Are you making progress toward your financial goals? Are your finances in order? Are you prepared for a financial emergency? If you’re not sure, take time to thoroughly assess your finances so you have a road map for your financial life:
Evaluating where you currently stand financially will help you determine how much progress you are making toward your financial goals. There are several items to consider:
Your net worth — Prepare a net worth statement, which lists your assets and liabilities with the difference representing your net worth. Prepared at least annually, it can help you assess how much financial progress you are making. Ideally, your net worth should be growing by several percentage points over inflation.
Your spending — Next, prepare a cash-flow statement, detailing your income and expenditures for the past year. Are you happy with the way you spent your income? You may be surprised by the amount spent on non-essential items like dining out, entertainment, clothing, and vacations. This awareness may be enough to change your spending patterns. But more likely, you will need to prepare a budget to help guide your future spending.
Your debt — Debt can be a serious impediment to achieving your financial goals. To assess how burdensome your debt is, divide your monthly debt payment, excluding your mortgage, by your monthly net income. This debt ratio should not exceed 10% to 15% of your net income, with many lenders viewing 20% as the maximum. If you are in the upper limits or a uncomfortable with your debt level, take active steps to reduce your debt or at least lower the interest rates on it.
Calculate how much you are saving as a percentage of your income. Is it enough to fund your future financial goals? If not, go back to your spending analysis and look for ways to reduce expenditures. That may mean reassessing your lifestyle choices. Commit to saving more immediately and then take steps to make that commitment a reality.
At least annually, thoroughly analyze your investment portfolio:
Review each investment in your portfolio, ensuring that it is still appropriate for your situation.
Calculate what percentage of your total portfolio each asset type represents; compare this allocation to your target allocation and decide if changes are needed.
Compare the performance of each component of your portfolio to an appropriate benchmark to identify investments that may need to be changed or monitored more closely
Finally, calculate your overall rate of return and compare it to the return you estimated when setting up your investment program.
If your actual return is less than your targeted return, you may need to increase the amount you are saving, invest in alternatives with higher return potential, or settle for less money in the future.
To make sure you and your family are protected in case of an emergency, set up:
A reserve fund covering several
months’ of living expenses.
The exact amount you’ll need depends on your age, health, job outlook, and borrowing capacity.
Insurance to cover catastrophes.
At a minimum, review your coverage for life, medical, homeowners, auto, disability income, and personal liability insurance. Over time, your insurance needs are likely to change, so you may find yourself with too much or too little insurance.
Take a fresh look at your estate planning documents and review them every couple of years. Even if the increased exemption amounts mean your estate won’t be subject to estate taxes, there are still reasons to plan your estate.
You probably still need a will to provide for the distribution of your estate and name guardians for minor children. You should also consider a durable power of attorney, which designates someone to control your financial affairs if you become incapacitated, as well as a healthcare proxy, which delegates healthcare decisions to someone else when you are unable to make them.
If you’d like help evaluating your finances, please call.
Everyone approaches their finances differently, but there are common mistakes that certain money personalities make. The following highlights five different money personalities, the mistakes they make, and how they can improve their financial picture.
Because they put all their financial resources and energy into their business, entrepreneurs may make mistakes such as cashing out their retirement plans to fund their business, holding too much debt, or even getting behind on self-employment taxes.
Entrepreneurs would be best served by developing a business plan with income and expense projections to ensure they use debt wisely to fund their business. They should also make contributions to a retirement plan annually, even if it’s only a few thousand dollars. And finally, entrepreneurs should work with a tax professional to help reduce their taxes as much as possible,
while making sure quarterly tax payments are made.
This is the person who follows all the rules and does it just right. They fully fund their retirement
accounts each year, don’t carry much debt, and have plenty of savings in the bank for any unexpected expenses. While this money personality may get to retire early, they may want to stop and smell the roses once in a while.
Professionals, such as doctors and lawyers, fall into two groups: savers and spenders. Those who
fund a large lifestyle may find they have trouble funding their retirement because they’ve spent too much.
Big earners need to develop a financial plan so they understand how much money they will need
to fund their retirement based on the lifestyle they want to live. They should also pay themselves first with a predetermined amount to
saving, before buying nicer cars or bigger houses, as well as considering setting monthly spending limits.
This money personality spends their paycheck as soon as it hits their account, and in some cases, live beyond their means. They have no savings if an unexpected emergency comes up, and they are likely carrying too much debt. To be able to retire, this person needs a financial plan with a strict budget to help pay down debt and develop both long- and short-term savings.
