Financial Abundance

Many people are questioning what they should do in these uncertain financial times.  My best advice is to have a current financial plan.  Now, more than ever, the sage advice that, “if you fail to plan, you plan to fail” is applicable.

Financial planning is not mysterious and does not require that you pay a “financial planner” to do it for you.  The following eight steps will provide an outline of how to begin planning your financial future:

1. Become a saver, not a consumer. Why do our media call Americans consumers?  While food, clothing, medicines, etc., are required, much of our consumption is discretionary.  Your financial plan must determine your current savings amount.  Between now and retirement, individuals should save at least 10 percent of their net income.  This saving can be accomplished through company 401K plans or a combination of tax deferred retirement plans and individual savings.  The key is to start saving now, to help ensure that you will have the financial resources required when you retire.

2. Establish a Budget. It is important that you have a budget to understand your current expenses.  I recommend a two-step budgeting process.  First, budget for items that are absolutely required for your day to day living.  The second part of this budget would be expenses that you would like to include, but are not critical to your enjoyment of an abundant life.  If the budget is not at least 10 percent less than your after-tax income, cut items from the “nice to have” list until reaching the 10 percent savings goal.

3. Pay off all non-mortgage debt. The first use of the savings generated above is to remove any non-mortgage debt.  This means to paying off credit card debt, student loan debt, or any other debts that you may have.  Other than your fixed rate mortgage, all other debt should be eliminated through the use of your savings.

4. Build an emergency fund. With unemployment at ten percent, it should be obvious why everyone needs an emergency fund.  An emergency fund provides for at least six months of required expenses.  This fund can be used  for unemployment, disabilities or unexpected medical expenses.   Keep the emergency fund in very safe investments such as money markets, short term bond funds, and CDs.

5. Save for college expenses and retirement through tax favored vehicles. With an emergency fund in place, it is time to begin saving for longer term financial goals, such as helping fund college expenses and/or saving for retirement.  Coverdell Education Savings Accounts and 529 College Savings Plans are tax-deferred ways of saving for college education.  Retirement savings can be placed in IRAs or 401(k) plans that also provide initial tax savings and longer term tax deferred investment accruals.  Use tax deferred vehicles to the maximum extent possible when saving for your retirement.

6. Invest appropriately for the goal you are trying to achieve. If your investment objective is short term (three to five years), use very safe investments, including certificates of deposit, money market funds and short term bond funds.  If your investment goal is medium term (five to ten years) riskier investments such as government backed bonds, municipal bonds, highly rated corporate bonds and some equities can be added to the investment pool.  If your investment is long term, (over 10 years) riskier investments, including emerging market stock funds, REITs, commodity funds, and other riskier investments can be added to your portfolio.  Only a small portion of your portfolio should be dedicated to the riskier investments.

7.  Stay on target. It is very easy for fear (or greed) to enter into our financial decisions.  Bubbles will continue to occur in our economy and markets will continue to rise and fall.  However, by maintaining your strategic investment approach, you can avoid making irrational, fear based decisions when conditions get uncertain.  While it may be beneficial to make well-reasoned tactical investment plan modifications, it is unwise to make emotional, reactionary decisions regarding your investment strategy.  A written plan on your investment approach will help avoid this pitfall.

8. Update your plan at least annually. Revisit all aspects of the financial plan, at least annually, to determine if circumstances have changed.  If a change has occurred, it is time for a plan update.  With an active, up to date plan, you minimize the fear of financial uncertainties and maximize your ability to live from a sense of financial abundance.

As a very wise person once said, “a rich person is not the one who has the most, but the one who needs the least”.  By honestly planning for your financial requirements, you can determine your requirements for an abundant financial life.