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Informational Resources

Setting Goals in your Financial Plan

You have probably heard the old adage, “If you don’t know where you are going, you are likely to end up anywhere”. This applies to finances just as much as it does other aspects of life. A destination is a “goal” and without one there is no way of measuring your performance.

Therefore having a goal is essential to managing your money properly. After all, money is not an ‘end’ in itself. It is merely a ‘means’ to an end. This means we don’t save money for the sake of money but we save it for things such as ‘peace of mind’, college education, retirement, vacation home, etc. The more you understand this, the better equipped you will be for dealing with your own portfolio.

So we now know that having a goal of achieving a particular rate of return is not enough. Instead a better goal would be a goal to achieve “X” rate of return for the purpose of (insert personal objective here). It is only when we know the ultimate purpose of our money that we can manage it properly. This is why we set retirement funds aside in specialized accounts and this is also why we put money for emergencies in accounts that are more liquid and easier to access. Essentially, it is the ultimate “purpose” of the money that determines where, how and why we invest it.

Create a List
Understanding how goals play into our financial life is only part of the equation though. The next step is to actually go through the process and begin to create a list of all the financial goals you have whether they are short term or long term. This should be one of the first steps in financial planning. However, most people tend to invest first and then later on decide what to do with the money and which money will be used to accomplish that objective. The wise investor will decide the purpose of his or her money first.

What you need to do is take a moment and make a list of all your goals that have a financial commitment behind them. Think of the following: retirement, vacations, college education, a new car, etc. All of these goals require a certain amount of money and therefore they should be budgeted and planned for over a period of time rather than simply taking the money out of present income or investments.

The first step toward goal planning is simply being aware of the many goals that you have. To do this look at each area of your life and determine what goals there are that require a financial commitment. Life areas would include: family, personal, professional, etc. If you look at each area separately you will probably come up with unique goals and desires that you would like to achieve in that particular sphere of life. Make a list of all of these and then beside them write down the amount needed.

The next step is to prioritize them according to necessity. Find the ones most important and list them first while the ones that are extraneous should be listed last. Once you have done this then you need to see exactly what kind of return you need and how long you have to reach the intended goal. This information will give you the rate of return required and the amount of time invested. It is only with those two numbers that you can determine whether or not a particular investment is appropriate or not. Unfortunately most people never even go through the thought process of determining either of these attributes and as a result they end up in the wrong investment for the intended goal.

Because people change, so do financial plans. Therefore don’t expect this plan to be written in stone. Instead expect to revise it as plans changes and new needs arise. A financial plan is dynamic and should change as life changes. Therefore do a regular check to make sure your goals are still the same and that the money intended for those goals are in the proper type of investment.

Investing Basics: Income Streams and Annuities

It is very important to understand an income stream from a conceptual standpoint in the world of financial management. In short an income stream is a regular inflow of money. Another more technical name for this flow of money is an “annuity”. Though there are some technical differences in the income stream you receive from your employer versus the income stream of an annuity purchased from Insurance Company, the concept is basically the same.

Anybody who has played the lottery has probably encountered the lump sum option or the regular payment option. This is a basic choice between an income stream and a lump sum distribution. So the question is this: What is the big difference between these two amounts? Or what is the main factor differentiating the two? The answer is time. More importantly proper logic tells us that the money we have in our hand today is worth more than any money we have in our hands in the future? Why is this so? Because any number of things could intervene between now and then. Thus, present money is always valued higher than future money.

The technical difference between these two types of distributions are calculated using the following formulas:

PRESENT VALUE OF AN ANNUITY

Future Value = Present Value x (1 + i)n

FUTURE VALUE OF AN ANNUITY

Present Value = Future Value x 1/(1 + i)n

These formulas essentially give a mathematical way to compare money in the present to money in the future. The variable “i” in the above equation stands for the % interest rate (i.e. .09 for 9%), while the variable “n” stands for the number of periods or terms being factored (if the income stream pays monthly then it would be 12 for each year – if yearly 1 for each year).

Once you have done the calculation you can easily determine whether it is wiser to take a lump sum lottery distribution or to receive yearly payments in the form of an annuity. Usually the better option will turn out to be the lump sum distribution. However, the lump sum distribution requires proper management to ensure that it is in fact the better option. Of course, the same concept applies to distribution from a retirement plan or even in calculating how much you will need upon retirement.

One easy exercise is to figure out for yourself how much you will need at retirement. All you need do is calculate your present level of income and then take 80% (the accepted sum of future living expenses by most financial planners) of that amount and then use the “Future Value” formula to calculate how much that amount would be in future dollars on the day you retire. Whatever that sum, it is the amount you need to accumulate in order to fund your retirement. You can then use this to determine how much you need to invest in order to reach that goal.

Posted in Investing and Financial Planning, Retirement | Tagged basics | Leave a comment

Saving Money and Accumulating Wealth: You, Incorporated

Here, we will make an imaginative leap into the realm of ideas. We are going to imagine ourselves not as people but instead as businesses. For those of you familiar with business jargon and characteristics this should be relatively easy. For others it may be more difficult. However, if you take the time to understand the concept you will surely gain some useful insight into your own life.

