Tag Archives: Financial Planning

Planning and Achieving Financial Freedom

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Financial freedom can be an elusive—and hard-to-define—goal.

Financial freedom is often said to be in the eye of the beholder. To some it may mean freedom of debt and being able to fund your lifestyle with your cash flow; to others it may mean early retirement on a Caribbean island. Whatever your financial goals or definition of financial freedom, there are ways and things you can learn to help you get your financial house in order.

Once you’ve decided that financial freedom is one of your top goals, you can start taking steps to achieve it. Thus, the first step toward achieving financial freedom is to define exactly what it means for you. You can’t generally achieve something that you haven’t defined. So, once you’ve defined what financial freedom means to you, you can start taking steps toward your goals.

“What then is freedom? The power to live as one wishes.” Marcus Tullius Cicero

Just because you have money does not mean you have financial freedom. There have been numerous people, especially professional athletes and entertainers, who have earned millions of dollars and subsequently lost it all through reckless spending and debilitating debt. Thus, even if you have a lot of money, if you don’t know how to manage and make your money work for you, it will more than likely disappear.

Financial freedom typically means having enough savings, financial assets, and cash on hand to afford the kind of life you desire for yourself and your families. It means growing savings and investments to a level that enables you to retire or pursue the career you want without being driven to earn a wage or salary each year. Financial freedom means your money and assets are working hard for you rather than the other way around…you’re working hard for your money.

In other words, financial freedom is about much more than just having money. It’s the freedom to be who you really are and do what you really want in life. It’s about following your passion, making choices that aren’t influenced by your bank account, net worth or cash flow, and living life on your terms.

Track your expenses

It’s difficult to know how to save money if you don’t have a good idea of where your money is going. Carefully track your spending habits for a typical month. Doing this will help you to become more conscious of your discretionary expenditures. It will also reinforce what expenses are essential and remind you to plan for unexpected expenditures, like medical emergencies and car repairs. Therefore, it is vital to understand and to know where your money is going.

Make a budget

Once you’ve taken inventory of your expenses, next step is to create a budget. While budgeting can sound like a cumbersome task, you may want to start by using a budgeting calculator to get a feel for how you are currently spending your money and how you’d like to change your spending.

One popular budgeting method is the 50/30/20 rule. The 50/30/20 rule is a way to divide your post-tax income based on your needs, wants and savings. The rule states that people should spend 50% of their income on their needs. This includes health insurance, housing, transportation, and groceries. Then, the guideline states that people should spend 30% of their income on wants or non-necessities such as entertainment, travel, and more. Finally, the last 20% of a person’s income should be saved or invested. This might include retirement savings and building a stock portfolio.

Once you have created a budget, don’t put it in a drawer and forget about it. Instead, make it a working and living document that you check and refer to often. Spend a half-hour per month reviewing how your actual expenses match your budget and make adjustments as necessary.

Automate your savings

Automating your savings and investing is one of the easiest steps you can take to ensure that you are on the path to financial freedom. You can set automated contributions to your employer-sponsored investments, including your 401(k) contributions and employee stock options.

When your savings and investing are automated, your money will continue to grow without you having to think about it. This will help you to reach your financial goals easily and quickly.

Have some percentage (10% to 20%) of your paycheck automatically deposited into a separate account—whether it’s a savings account, a 401(k) or an IRA. Money that isn’t easily accessible is not easily spent.

Unfortunately, many Americans are not saving enough to maintain their current standard of living during their retirement years. It was found that about 21% of Americans have nothing saved for retirement, according to the Northwestern Mutual’s 2018 Planning & Progress Study.

Start investing early

Follow the adage, the best time to start investing was twenty years ago; the second best time is today. You should start investing in a tax deferred account, preferably with your employer matching a portion or all of your contribution.

Planning for retirement is a marathon and not a sprint. Even if you are starting small, the most important thing is to get started. Therefore, it will likely take decades to reach your goal. Therefore, it is important to remember why you want to achieve financial freedom. Keeping your purpose, goals and the bigger picture in mind will help you navigate the day-to-day financial decisions.

Once you become financially free, you have more choices of how to live your life and spend your days.

When you decide that you want to start working toward financial freedom, it is important to remember that you will not become financially free overnight. However, according to certified financial planner David Rae, in a 2018 article in Forbes magazine, there are eight hierarchies of financial freedom that you can work towards:

  1. Level 1: Not Living Paycheck to Paycheck – The first level of financial freedom is building up an emergency fund and paying off any credit card debt. Unfortunately, living paycheck to paycheck is the reality of millions of Americans. According to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2017, some 40% of households could not cover a $400 unexpected expense.
  2. Level 2: Enough Money to take a sabbatical from your work – Accumulating enough money to be able to take a break away from work can be rewarding. This does not mean you have to quit your job, but it sure is a good feeling to know you can.
  3. Level 3: Enough to be Financially Happy and still Save – it’s about enjoying your life and having the money to do it. There can be peace when you are earning enough to save, doing the things you enjoy and still having extra at the end of the month.
  4. Level 4: Freedom of Time – Many people desire more flexibility with their schedules. Freedom of time and financial independence go hand in hand. Together, they are about following your passion, or spending more time with family, and not going completely broke doing it.
  5. Level 5: Enough for a Basic Retirement – Think about what your bare minimum retirement would look like. By knowing your bare minimum retirement, and knowing that you have enough money saved to at least cover some standard of living in your retirement, will also influence other life choices you may make along the way.
  6. Level 6: Enough to Actually Retire Well – Knowing you are on track to accumulate a nest egg to support that lifestyle is a big win. Well done to those who have accumulated enough assets, or passive income streams, to be in a position to retire well.
  7. Level 7: Enough for Dream Retirement – It would feel great knowing that you are on track to have enough money to retire and be able to live your dream life. What is stopping you from getting there.
  8. Level 8: More Money Than You Could Ever Spend – Having more money than you expected to spend is great. Building enough wealth so that you could not possibly spend all of it is another.