This person saves and spends. They want to enjoy life experiences along the way to retirement, such as vacations, maybe a boat or
cabin. While they contribute to their 401(k) plan, they may not have a financial plan that includes short-term financial goals and how much they need to save for retirement.
While it is great that this money personality saves, they need to ensure that their spending isn’t outpacing their savings. By developing a solid financial plan, this money personality can create a more balanced approach to saving and
spending.
You should determine where you fall on the spectrum of money personalities so you can develop a financial plan that suits your personality, but also helps you secure your future.
Please call if you’d like to discuss this topic in more detail.
If you’re in the markets for the long haul and look to capture the benefits of long-term trends, you should focus on the tools that maximize your long-term rate of return while managing the risks you take:
Asset allocation. A long-term asset allocation strategy aims at determining an optimal mix of stocks, bonds, and cash equivalents in your portfolio to suit how much risk you’re willing to take. The benefit of investing in all three asset classes is diversification — spreading investments among assets that have different cycles of return.
Portfolio rebalancing. This may be the most overlooked technique for potentially boosting returns and control-ling risk. Yet the technique is relatively simple: once a year (or some other pre-determined time period), compare the percentage of your assets in each class to your strategy. Then sell some assets from the categories that are larger than your strategy calls for and use the pro-ceeds to buy more of the assets that decreased in value. The principle is that rebalancing forces you to sell high and buy low.
Dollar-cost averaging. This technique actually puts market downturns to work in your favor. The
method is to invest a set amount of money on a recur-ring basis in each asset class. By continuing to make purchases when prices decline, you buy more shares than you do when prices are high. Keep in mind that dollar-cost averaging neither guarantees a profit nor protects against loss in a prolonged declining market. Because dollar-cost averaging involves continuous investment regardless of fluctuating price levels, investors should carefully consider their financial ability to continue investment through periods of low prices.
Between the strategies of trading actively and managing your portfolio strictly for the long term is a technique called tactical asset allocation. This involves moving significant chunks of your portfolio from one asset class to another, depending upon your reading of the changing prospects for risk and reward.
Trading involves market timing, which in turn depends on reading market and economic indicators with precision. Is watching the indicators for the right moment to move in a new direction the right approach for you?
To determine the approach right for you, please call me at 973-515-5184.
Use debt only for items that have the potential to increase in value, such as a home, college education, or home remodeling.
Consider a shorter term when applying for loans.
Make as large a down pay-ment as you can afford. If you can make prepayments without incurring a penalty, this can also significantly reduce the interest paid.
Consolidate high interest-rate debts with lower-rate options. It is typically fairly easy to transfer balances from higher-rate to lower-rate credit cards.
Compare loan terms with sev-eral lenders, since interest rates can vary significantly. Negotiate with the lender. Although most lenders have official rates for each type of loan, you can often convince them to give you a lower rate if you are a current customer or have an outstanding credit score. Review all your debt periodically, including mortgage, home equity, auto, and credit card debt, to see if less expensive options are available.
Review your credit report before applying for a loan. You then have an opportunity to correct any errors that might be on the report.
Based on data from the Survey of Consumer Finances, older adults with more outstanding debt commonly respond to liquidity constraints by working longer, delaying retirement, and postponing claiming Social Security benefits. The researchers found that more household debt translates to an expectation of about an extra 2.5 months of full-time work and an additional year of overall work. Individuals with a negative net worth (or more debt than financial assets) work for an additional two years. The study deter-mined that mortgage debt remains the most significant and common source of debt among older households, representing 69% of total debt in 2016. Older adults with a mortgage are 4.8% less likely to be retired and 3.1% less likely to receive Social Security benefits (Source: AAIIJournal, June 2020).
Emerging research on cognitive aging found declines in financial capability and concurrent lower investment performance among older individuals. Investors older than 75 on aver-age experience investment returns that are 3% lower than those of middle-age investors. The return disparity rises to 5% among older investors with greater wealth (Source: AAIIJournal, July 2020).
On a broad basis, there are a few main investment objectives to help you accomplish your goals. Understanding these objectives is important because certain investment strategies and products are appropriate for one type of goal but perhaps not for others. The following will provide an overview of the main investment objectives.
Capital appreciation is an objective for achieving long-term growth. If saving for retirement is one of your objectives, the strategy to meet it would most likely be to invest in a qualified retirement plan where the investments work for many years.
This objective is not only limited to a qualified retirement plan; itcan also be about wealth building over many years. With a capital appreciation objective, you need to be confident that your portfolio is going to grow over time, and not concern yourself with day-to-day fluctuations. Watch for any changes with the companies you are investing in that could affect your long-term growth. And you should rebalance your portfolio if it strays from your asset allocation strategy.