The first think we would recognize about you, as a business would be your share price. The share price of a business is related to its financial strength and its prospects for the future. Can you imagine how someone might evaluate your present financial situation and your prospects for the future? Would you be a “hot stock” or would you be a “bottom dweller”? Would you be a value oriented investment or a blue chip? It all depends on what the investors deem the merits and the liabilities of the way you conduct yourself in the business of life. Let’s think about this further.

Let’s talk about certain important aspects of each and every business. These aspects are marketing, research and development, management and sales. These are not only sound ways to evaluate a business but they are also sound ways to evaluate a life.

Marketing is the way a company gets its message out into the world and how the consumers perceive the value of the product the company is trying to sell. Think of all of your talents and skills as the package you are trying to sell. Essentially you place yourself out there on the free market of life and you receive in return compensation in the form of a job, friends and family and respect. What would you say the evaluation has been of your worth considering the salary and income you now receive? What would you say the evaluation has been in terms of what you are receiving in the form of relationships with other people and respect? Do you think you are not getting what you feel you deserve? If so, then think about it from a marketing perspective. Perhaps you are not advertising yourself well enough or perhaps the consumer is not as aware as they should be of your inherent value. Think about all of the ways you can evaluate your life from the perspective of marketing and see what insight develops as a result.

Research and development is where companies create their new products. In terms of your life it would be the education you are undergoing or the growth you are experiencing as an individual or of latent talents that you have yet to fully realize. For example, if you have a talent for writing and have been working for many years to learn the craft of a novelist then it could be said that this increases your market value because of the potential for a big payoff in the future when this talent is fully realized. Consider other aspects of research and development and how they might apply to your life.

Management is the way a company conducts itself and functions in the world on a day-to-day basis. Management is essentially about discipline. A company without discipline is a company waiting to fail. The same could be said about life. How are you managing your life? What are you doing on a day-to-day basis to increase your value in the world and to the people around you? Do you think that a change of management might be in order? Consider the ways management has contributed to the success and to the failures you have experienced in life.

Lastly we need to consider the sales part of the organization called you. No matter how good the marketing is for a product nothing will happen if the sales force doesn’t actively go after the sale and entice the customer to make a purchase. We can see this illustrated in life in the example of an individual who has the degree and the right combination of intelligence and social charm to be a success but yet never send off his resume or fails to go to the job interviews. A sale is the direct communication that takes place between the company and the consumer. The same problem would be illustrated in the case of a man who women find generally attractive but yet never has a date because he fails to get the nerve up to ask anyone out. Sales must be a part of any company including the company called you. Without it nothing of value will ever be achieved. Think about the impact selling yourself has had in the successes and failures you have experienced in life.

Posted in Financial Planning, Investing and Financial Planning, Saving Money | Tagged advice, tips | Leave a comment

Avoiding Online Investment Fraud

The Internet is like anything else an investor may choose to use, it’s a tool. There’s really nothing magic about it, it’s just a convenient way to disseminate information, and it can be used well or used poorly. It can be used to publish good information or bad; and it can be used to help or to defraud.

There is no reason that an investor shouldn’t use online resources as part of their decision-making strategy. There are many useful online resources, some of which are even free of charge, which can help you research equities before investing. Too, there are plenty of legitimate opportunities that can be found online from those who have created stock trading systems, newsletters, and courses.

There is, however, fraud that exists. Criminals use the online world to perpetrate theft, fraud, con games and other types of thievery, and the situation has reached a point where some individuals have even become afraid to use the Internet to its fullest capacity. In fact, an Osterman Research study showed that among home computer users, 44 percent use the Web and email less than they did a year ago because of problems like spam, spyware, and the possibility of identity theft and Internet fraud. This unfortunate attitude however, is a bit short-sighted; it’s like refusing to use a hammer because of the possibility of hitting your thumb. There’s a lot the Internet has to offer an investor.

However, it’s always wise to proceed with caution, and know some of the warning signs of investment fraud. There is indeed a great deal of investment fraud that is perpetrated via the Internet, but you don’t have to fall victim to it. In most cases, common sense and instinct will tell you what’s real and what’s not.

1. The best way to avoid getting sucked into an online investment fraud is to keep your greed in check. Of course, we are investors because we want to make lots of money. We want to have more than the guy next door, we want to have a flashier car, and we want to have a bigger house. This is a natural part of capitalism, and to a degree, what drives the growth of our economy. But those desires must be countered with a reality check or disaster could strike. A controlled desire for wealth can drive us to achieve great things; uncontrolled desire leads to falling victim to fraud.

2. A lot of online investment schemes promise “guarantees” of incredibly high returns. Beware of any scheme that offers such a guarantee. In reality, if you are an investor, you should know already, there are no such guarantees. We make money in the market because there are calculated risks we take. The guy who puts money into certificates of deposit or treasury bills that generate maybe four percent annually gets a guarantee. We invest in things like stocks, commodities and futures contracts because the very lack of a guarantee is what generates higher returns. If an online investment scheme promises in big letters, “guaranteed high profits,” especially if it guarantees a specific amount, then that should be a huge red flag. Beware of investment programs that have guarantees.