Bottomline is that if you want to be financially free, if you want to be able to live the lifestyle of your choosing while responsibly managing your finances, you need to become a different person than you are today and let go of the financial mindset that has created your current financial predicament and has held you back in the past.

Attaining financial freedom, which means having enough savings, investments and cash flow to live as you desire, both now and in your later years, requires a continuous process of growth, learning and emotional strength. In other words, whatever has held you back and provided you comfort in the past or kept you less than who you really are will have to be replaced. You will have to become comfortable for awhile being uncomfortable. And in return, the financially empowered, purposeful, and successful you will emerge — like a butterfly shedding its cocoon.

References:

  1. https://www.richdad.com/what-is-financial-freedom
  2. https://smartasset.com/financial-advisor/financial-freedom
  3. https://www.forbes.com/sites/davidrae/2019/04/09/levels-of-financial-freedom

U.S. Middle Class Owns Few Financial Assets

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U.S. Middle Class Households Have Few Financial Assets, According to New Analysis from the National Institute on Retirement Security (NIRS)

New analysis finds that across generations, middle class households in the U.S. own few financial assets and the median amounts held fall far short of the assets needed to fund a secure retirement.

In 2019, middle class Millennials owned only 14 percent of their generation’s financial assets. The numbers are even worse for middle class Gen Xers and Baby Boomers, which owned eight percent and six percent, respectively, of their generation’s financial assets.

“In America, the middle class can no longer afford retirement. Middle class Americans face sharp economic inequality, with ownership of financial assets highly concentrated among the wealthy,” explained Tyler Bond, National Institute on Retirement Security (NIRS) research manager. “Now that we have a retirement system largely built around the individual ownership of financial assets in 401(k) accounts, middle class Americans are struggling to accumulate sufficient financial assets during their working years. This means the retirement outlook for many in the middle class is bleak at best.”

The research also finds low numbers when examining the mean and median financial assets owned.

  • For middle class Millennial households in 2019, the mean financial assets owned were $17,802, and the median was $7,800.
  • Middle class Generation X households had mean financial assets of $62,944, and median financial assets of $39,000 in 2019.
  • For middle class Baby Boomers, the mean amount of financials assets held was $93,298 in 2019, while the median was only $51,700.

Baby Boomer households are retired or near retirement, but their assets fall far short of what’s required to finance a secure retirement,” Bond explained. “A nest egg of $51,700, the median amount middle class Boomers hold, would generate only $2000 of income annually over 30 years. This means that many middle class Boomer households may struggle in retirement and could face a sharp reduction in their standard of living.”

The research indicates that implementing pragmatic fiscal policy solutions can help middle class households get on a better path to saving for retirement including strengthening and expanding Social Security; protecting defined benefit pensions; and ensuring access to a retirement savings plan through an employer.

For this research, the middle class is defined as those between the 30th and 70th percentiles of net worth, or the middle 40 percent. The research is based upon data from the Federal Reserve’s Survey of Consumer Finances (SCF). It examines financial asset ownership, a broader category than retirement assets.

According to the SCF, the category of financial assets consists of liquid assets, certificates of deposit, directly held pooled investment funds, stocks, bonds, quasi-liquid assets, savings bonds, whole life insurance, other managed assets, and other financial assets. It does not include physical assets such as a home or a car.

The data for this research is for households rather than individuals.

References:

  1. https://www.nirsonline.org/2021/10/middle-class-u-s-households-have-few-financial-assets/

Financial Planning and Investing

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“Take control of your finances, savings and wealth building with a financial plan.”

Whether you have short-term financial needs — such as planning for an upcoming vacation or holiday spending — or long-term plans like retirement, financial planning can help you organize your finances by evaluating your expenses and income. Yet, a 2020 Northwestern Mutual study found that 71% of U.S. adults admit their financial planning needs improvement.

Futhermore, the Northwestern Mutual research finds a third (32%) of Americans say their financial discipline has improved during the pandemic, and 95% say they expect their newfound habits will stick after the health crisis subsides.

Among the financial behaviors that people say they’ve adopted as a result of the pandemic and expect to maintain going forward are:

  • Reducing living costs/spending (e.g., cancel subscriptions, eat out less, etc.) – 45%
  • Paying down debt – 34%
  • Increasing investing – 33%
  • Regularly revisiting financial plans – 29%
  • Increasing use of tech/digital solutions to manage finances – 28%
  • Increasing retirement contribution/savings – 25%

A financial plan can show if you’re on track to meet your money and savings goals. Financial planning can include strategies for paying off debt, starting an emergency fund, saving up for a large purchase like a house, or building wealth.

