Financial planning

What should you do if you’ve got extra money or get an inheritance?

There will be times in your life when you will earn more money than you need to live or maybe you run into inherited money. What should you do with this extra money? Here are a few things that you can do with that extra cash:

• Pay off any unsecured loans or credit card cards that you hold. Credit is very expensive. Credit cards are the biggest source of unsecured loans in the World today. Credit card companies charge you different rates of interest on different types of money. Cash from an ATM taken with a credit card is a lot more expensive than ordinary shop purchases. Credit cards take your repayments towards shop purchases first and then only later towards the cash withdrawals so that you pay the maximum interest possible for the longest time. Getting a credit card with zero percent interest on balance transfers is always a smart move. There are many deals around so check my credit card reviews, why pay more than you have to?
• Build an emergency fund so you don’t have to use credit when something bad happens. A rule to use would be to reserve as much cash as you would need to live if you were to become unemployed tomorrow. A professional may need 12 months worth of living expenses in order to find a job. A factory worker may only need 3 months of living expenses, as they can find a job faster (this may no longer be true though). Also, set aside an emergency stash for car or home repairs on top of living expenses to cover the time it would take you to find a job.
• Build up your equity in your home and pay down principal. Once you have accomplished paying down high interest unsecured debt, the second step is to build the equity in your home. If you’re considering purchasing a home soon or in the future, push yourself to put down the maximum down payment that you can afford at the time you buy your property (as long as credit card debt is paid off). Avoid including arrangement fees, legal fees or Realtor fees in your mortgage, try and negotiate to have the seller pay for these. Mortgages interest can cost you huge amounts of money over the lifetime of your loan. Whenever you can, pay more than your monthly payment minimum, as most mortgages are front end loaded with interest. This means if you’re in a 30 year note, most all payments in the first half of the life of the loan will be applied to interest, not principal. To build equity outside of property value increases, take surplus money that you come into and pay down your mortgage principal (after credit card debt is paid off). Check out your loan options as well, for example, some mortgage payments can be made on a a bi-monthly repayment schedule, helping you pay down principal faster. There’s a huge difference in interest paid between 30 year and 15-year mortgages, and you can save a small fortune in interest without a significant increase in payment.

• Maximize your 401(k) and or other investments after you’ve paid down debt. When you change jobs, don’t touch that 401(k) retirement fund either. Roll the balance over to an IRA and keep it invested. If your employer is giving you money in the form of matching contributions in a 401(k) or similar, be sure to take advantage of it. Quite often, people use the excuse that they don’t like the investment company offered by their employer, but you can more than make up for any poor selections or returns provided by your company selections with the matching dollars you’ll get, even if that means sticking your dollars in money market funds. At minimum, maximize your contributions to maximize their match.

Instead of taking your extra money and buying toys, boats, TVs or new cars, take that money and pay off debt and start investing. Not only will you save paying thousands of dollars in interest, you can start making your money work for you, instead of always working for your money.

Stop associating retirement with being old

Too often we fall into the trap of associating retirement with being old and by doing so we create a self fulfilling prophecy. We delay planning because we think retirement is something you do when you get older, and instead mostly focus on the now. Instead of thinking of retirement as something you do in your 60’s or 70’s, why not shoot for retiring in your 30’s, 40’s or 50’s? But how will you ever retire young if you never try and figure out what it will take to do so?

So how do you get started? Below, I’ve sequentially listed several of things you should do to start planning your retirement early (this list is not meant to be comprehensive, rather a starting point to get you thinking). You need to see if your goals are feasible and or what you need to do to make retiring early a reality (this exercise will be for someone in their 20’s, simply use the same concepts if you’re older):