3. Some promoters of investment schemes will use multiple aliases to hide their identity. If you are considering an online investment program, make sure that first, there is a name attached to the program, and second, that the name is legitimate. At the very least, do an online search of the promoter’s name and see what turns up. If your search turns up nothing outside of the one program, that should be a red flag–it’s very possible that the individual is using different aliases for each program they are promoting. And of course, if they feel they have to use aliases, then they more than likely have something to hide.

4. There are many legitimate offshore investment opportunities, but here’s where you have to have your fraud detector on in full force. If you’re sending money to an offshore location, you may have very little recourse if you are defrauded. Offshore investment promoters may be very difficult to track down. That picture on the web site of the skyscraper may be just a picture–the real office may be nothing but a mail drop.

5. Beware of promotions from companies that are not licensed. Research any company or promoter as much as possible before investing, and check it out with your state securities regulator, the SEC, and other government regulating bodies.

Posted in Investing and Financial Planning | Tagged advice, stocks, tips | Leave a comment

Saving Money and Accumulating Wealth: Fundamental Principles of Wealth and Resource Management

An objective of ours is to help you learn how to find financial success. However, there is more to doing that than just crunching numbers and making investments. The main reasons most people do not achieve financial success is because they fail to apply fundamental lessons that apply on a much wider basis than finance alone. This section will discuss some of those various areas and suggest ways in which you can improve and learn the skills necessary to not only be a success financially but to be a success in life in general.

You will notice that we use the phrase “resource management” as opposed to financial management. This is because many of the lessons covered below are fundamental to success in many areas of life and can be applied beyond the arena of finance. Essentially, for our purposes, a resource comprises anything, which we use to achieve a desired end or objective. Thus, the body is a resource as well as our talents and abilities and anything else that would fall under this criterion. Keep this in mind as you read the following topical subjects and try to imagine how they apply to your life on a broader basis.

Below you will find brief descriptions about the topic as well as an overview of what is covered and basic ways in which it applies to finances and other aspects of resource management:

Balancing Income and Expenses – This topic is concerned with understanding the concept of a zero-sum system which we call basic money management. No matter how much money you make it has to be accounted for somewhere and no matter how much you spend it has to come from somewhere. This section deals with finding out where you may or may not be having problems from a budgetary standpoint and how to make improvements.

Credit Cards – This is a general overview of credit cards and a discussion on when they are appropriate and things to know when using credit.

Debt – The concept of debt is applied on a much larger basis here. The good types of debt are discussed as well as the bad types as well as how to manage it once it has been incurred.

Saving Money – The main topic is saving money but the larger issue is learning how to make do with less and in so doing accumulate wealth that can begin to work for you and provide a larger return in the long run.

Your Estate – This is a basic discussion of what an estate is and how it helps you to achieve a clearer view of your finances. We discuss no details on estate planning in this article.

Discipline – This is a general discussion on the quality of discipline and how it can make for success or misery in finance and other aspects of life.

Risk – Risk as a concept central to compensation is the topic discussed in this article. This article also helps you to define your own risk profile.

Using Goals In Your Financial Plan – Goals are important for measuring performance and evaluating proficiency in resource management. We discuss how using goals in a financial plan helps you make more intelligent decisions and better prepare for the future.

Emergency Money – Emergency money is important for any financial plan. Here we discuss why it is important and some rough guidelines on how much to set aside.

Inflow v. Outflow – This articles goes deeper into the income and expense issue, which was touched on in a previous article.

Record Keeping – Record Keeping is an often-neglected aspect of finances. This article discusses why it is important and pros and cons of various storage methods.

Wish Lists and The Purpose of Money – This article looks at money from a philosophical standpoint and helps you to place proper emphasis on it in life and achieve goals far more important than wealth.

Managing Your Finances Yourself – This article gives general guidelines for those who choose to manage their portfolio by themselves.

Money as Energy – This article gives another philosophical view of money and shows how this view can help you achieve success in financial management.

You, Incorporated – This article challenges you to look at yourself as a corporation and shows you how this viewpoint can give insights to meaningful changes that can make a profound difference qualitatively and quantitatively.

Wealth Consciousness – This article discusses why some people achieve wealth and others do not.

The Law of Exchange – This article applies the concept of exchange on a much larger basis and show how it functions as a basic law involving the management of any resource.

Why Some Accumulate Wealth and Others Do Not – This goes deeper into the “wealth factor” and explains other key differences in behavior and psychology that the wealthy have when compared to other people.

Delayed Gratification – This is one of the most important lessons and one of the biggest keys to achieving success in many areas of life.

Abundance – Abundance is the key mindset required for high level of achievements in finance. This article discusses how to evaluate your own attitude and how to make changes for the better.

Paying Yourself First – This article discusses a very old principal that is one of the first keys to accumulating money.

The Law of Diminishing Returns – This is the last philosophical based article as well as the last of the fundamental principles. Understanding this concept helps you to know when it is time to cut your losses or focus in another direction.