Investors who stick to a financial plan have an average total net worth that’s 2.5 times greater than those who don’t follow one, according to Charles Schwab. Financial planning helps you understand where you are today. It also creates a roadmap to get you where you want to be in the future.

Investing is key to building wealth.

Time is on your side and key when it comes to building your wealth. That’s the magic of compound interest. Compound interest is interest earned on interest. Basically, it’s the reason why investments earn more money over time.

But before you start investing, it’s crucial that you’re financially prepared. Consider these four signs you’re ready to invest:

  • Have a long-term financial plan and strategy.
  • Have an emergency fund.
  • Research and prepare to invest.

Investing all depends on tim ane in the market and your unique financial situation. These signs are a good step to getting your finances in order. But consult a financial professional for comprehensive investment advice.

As a result of the personal finance challenges experienced by Americans during the pandemic, the 2020 Northwestern Mutual study found that  there was mounting interest in personal  financial planning that may be here to stay. “Personal finance is a lifelong journey; it’s not something you look into once and say, ‘OK, I checked that box,’ and move on,” explains Matthew Pelkey, OppUs’ director of financial education. “Just the simple act of looking into things you can do to be more deliberate in your financial life will give you that agency over your finances — and create the habits that are really what produce good financial health.”

Financial planning can equip you to handle life’s many unexpected financial twists and turns. Although, it will vary, depending on your stage in life. You don’t need to know everything — but knowing and planning for the essentials will provide a solid foundation. Always remember the adage:  “Failing to plan is planning to fail.”

  • References:
    1. https://news.northwesternmutual.com/planning-and-progress-2020
    2. Strategic Business Insights, MacroMonitor 2018-2019 Report, February 2019.
    3. https://www.opploans.com/oppu/articles/financial-planning/

    Black Wealth Summit

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    Receiving a College Degree Accumulates Wealth for Whites and Not For Blacks

    Wealth managers investing billions of dollars toward racial equity are confronting disparities that are growing worse in some ways even as there are some notable signs of change, according to the Black Wealth Summit. For example, the typical White family has eight times the wealth of the typical Black family, according to the 2019 Survey of Consumer Finances (SCF). The research showed that long-standing and substantial wealth disparities between families in different racial and ethnic groups were little changed since the last survey in 2016.

    Wealth is defined as the difference between families’ gross assets and their liabilities.

    During the Black Wealth Summit, John Rogers of Ariel Investments cited studies by the St. Louis Fed showing that white households with college degrees tend to build wealth while net worth often declines among Black college graduates. The median and mean wealth of Black families is less than 15% of White households’ wealth, according to the Fed’s latest figures from last year.

    John Rogers launched the nation’s first Black-owned money management and mutual fund firm when he was only 24 years old. His firm has reached nearly $17 billion in assets under management.

    Signs of change amid widening disparities

    The data confirms prior research on the role of parental wealth in the transmission of lasting economic advantage: Less-wealthy parents, mostly Blacks, are less able to financially help their adult children, making it more difficult for the next generation to accumulate wealth.

    In addition, Black college-educated households are far more likely than their White counterparts to give financial support to their parents. These parents may have entered the workforce at a time when their only employment provided no pension or retirement savings benefits, or even Social Security.

    In contrast, parents of White college-educated households have mostly benefited from employment-related retirement benefits. Thus, the pattern among White and Black college-educated households is the opposite: Young college-educated White households are more likely to receive financial support from parents and at considerably higher levels

    The findings confirms prior research, which shows that the typical Black college-educated household does not have the same opportunities to add to their family wealth building as their White counterparts, who report large wealth gains at least up to the Great Recession.

    Understanding factors such as inter-generational transfers, homeownership opportunities, access to tax-sheltered savings plans, and individuals’ savings and investment decisions contribute to wealth accumulation and families’ financial security.

    References:

    1. https://files.stlouisfed.org/files/htdocs/publications/review/2017-02-15/family-achievements-how-a-college-degree-accumulates-wealth-for-whites-and-not-for-blacks.pdf
    2. https://www.federalreserve.gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.htm

    Difficult Financial Conversations

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    The financial realities of being a woman — 4 out of 10 people—men and women alike—do not realize that women need to save more for retirement. Life expectancy, the pay gap, health care costs, and career interruptions due to caregiving are all contributing factors, according to Fidelity Investments Women Talk Money.

    Video: 5 Investing Conversations to Have Now with guest: Anna Sale, host of the podcast “Death, Sex and Money” and author of “How to Talk About Hard Things”
    Hosted by Lorna Kapusta, Head of Women Investors at Fidelity Investments

    “Money is like oxygen. It’s all around us. We can pretend it’s not but we need it to breathe. When you don’t have enough you really feel it.” Anna Sale, host of the podcast “Death, Sex and Money” and author of the book “How to Talk About Hard Things”

    “Money is at once a tool which is the choices we make around money, what we spend it on, how we save it”‘ says Anna Sale. “And money is also a symbol which brings up all these questions about am I enough, am I worthy enough, am I living up to all these expectations for myself. When we talk about money as a tool, sometimes the symbolic ways that money kind of makes us feel lots of big feelings can distort those conversations about money being a tool.”