• Determine how you want to live in retirement: Everyone wants to live comfortably, but define that comfort level. Determine your anticipated living expenses on an annual basis out through your life expectancy. Some expenses to consider would be monthly rent, leisure, insurance, health care, emergency funds, etc.
• Determine how much money it will take in the bank to support your lifestyle. For example, if you’re 25 now and want to retire by 30, will you have enough funds saved up to cover your lifetime expenses? If not, readjust your retirement age or lower your expenses. Also consider how your income will be distributed throughout your retirement. You start off with a chunk of money in the bank and that money earns you money, however, as you draw down that balance, the income you make off of those investments will also go down.
• Make an investment plan to meet your savings goals. Anyone can pull a number out of the air of how much money in the bank they need to support their retirement needs, but can you amass that amount of money or not? This process will help you determine whether or not you can or cannot meet your savings goals. For example, if you’re 25 and have determined you will need $1,000,000 to retire at 35, and you anticipate making around $50,000 in income for the next 10 years, you may come to the reality that 35 is unrealistic and you have to push your age back another 10 years.
• After you’ve determined realistic savings and retirement plans, put your plan into action and monitor your progress. Your situation may change and or the markets may change. You may be promoted or lose a job and need to adjust your goals along the way. The market may explode or implode.
• As you move throughout the life of your retirement plan it’s critical to adjust your risks accordingly. When you are younger or earlier on in your investing you’re more willing to take risks, as you progress through your plan it doesn’t make sense to take as many risks, as you move from wealth accumulation to wealth protection.

If you wait until you’re older to plan for retirement you will concentrate too much on the now instead of the future. You will continue to work for your money instead of having your money work for you. It’s important to start planning as early as possible. Why not figure out what it would take to retire at 30, 40, 50… instead of waiting to figure out what it will take to retire in your 60’s or 70’s? You really have little to lose by going through an exercise like this of your own. If it seems too complicated, consider working with a financial planner or other professional that can help you along the way.

The importance of a Budget to your personal finances

In the business world, management lives and dies by their budgets. A budget’s importance cannot be overstated,without one you cannot know how well you’ve performed over the time period your analyzing nor take any corrective actions if you don’t know whats gone wrong.

Most businesses are started and built upon debt, thus the most meaningful way to ensure the debt will be repaid is through maintaining budgets and setting goals. You must look at your personal finances like a business does, and lay out all your anticipated expenses within a given time frame. Everything starts with a budget for a business, and ends in analyzing and evaluating spend against budget, and taking corrective action after goals are not met.

Businesses create short term budgets and long term budgets. The companies that I have worked for start by looking at sales (projected sales in most cases – similar to your anticipated revenue stream, otherwise known as your take home pay), then financial management builds up monthly, quarterly, annual, and 3 to 5 year budgets. With this, management can determine such things as; What will our bottom line look like if we stick to this budget. Are sales revenues truly going to cover costs and debt, or not? How come we weren’t able to stick to our budget – or why did we finish more favorable than we thought we would (did we make our budget too loose, meaning did we not make budgets tight enough).

Basically, management uses the budget as first a reasonable or sanity check. By this I mean, are there monthly goals going to make them any profit or at least break even. If not, back to the drawing boards. Where can they cut costs or increases revenues? After management agrees to their best budget, they proceed with operations, buying and selling as they set they had planned. At the end of the month, management goes back and reviews all of their cost and revenue, and they analyze their actual costs and sales against budget. From here, they can start to interpret what happened, good or bad. Why we’re labor costs so high, why we’re utilities costs lower than budgeted, and so on. The message here is, they now have the ability to know if they’ve met their goals or not, and they can start to figure out why they have or haven’t met their goals. After doing this for a continued period of time, say over a couple of years, management can start analyzing how they did year over year and so on.

Without management budgets, like personal budgets, you could never know if you have done well or not, or if you could have changed the outcome if you had known something was going wrong mid month for example. Personal budgets are critical to your personal finances, without them you’re essentially not managing your finances.

Our roadmap to understanding personal finance will next take you on the journey of setting up a personal budget, so that you can start taking control of your finances and reduce your debt. After you’ve mastered that, you can then more easily move on to setting up a retirement plan and following through on it.

What to look for in financial planning companies

Ameriprise is one of the top financial planning companies. They probably have more advisers in offices around the country than any of the other top financial planning companies. However, a friend of mine swears he will never work with them again.

His experience highlights one of the things that everybody should look for when using a financial planning service, namely, up-front transparency of fees and charges. He felt that the adviser invited him to several ‘chat’ meetings where nothing much happened and he did not realize that he was being charged for the privilege. He felt that he never had adequate explanations of the ‘contract charges’ that were more than the earnings from his investments, held with them. This lack of transparency left him feeling ripped off.