If your objective is to generate current income, you would most likely invest in stocks that pay a high dividend on a consistent basis, as well as highly rated bonds. People that pursue a current income stream may be retired and use the income for living expenses. Others may use this strategy to pay for certain needs, such as a college education, where they use the interest
to pay without touching the principal.
The objective is typically for those who want to make sure they don’t outlive their money. Security is extremely important even if that
means giving up return. To meet a capital preservation goal, the strategy would be to invest in bank certificates of deposit, U.S. Treasury
issues, savings accounts, and fixed income bonds, such as municipal bonds, other government bonds, and corporate bonds.
Most experts agree that goals- based investing is the best approach to reach investment goals. With this method, you set investment goals based on reaching specific life goals. You consider each goal individually to set a time horizon and a risk level.
To help you determine your comfort with risk and time horizon, ask yourself these questions:
What is your intent for investing this money?
When would you like to withdraw your money?
Do you want your money to achieve substantial capital growth by the time you withdraw it or are you more interested in maintaining the principal?
What is the maximum decrease in the value of your portfolio that you are comfortable with?
Once you have a better understanding of why you want to invest and what you are hoping to achieve, you want to be very specific when developing your goals. Your investment objectives are the foundation of your investment plan, so don’t take them lightly.
There are various methods for setting goals, but one of the best to consider is the SMART goals format, which will help guide you through the process of setting your investment objectives. Following are the elements of the SMART format:
Specific — make each goal specific and clear
Measurable — make sure you define goals that can be measured
Achievable — make sure it is realistic
Relevant — make sure the goals relate to your life
Time-based — assign a timeframe so that you can track your progress and know when it is achieved
After you have defined your goals, you will then want to determine a timeframe for each goal. You are not going to achieve all of your goals at once, so break them down by goal categories such as short, medium, and long term. You will then want to set a specific number of months/years in which you want to achieve each goal.
Once that is complete, the final step is to determine a dollar figure for each goal. Some goals will be easier than others to define a dollar amount. For longer-term goals, such as retirement, education, or starting a business, spend the time to research what each of these could cost.
Once you have your goals clearly defined in some type of format, it will make it much easier to develop an investment plan, as well as a budget that includes your savings goals.
These tips can help baby boomers get back on track with estate planning.
1. Know what your kids expect — and what you plan to give them. Even boomers who’ve saved a lot may end up spending much of what they’ve accumulated, since retirements are likely to be long and healthcare costs expensive. Active boomers may be planning on spending much of their hard-earned money on themselves. They believe they’ve done a lot for their children already. That’s fine, but if this is your plan, you may want to let your children know.
2. Have a plan for the end of your life. While taking steps to live a healthy lifestyle is important to enjoying a great retirement, boomers shouldn’t assume they’ll be healthy forever. Sickness and disability can happen, and it will be easier for you and your family to deal with if you have a plan. Not only should you think about long term-care and how you’ll pay for it, you should also make sure you have end-of-life planning documents in place.
3. Make sure your estate plan is up-to-date. As you get older, your estate planning needs change. If your kids are independent
adults, providing for them is no longer as critical. You may have grandchildren who you want to receive part of your estate or new property that should be incorporated into your will. Or your family composition might have changed. Boomers need to sit down and review their estate plans to make sure they are properly conveying all their wishes.
4. Decide if, and how, you want to leave a legacy. If you count yourself among those for whom leaving a legacy is important, now is the time to start thinking seriously about how to turn those legacy dreams into reality. If your goals are ambitious — like starting a foundation or charity or endowing a scholarship — you should start
planning now. The more lofty your goals, the more important it is that you take clear, concrete steps to turn your dreams into reality — like meeting with the leaders of the organization you support and finding out how you can best help them. After all, you won’t be able to do this work after you are gone.
Not sure how to put these estate-planning tips into action? Please call if you’d like to discuss this topic in more detail.
How to be like Buffett – by buying life insurance, to provide financial protection for your loved ones. Coverage for family breadwinners has become especially important in 2020, during a deadly and highly
contagious disease. From MoneyWise, Oct. 6
In 1903 Edward Hale became the United States Senate chaplain. At one point he was asked, “Do you pray for the senators, Dr. Hale?” He replied, “No, I look at the senators and I pray for the country.”
“The distrust of wit is the beginning of tyranny.” -Edward Abbey
What’s most important to you right now? Employment, the economy, election, or ‘Rona’? We seem to be climbing the proverbial wall of worry daily, and the only thing changing is the incline of that wall- upwards!
If you or anyone you know needs an element of perspective, please call or contact me!