    References:

    1. https://www.fidelity.com/learning-center/personal-finance/women-talk-money/investing

    Things to Consider When Saving, Investing and Building Wealth

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    Saving for the future, investing to grow your money and building wealth has little to do with the economic cycle, the stock market valuation or even how much money you earn.

    It’s your mindset that can hinder your financial outcome and keep you trapped at an unsatisfying level of financial success. And, unless you can embrace a positive financial mindset, your ability to save, invest and build wealth will be hindered for the rest of your financial life.

    The process of investing and wealth-building can be improved by a adhering to the following tips to set yourself up for potential financial success and freedom:

    1. Start Early

    It’s important to invest a percentage of your salary each month. And, starting early could be a way to dramatically increase your savings over time. The good thing about starting early is you can get the benefits of compound interest!

    2. Set Investment Goals

    Are you saving up to buy a house? Or putting money away for retirement? Investing with a purpose will help you determine the right strategy and keep you on track to pursue your financial goals. Determine your financial freedom number.

    3. Know Your Time Horizon

    If you think you’ll need the money within the next five years, you might consider less volatile investments, like fixed income securities. Investing for the long-term (think: 15 or more years)?  You might think about adopting a less conservative strategy.

    4. Assess Your Risk Level

    Knowing how much risk you’re willing to take on will help you narrow down your investment choices and keep you from letting your emotions guide your investing during periods of high market volatility.

    5. Analyze Your Budget

    Take your monthly income and take a list of your monthly expenses and create a budget (for instance, the popular 50/30/20 budget). By looking at your spending, you may discover extra money to invest each month.

    6. Know Your Investment Choices

    Familiarize yourself with different investment types to see what makes sense for you. Are you interested in international stocks and ETFs (exchange-traded funds)? Maybe bonds and mutual funds?

    7. Go It Alone or Use an Advisor

    If you’re the independent type, you may be drawn to Self-Directed Trading. Or if you prefer an advisor or to automate your investments with a Robo Portfolio.

    8. Consider Avoiding Individual Stocks and Bonds; Invest in Market Index Funds

    If you’re still learning the ropes, you might be more comfortable sticking to broader based investments like index funds and ETFs. These types of investments require less of your time and are less risky since they invest in numerous companies. As an alternative, an market index fund is an investment that tracks a market index, typically made up of stocks, like the S&P 500, or bonds. Index funds typically invest in all the components that are included in the index they track,

    9. Diversify Your Portfolio

    If all your investments are your company’s stock, and they go out of business, you’ll wish you had a diversified portfolio. You may reduce your risk by holding a variety of securities that react differently to market changes.

    10. Think Long-term

    History shows whenever the market takes a dip due to volatility, it eventually bounces back. Be patient and disciplined: Give your money time, make consistent contributions and wait out inevitable market downturns.

    11. Don’t Forget High Interest Debt

    School loans or credit card debt can make allocating money to investments a tough choice. It’s possible to reduce your debt and invest, and we can help you accomplish both.

    12. Get Your Match

    Many employers offer a 401(k) match, which can be a great incentive to invest for retirement, helping you to potentially build tax deferred savings.

    13. Save and Invest for Retirement

    When you’re young, retirement seems like eons away — but for many, regardless of age, now is the best time to start saving for your golden years. You may consider looking into Traditional and Roth IRAs to get started. The typical retirement strategy is built on the pillars of your pension, 401(k) plan, your Traditional IRA, and taxable savings.

    14. Automate Your Contributions and Pay Yourself First

    Pay yourself first instead of saving what remains after monthly expenses. Set up recurring investments to take advantage of dollar cost averaging. With this strategy, instead of trying to time the market, you invest the same amount each month — sometimes you might buy high, but other times, you’ll purchase low.

    15. Beware of Fads

    Just because everyone is jumping on the latest meme stock or investing app doesn’t mean you should. Fad stocks are often unpredictable, so if this doesn’t align with your investment strategy, feel confident to sit them out.

    16. Be Informed

    A prospectus sheet details the performance of a company to help you understand its stock performance. And digital tools can help you track your investments, too. If you cannot dedicate time to read and research, invest in a market index fund which is one of the easiest and most effective ways for investors to build wealth.

    17. Don’t Neglect Your Emergency (or Peace of Mind) Fund

    Investing grows your money and helps build long-term financial freedom, but you need to be prepared for short-term unexpected expenses. So when setting out on your own, don’t forget to start setting aside funds in an emergency (or peace of mind) fund. This money should be liquid (not invested in securities), so you can access it for unexpected expenses.

    18. Watch Out for Fees

    Some brokers will charge a commission fee whenever you buy or sell stocks, which add up and make a dent in your overall returns. Trade U.S. stocks and ETFs commission-free with our Self-Directed Trading.

    19. Ask for Help

    Investing can get complicated. Don’t be afraid to reach out to a financial advisor for advice and support.

    20. Adjust as You Go

    As life circumstances change, it might make sense to move your money into different types of investment accounts or change up how much you contribute. Any time your financial circumstances change, remember to reassess your financial goals, plan and investments.

