checks, credit card receipts, and tax returns will provide much of the needed information. However, you might want to keep a journal of all expenditures for a month if you can't account for large sums of money.
2. Review your expenditures to see if you can reduce your spending so you'll have more money for saving. It is often helpful to view your expenditures as follows:
| Essential expenses with fixed amounts
- Items like mortgage payments, taxes, and insurance generally don't
fluctuate much in amount. However, you may be able to refinance your
mortgage to reduce your mortgage payments or consider strategies to reduce
taxes.| Essential expenses that vary in amount
- Items like food, medical care, and utilities are essential but can
fluctuate in amount. Generally, you can alter your spending or living habits
to reduce the amount spent on these items. | Discretionary expenses - Items like
entertainment, dining out, clothing, travel, and charitable contributions
generally provide the most room for reductions. You don't want to eliminate
these items entirely and take all of the fun out of your life, but this is
generally a good place to look if you are searching for ways to increase
savings. | |
3. Prepare a budget for future spending that incorporates your financial goals. Keep these points in mind:
| Consciously decide how you will spend your income. Don't just assume that
you will spend the same amount as last year.| Understand that your budget must be flexible. Unexpected expenditures are
bound to occur and your budget should be able to handle this. | Budget for large, periodic expenditures, such as insurance premiums or
tuition. | Realize that you don't have to account for every dollar spent. Everyone in
your family should have a reasonable allowance to spend.
| Periodically compare your actual expenditures to your budget to see if you
are on track. | Your budget shouldn't be a dreaded exercise, but a tool to help you
achieve your financial goals. So keep it short, simple, and easy to
implement. | |
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Money
and Marriage
Money and marriage can be a difficult combination. To make sure money doesn't become an issue in your marriage, consider these tips:
| Thoroughly discuss your views on a wide range of
money issues. Does one of you like to save money, while the other
prefers to spend it? Does one feel comfortable with high levels of debt,
while the other can't stand the thought of paying interest? Make sure you
and your spouse understand each other's views on items like earning,
spending, saving, investing, and borrowing. Be aware that different money
issues will be more important at one stage of your life than another. Thus,
you may find that for years you have no money disagreements, then are faced
with an issue you can't agree on.| Agree on basic monetary goals and develop a
written budget. Those who share very different views about money
often find that the process of defining goals and setting a written budget
helps to resolve some of those issues. The process forces couples to
compromise and make decisions about how money will be spent. With the issues
resolved and a plan in place, there is less room for disagreement. | Decide whether to keep joint or separate
accounts. Some couples prefer to keep all funds pooled, while
others feel uncomfortable about losing control of money they earned. For
couples with vastly different spending styles, separate accounts may ease
some of the tension. A joint account can be used for shared expenses, with
each spouse contributing a designated amount to the account. Any remaining
funds are kept in individual accounts. No matter how funds are maintained,
however, each spouse should have some money that can be spent as he/she
wishes. | |
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Pay
Yourself First
We've all heard the advice - pay yourself first to make sure you save every month. But as easy as the advice sounds, it can be difficult to implement. If you're looking for ways to start paying yourself first, consider the following:
Reduce spending, diverting that money to savings. You can reduce nonessential expenditures, such as entertaining, eating out, clothing, vacations, etc. But many people have difficulty sticking with this option because it feels too much like sacrifice. Another strategy is to find ways to spend less money on the same items. For instance, obtain quotes for car insurance from several companies, placing any premium reductions in savings. Or find ways to reduce the cost of your borrowing. If you have large credit card balances, consider paying them off with a home-equity loan. Not only will the interest rate typically be lower, but if the balance is less than $100,000, the interest paid on home-equity loans is tax deductible. Again, any reductions in costs should be saved.
Invest all unexpected income. Instead of spending money from tax refunds, bonuses, and inheritances, invest the money immediately. You may also want to put any salary raises into savings, possibly in your 401(k) plan.
Save regularly to make it a habit. One of the best ways to save regularly is to make saving automatic. If you have to remember to write a check every month, it's easy to forget or not get around to. It's usually easier to have the money automatically deducted from your bank account and deposited directly in an investment account. Another good alternative is to sign up for your company's 401(k) plan, having funds withdrawn every paycheck. (Keep in mind that an automatic investing plan, such as dollar cost averaging, does not assure a profit or protect against a loss in declining markets. Because such a strategy involves periodic investment, you should consider your financial ability and willingness to continue purchases through periods of low price levels.)
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It's
Time for a Financial Checkup
At least annually, you should take time to reassess your financial situation. Some areas to review during this financial checkup include:
| Are your financial goals written down with estimates of how much you need
to achieve them?| Is your spending guided by a detailed budget? Have you tried reducing your
expenses so that savings can be increased? | Have you set aside at least two to six months of household expenses in an
emergency fund in case of a financial catastrophe? | Are you making strides in reducing your debt load? Have you looked at ways
to reduce the interest rates on your debts? | Have you thoroughly reviewed your individual investments recently? Are
your investment allocations still in line with your asset allocation
targets? | Have you calculated your portfolio's overall rate of return? Are you
satisfied with that return? | Are you saving towards your retirement? Have you calculated how much
you'll need to support your desired lifestyle? | Are you using all retirement savings options offered by your employer?
Have you considered other options, such as individual retirement accounts or
annuities? | Have you reviewed strategies to reduce your tax liability? | Are you setting aside funds to finance your children's or grandchildren's
college education? | Are the limits of your life insurance policies adequate to meet your
family's needs? | Do you carry disability income insurance? | Are your will and estate plan up to date? | |
Please call if you're not satisfied with the answers to any of these questions. Together, we can work on helping to get your finances in shape.
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Copyright © 2000. These articles intend to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.
FR2000-0103-0075