Ameriprise is a good brokerage service and they don’t push their own products ahead of others if they aren’t right for you. This is another thing to look for when comparing the best financial planning companies. However, there is an issue with their pricing policy.

Longevity in the financial business is another factor to consider when searching for the best financial planning companies along with a solid investment ethos. Waddell and Reed have been around for over 70 years and consistently performed above market norms. They sell mutual funds to individual investors through a network of financial advisers. This company’s fund management team has an investment philosophy, which emphasizes long-term secure investing. Fundamentals rather than fads are what make Waddell and Reed successful and they extend this belief to the their investors.

Top financial planning companies make a good habit of beginning with the end in mind. They will guide you with an estate-planning checklist and get you to consider a living will. Your estate is anything left on the table when you are six feet under. So, whether you don’t want to leave anything, or you want to endow your local dog pound, look for a financial planner that takes this approach.

More relevantly perhaps, top financial planning companies will work backwards from your anticipated life expectancy through your target income level when you retire to your required saving and investment level right now and forward. Financial planning should be all about your individual circumstances and ambitions.

Several other top financial planning companies include:

• ING
• Merill Lynch
• Prudential
• Edward Jones
• Fidelity
• Northwestern Mutual
• Many more in your area, check your local listings

Financial planning advice in your 40s

We’re going to make the assumption that you’ve been investing now for some time, maybe not too long though. Now is a great time to reevaluate where your portfolio stands, and think about reallocating assets to somewhat less risky choices. Our rule of thumb is 120 less your current age, should be your stock to bond ratio. So Say you’re 45, that would mean take 120-45 = 75. You should be at around 75% stocks now, with 25% in less risky money market accounts and or bonds. Granted, that’s somewhat aggressive, if you want to be conservative, use a factor of 100 instead of 120 (100-45=55%) and your mix would be 55% stock, 45% bonds. So, by now, your asset mix should be some where between 55%-75% stocks. You’re probably saying that’s a huge swing, which is true, but the more aggressive path should be used by those trying to make up more ground, while the conservatives would be those who started investing earlier and their interest is in preserving capital, not necessarily being risky to accumulate more.

Good financial planning advice in your 40s is to not panic, remember that you still have around 20-30 years to reorient your finances and optimize your retirement fund. If retirement saving has not been topmost on your agenda till now you need to consider maximizing your contributions to the top limits on any 401k or IRAs that you do have, and consider pumping up as much as possible with the catch-up contributions.

It is good to not rely solely on employer-sponsored pension type plans and buy into at least one private retirement fund plan. Your 40s are the ideal life stage to review and adjust your financial assets or to get going if you’ve procrastinated til now, remember, you still have a bunch of time to make up. Look at the big picture when it comes to your whole financial position. If you have been investing aggressively in the more volatile investments such as stocks and mutual funds then now is the time to move toward consolidation. Scale back on those stock options to around three quarters of your total assets, and move that cash into saver options such as bonds and or certificates of deposit.

As you enter your 40s, you will probably be at or around the peak of your earning power. You need to review your financial portfolio so the mix of funds can move from growth-oriented investments to wealth consolidation funds, while re balancing your holdings towards those in money market and bond funds. Your late 40s may even be the time to consider buying an annuity for early retirement. Annuities can be a good way to make good a shortfall between your projected income and your life expectancy.

A necessary piece of financial advice in your 40s is to make the best possible ‘guesstimate’ of how long you will live and to set financial goals accordingly if you haven’t done so already. If you want to leave a maximum of assets to the beneficiaries of your estate, then you will require a different investment strategy to a situation where you simply want a good income for the whole of your life and leaving nothing ‘on the table’ when you die. If your best estimate of life expectancy is say 85 and your investments only give a target income to 80 then an annuity can provide the extra five years of income and will cost you less if you buy it in your 40s. Consider a living will too, if you already haven’t done so.

As your retirement approaches, the balance should shift further from wealth consolidation to bonds that yield a regular income stream but without reversing your capital growth rate. You should still hold on to some growth funds in your portfolio to ensure that your assets will be sufficient to see you through the remainder of your retirement in the lifestyle that you want.