    21. Create and Follow a Financial Plan

    Every living adult needs to financially plan. A financial plan is a comprehensive overview of your financial goals, net worth, cash flow, debt, taxes, risk tolerance, time horizon and it provides the steps you need to take to achieve and manage them.

    22. Investing has risks.

    No one knows exactly what will happen in the future and investments could lose money, so be aware of how much you are able to invest and be comfortable leaving it there for a period of time since it may have ups and downs.

    23. A Wealthy (or Positive Financial) Mindset

    It’s imperative that you refocus your mindset and change how you think about yourself, your finances, and the world around you. If you keep thinking about things the same way, you’re going to get the same results. Change in the world around you doesn’t happen until you change yourself. Embrace and grow your positive financial mindset about money, wealth and financial freedom.

    Getting Started

    Getting started is often the hardest step for most new investor to take, but starting to invest today is advice worth implementing! “The best time to plant a tree is twenty years ago; the second best time is today.” And, what’s true for a tree is also true for growing your money.

    References:

    1. https://www.ally.com/do-it-right/investing/things-to-know-when-investing-in-your-20s/
    2. https://www.harveker.com/blog/11-principles-infographic-financial-freedom/

    October is National Financial Planning Month

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    “Financial Planning Month is a great opportunity to get your finances and budgets in order before life gets too busy.”

    See the source image

    October is National Financial Planning Month—an ideal time to plan your financial health and future. Research from the Brookings Institution shows that just one-third of Americans are truly financially healthy. Half are just coping, while nearly one in five are financially vulnerable, acdording to The U.S. Financial Health Pulse 2020 Trends Report. Financial health at a minimum addresses the ability of individuals and families to meet their current obligations and needs, absorb and recover from financial shocks, secure their future, and improve their financial situation over time. And, financial planning can be an essential tool in improving an individual and family’s financial health.

    As of August 2020, 33% of people in America were Financially Healthy, 50% were Financially Coping, and 17% were Financially Vulnerable  U.S. Financial Health Pulse 2020 Trend Report, Financial Health Network

    Many individuals think financial planning is only needed for wealthy investors with complex financial asset portfolios, but the reality is a financial plan is something that can help everyone — not just the wealthy. Financial planning simply means having a well-thought-out strategy that helps you achieve longer-term financial goals and build wealth while meeting near-term money needs.

    You should have a financial plan in order to increase your likihood of reaching your financial goals and maintaining your lifestyle. Financial planning includes budgeting, emergency planning, investing, tax planning, retirement planning, and basically other ways to get your finances in order and create mindful budgets to ensure a safe and secure future.

    • Financial planning applies to everyone, whether you’re just starting out or are a wealthy investor.
    • A financial plan answers real questions to help you make better day-to-day decisions and reach your financial goals—and it doesn’t have to be expensive or complicated.

    With a plan, you can set short-term and long-term financial goals and benchmarks. You can estimate the amount of money you will likely need to meet retirement, college, and health care expenses. You can also get a good look at your present financial situation—where you stand in terms of your net worth and cash flow, which will thehelp you understand the distance between where you are financially and where you would like to be in the future.

    Growing and retaining wealth takes more than just investing. Along the way, you must plan to manage risk, manage and eliminate bad personal debt, and defer or reduce taxes. A good financial plan addresses those priorities while defining your investment approach. It changes over time, to reflect changes in your life and your financial objectives.

    Having a savings account is a good start, but money in a savings account simply won’t produce the total returns and dividends that are needed for long-term financial success and very few Americans retire on savings alone. Rather, they invest some of their savings and retire mostly on the accumulated earnings those invested dollars generate over time.

    Investing your money and capital in assets is essential to achieve financial freedom. In fact, most Americans retire with the money that they earned from investing, not the money they set aside in their savings account.

    Last year, a Gallup poll found that just 38% of investors had a written financial plan. Gallup asked those with no written financial strategy why they lacked one. The top two reasons? They just hadn’t taken the time (29%), or they simply hadn’t thought about it (27%).

    Paying down debt is also an integral part of a financial plan. Many people get overwhelmed when thinking about debt and developing a strategy to pay it down. Debt, not including your mortgage, should consume less than 20% of your income. With your mortgage, debt should equal 40% or less. Paying the debt with the highest interest first will reduce the amount of interest you pay and saves more money; however, paying the smallest balances first allows you to see progress quicker.

    Financial planning is the key to getting on the road to financial success and freedom.

    A financial plan simply means knowing where you want to go financially and figuring out how best to harness your resources to get you there. And it’s not just about money. It’s about your “why” (purpose, cause or belief that drives you), your aspirations, your priorities for you and your family, and how to protect yourself both now and in the future.

    To get started mapping out your financial future, it’s essential that you understand why you’re doing what you’re doing. Knowing your why is the single most important question you can ask with respect to your financial future.

    Failure to ask and answer the question “why” can be the single greatest oversight you can make when it comes to your quest for financial freedom. Those who do have a strong sense of why they are “saving and investing” are more likely to reach their financial goals.

    After determining your why, here are 10 Steps you can follow to prepare a do it yourself (DIY) Financial Plan, according to Charles Schwab:

    1. Write down your goals—The first thing you should ask yourself are what are your short-term needs? What do you want to accomplish in the next 5 to 10 years? What are you saving for long term? It’s easy to talk about goals in general, but get really specific and write them down. Which goals are most important to you? Identifying and prioritizing your goals will act as a motivator as you dig into your financial details.
    2. Create a net worth statement—Achieving your goals requires understanding where you stand today. So start with what you have. First, make a list of all your assets—things like bank and investment accounts, real estate and valuable personal property. Now make a list of all your debts: mortgage, credit cards, student loans—everything. Subtract your liabilities from your assets and you have your net worth. But whatever it is, you can use this number as a benchmark against which you can measure your progress.
    3. Review your cash flow—Cash flow simply means money in (your income) and money out (your expenses). How much money do you earn each month? Be sure to include all sources of income. Now look at what you spend each month, including any expenses that may only come up once or twice a year.
    4. Zero in on your budget—Your cash-flow analysis will let you know what you’re spending. Zeroing in on your budget will let you know how you’re spending. Write down your essential expenses such as mortgage, insurance, food, transportation, utilities and loan payments. Don’t forget irregular and periodic big-ticket items such as vehicle repair or replacement costs, out of pocket health care costs and real estate taxes. Then write down nonessentials—restaurants, entertainment, even clothes. Examining your expenses helps you plan and budget when you’re building an emergency fund. It will also help you determine if what you’re spending money on lines up with what is most important to you.
    5. Focus on debt management—Debt can derail you, but not all debt is bad. Some debt, like a mortgage, can work in your favor provided that you’re not overextended. It’s high-interest consumer debt like credit cards that you want to avoid. Try to follow the 28/36 guideline suggesting no more than 28 percent of pre-tax income goes toward home debt, no more than 36 percent toward all debt. Look at each specific debt to decide when and how you’ll systematically pay it down.
    6. Get your retirement savings on track—Whatever your age, retirement saving needs to be part of your financial plan. The earlier you start, the less you’ll likely have to save each year. You might be surprised by just how much you’ll need—especially when you factor in healthcare costs. But if you begin saving early, you may be surprised to find that even a little bit over time can make a big difference. Calculate how much you will need and contribute to a 401(k) or other employer-sponsored plan (at least enough to capture an employer match) or an IRA.
    7. Check in with your portfolio—If you’re an investor, when was the last time you took a close look at your portfolio? Market ups and downs can have a real effect on the relative percentage of stocks and bonds you own—even when you do nothing. And even an up market can throw your portfolio out of alignment with your feelings about risk. Don’t be complacent. Review and rebalance on at least an annual basis.
    8. Make sure you have the right insurance—Having adequate insurance is an important part of protecting your finances. We all need health insurance, and most of us also need car and homeowner’s or renter’s insurance. While you’re working, disability insurance helps protect your future earnings and ability to save. You might also want a supplemental umbrella policy based on your occupation and net worth. Finally, you should consider life insurance, especially if you have dependents. Review your policies to make sure you have the right type and amount of coverage.
    9. Know your income tax situation—The Tax Jobs and Cuts Act of 2017 changed a number of deductions, credits and tax rates beginning in 2018. And that caught a lot of people by surprise as they filed last year’s taxes. For instance, standard deductions were increased significantly, eliminating the need to itemize for a lot of people. To make sure you’re prepared for tax season, review your withholding, estimated taxes and any tax credits you may have qualified for in the past. The IRS has provided tips and information at https://www.irs.gov/tax-reform. Taking advantage of tax sheltered accounts like IRAs and 401(k)s can help you save money on taxes.
    10. Create or update your estate plan—At the minimum, have a will—especially to name a guardian for minor children. Also check that beneficiaries on your retirement accounts and insurance policies are up-to-date. Complete an advance healthcare directive and assign powers of attorney for both finances and healthcare.

    “Saving is a great start, but planning to reach your financial goals is even better.”

    A financial plan can be especially important if you don’t have a lot of money because it can help you get on the path to greater financial strength and health. Think of it like a roadmap. Specifically, if you want to enjoy your senior years to the fullest, taking the time to financially plan for retirement is a smart bet to enhancing your financial health. Financial health at a minimum should address the ability of individuals and families to meet their current financial obligations and needs, absorb and recover from financial shocks, secure their future, and improve their financial situation and build wealth over the long term.

    Successful investing starts with knowing your purpose why and with financial planning. Investors who stick to a financial plan have an average total net worth that’s 2.5 times greater than those who don’t follow one, according to Charles Schwab research. Financial planning helps you understand where you are today. It also creates a roadmap to get you where you want to be.

    References:

    1. https://www.kiplinger.com/article/investing/t023-c032-s014-october-is-national-financial-planning-month.html
    2. https://www.brookings.edu/research/measuring-the-financial-health-of-americans/
    3. https://engineeringmanagementinstitute.org/knowing-your-why/
    4. https://s3.amazonaws.com/cfsi-innovation-files-2018/wp-content/uploads/2020/10/26135655/2020PulseTrendsReport-Final-1016201.pdf
    5. https://www.kiplinger.com/personal-finance/603659/financial-planning-is-for-everyone-yes-that-means-you
    6. https://loanatlast.com/october-is-national-financial-planning-month/
    7. https://www.schwab.com/resource-center/insights/content/7-important-questions-financial-plan-can-help-you-answer

    Own Your Net Worth and Cash Flow

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    8 out of 10 women will be solely responsible for their financial well-being. Some women will be ready. Many won’t. UBS Wealth Management Report

    As women’s life expectancies increase and the rate of divorce for individuals over age 50 continues to climb, more women will find themselves solely responsible for their own current and long term financial well-being.

    UBS Wealth Management embarked on research–Own Your Worth–to explore women’s thoughts and feelings, the challenges they faced, lessons they learned and advice they would impart to other women.

    With the wisdom of hindsight, nearly 60% of widows and divorcees regrettably wish they had been more involved in long-term financial decisions while they were married, according to UBS’ findings. A full 98% of them urge other women to become more involved early on.

    Unfortunately, too many women ignore the advice of widows and divorcees. In direct contrast to the advice, many married women are taking a lesser role in managing the household finances. In a counterintuitive twist, Millennials are the most willing to leave investing and financial planning decisions to their husbands.

    Fifty-six percent of married women still leave investment decisions to their husbands, according to UBS. Surprisingly, 61% of Millennial women do so, more than any other generation. What’s more, most women are quite content with their backseat role when it comes to investing and financial planning.

    UBS’ research reveals many reasons for women’s abdication, from historical and social precedents to family, gender roles and confidence levels.

    So. why do women minimize their role in major financial decisions? According to USB’ research, the reasons vary:

    • Gender roles run deep – Gender roles are ingrained from early in life and often prove hard to shake. In many cases, married couples are simply imitating the gender roles they witnessed growing up.
    • Men are still the breadwinners – Within families, 70% of men are the main breadwinners, in part because of the gender pay gap and the career breaks women take to raise children.
    • Time constraints are challenging – Whether married or not, women have many demands on their time. They take on the majority of household duties, including childcare and chores, as well as paying bills and tracking spending.
    • Competence vs. confidence – Together, history and society have conspired to affect women’s financial confidence. Both women and men think men know more about investing, and women are less confident than men in making major financial decisions. Women consistently underestimate their own abilities while overestimating what is required to be financially involved.

    Yet, most study respondents participated in some financial decisions while married, from handling cash flow and bills to saving and investing. Regardless of their level of engagement, however, most agree it wasn’t enough. The research shows:

    • 59% of widows and divorcees wish they had been more involved in long-term financial decisions
    • 74% don’t consider themselves very knowledgeable about investing
    • 64% of widows blame themselves for not being more financially involved (53% of divorcees)
    • 56% of widows and divorcees discover financial surprises
    • 53% would have done fewer household chores to find more time for finances
    • 79% of women who remarry take a more active role

    USB recommends three actions to take today

    The advice from women who have been there is clear: The time to become involved in your family’s present and future financial well-being is today, not when some unforeseen events happen in the future.

    Women are encouraged to get involved in their financial well-being as a form of self care, much in the same way you would take care of your health by:

    1. Owning your worth – Know where you stand and what you want for the future. Take the time to add up your assets and liabilities, like loans, credit and other debts, and ask for full transparency from your partner.
    2. Finding your voice – Start the conversation with your partner. Talking about money is considered taboo to some couples, particularly before they are married. But if you found yourself alone tomorrow, do you know what you’d do to make sure you’re financially secure? There is a tremendous benefit to having open communication about money with a trusted confidante.
    3. Setting an example – Model financial partnership for your family and loved ones. According to our survey, women are repeating the gender roles they saw growing up. As you begin taking a more active role in your finances, you can set an example of financial partnership for the younger generation.

    Though women are aware of their increasing longevity and the financial needs associated with it, most tend to focus their efforts on short-term financial responsibilities such as managing the household’s day-to-day expenses and paying the bills.

    In contrast, taking charge of long-term financial decisions, such as investing, financial planning and insurance, can have far more impact on their future than balancing a checkbook.

    By sharing decisions jointly, both women and men can face the future with optimism—and set an example of financial partnership for generations to come.

    Almost 60% of women do not engage in the most important aspects of their financial well-being: investing, insurance, retirement and other long-term planning. USB Wealth Management Report

    References:

    1. https://www.ubs.com/content/dam/WealthManagementAmericas/documents/2018-37666-UBS-Own-Your-Worth-report-R32.pdf
    2. https://www.ubs.com/us/en/investor-watch/own-your-worth/_jcr_content/mainpar/toplevelgrid_1797264592/col2/teaser/linklist/link_2127544961.2019551086.file/PS9jb250ZW50L2RhbS9XZWFsdGhNYW5hZ2VtZW50QW1lcmljYXMvZG9jdW1lbnRzL293bi15b3VyLXdvcnRoLXJlcG9ydC5wZGY=/own-your-worth-report.pdf

    Growing Your Money

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    When investing your money in the stock market, doing your research and investing in what you know are crucial elements of successful investing. You don’t have to be a financial expert to start buying stocks, but the more you know going in, the more likely your investing journey will be successful.

    It’s critical to understand that stocks represent legal ownership in a company; you become a part-owner of the company when you purchase shares.

    People ultimately invest in stocks with one end-goal in mind: to grow their money and build wealth.

    But it’s important to note that growing your money and building wealth are not guaranteed. Investing in individual stocks carries much more risk than buying bonds or putting your money in index funds.

    As you begin to research stocks, first know how much risk you can take, or your risk tolerance, and your time horizon.

    Financial experts typically recommend that you only invest money that you can afford to lose and, since investment returns are typically maximized over the long term, only invest money that you won’t need in the short term (less than three to five years).

    Stock’s Value vs. Price

    Buying stocks equates to owning companies which lets you be a part of something that’s normally very exclusive. It allows you to invest in pieces of well-known companies, such as Amazon, Google or Apple.

    A company’s stock price has nothing to do with its value, because the share price means nothing on its own.

    The price of a stock will go down when there are more sellers than buyers. The price will go up when there are more buyers than sellers.

    A company’s performance doesn’t directly influence its stock price. Investors’ reactions to the performance decide how a stock price fluctuates.

    The relationship of price-to-earnings and return on equity is what determines if a stock is overvalued or undervalued. Essentially, You should make no assumptions based on price alone.

    Knowing when to sell is just as important as buying stocks. Most retail investors buy when the stock market is rising and sell when it’s falling, but smart investors follow a strategy based on their financial plan and requirements.

    Benjamin Graham is known as the father of value investing, and he’s preached that the real money in investing will have to be made not by buying and selling, but from owning and holding securities, receiving interest and dividends, and benefiting from the stock’s long-term increase in intrinsic value through compounding.

    Learning how to invest in stocks might take time, but you’ll be on your way to growing your money and building your wealth when you do so. But, keep your risk tolerance, time horizon and financial goals in mind,

    References:

    1. https://www.thebalance.com/the-complete-beginner-s-guide-to-investing-in-stock-358114

    Sequence of Returns Risk in Retirement

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    A stock market pullback can pose a risk early in retirement.

    Retirees face many risks when investing for retirement. Markets crash, inflation can eat into your returns, you might even worry about outliving your savings. And, there’s another big retirement risk: Sequence of returns risk.

    Down markets can pose significant “sequence of returns” risk in the early years of retirement. Sequence risk is the danger that the timing of withdrawals from a retirement account will have a negative impact on the overall rate of return available to the investor, according to Investopedia.

    A “sequence of returns” risk is basically about how the order, or sequence, of stock returns over time — combined with your portfolio withdrawals — can impact your balance down the road.

    Once you start withdrawing income, you’re affected by the change in the sequence in which the returns occurred. During your retirement years, if a high proportion of negative returns occur in the beginning years of your retirement, it will have a lasting negative effect and reduce the amount of income you can withdraw over your lifetime.

    Timing is everything. Sequence risk is the danger that the timing of withdrawals from a retirement account will damage the investor’s overall return. Account withdrawals during a bear market are more costly than the same withdrawals in a bull market.

    “If there’s a big loss in the market and you’re taking withdrawals, you could be taking more from your portfolio than what it can make up for,” said certified financial planner Avani Ramnani, managing director at Francis Financial in New York. “If that happens early in retirement … the recovery may be very weak and put you in danger of not recovering at all or being lower than where you would have been and therefore jeopardizing your retirement lifestyle.”

    One of the basic rules of investing is that a long-term strategy is self-correcting. And, for long-term investors — those whose retirement is many years or decades away — such market drops matter less because there’s time for their portfolios to recover from this risk before they need to start relying on that money for cash flow in retirement.

    Retirement is a long game.

    Since running out of money in retirement is the primary concern for most retirees, fortunately, there are options for mitigating the risk:

    • Plan to spend more conservatively since the less you spend consistently, the less you have to withdraw overall.
    • Withdraw and spend less when your portfolio performance is suffering. 
    • Reduce the risk in your portfolio by creating a low stock allocation early in retirement but increase it over time, or use bonds for short-term expenses and stocks for long-term ones.
    • Set aside assets outside your investment portfolio that can support your spending needs when stocks are underperforming.

    You may simply be able to meet your goals without taking on the risk that comes with stocks.

    Key Takeaways

    Sequence of return risk is basically the risk that market declines in the early years of retirement, paired with ongoing withdrawals, could significantly reduce the longevity of your portfolio. Thus, timing is everything, and in retirement early market declines, particularly if they are paired with rising inflation, can have a huge effect on how long a nest egg can sustain you in retirement.

    The recommended way to mitigate sequence of returns risk when you can’t predict future market performance or future rates of inflation is by managing spending and/or keeping a portion of your portfolio in liquid assets, such as cash or bonds, to ride out the market downturn.

    When market returns are high and inflation is low, retirees can distribute more from their portfolios, according to Forbes Advisor Staff Editors Rob Berger and Benjamin Curry. When market returns are negative and inflation is higher than expected, retirees reduce the amount of their annual distributions.

    Remember, no one can forecast market performance or economic inflation. Yet, by managing your spending, you can adjust annual withdrawal amounts to reflect inflation and market returns.

    References:

    1. https://www.investopedia.com/terms/s/sequence-risk.asp
    2. https://www.thebalance.com/how-sequence-risk-affects-your-retirement-money-2388672
    3. https://www.cnbc.com/2021/09/21/stock-market-pullback-is-a-big-risk-early-in-retirement-what-to-know.html
    4. https://www.forbes.com/advisor/retirement/sequence-of-returns-risk/