| Personal Financial Planning |
Dr.
D. Larry Crumbley, CPA, DABFA
Dr. L. Murphy Smith, CPA
PFP-short stories
Are you good at controlling credit cards and other sources of debt?
Are you successful at managing a household budget? Do you keep good financial
records? Why can some people manage to save money? Are you aware of the
simple ways to increase your net worth? Do you know the best investments
for your financial situation?
Most Americans spend most of their lives earning money, but they
rarely spend any time planning how to use their accumulated capital efficiently.
When they reach age sixty-five most people are flat broke. Income from
Social Security is inadequate to support people at today’s rate of payment,
and few observers can predict the future of Social Security.
Systematic personal financial planning (PFP) should begin as
early as possible in your career. Financial planning is both a process
and an attitude. It should become a habit. Financial planning involves
gathering all your financial and emotional data, analyze these data, and
preparing a financial plan for the future. You must take action and follow
the plan. Finally, you need to review the plan and make necessary changes
as your environment and financial conditions change.
The first step is to determine where you are now by preparing
a balance sheet in order to determine your net worth. Your net worth is
the excess of your assets over your liabilities. You must manage your cash
in order to save some investment capital each month. A budget or cash flow
statement will help you to determine your inflows and outflows. Reconciling
your checkbook regularly is important for your financial security. It helps
you review your expenditures and analyze areas where you might cut back
if necessary, and of course it ensures that you and your banker agree about
how much is available to you. Nonsufficient funds fees can be very costly.
Next you need to determine where you wish to go. What are your
short-term and long-term goals? Seneca said that "our plans miscarry because
they have no aim. When a man does not know what harbor he is making for,
no wind is the right wind." What are your objectives? To buy a new car?
To educate your children? To prepare for retirement? To travel around the
world?
You must determine quantitative objectives and how you plan to
reach them. These goals or objectives must be reviewed regularly. Did you
meet your short-term goals? Are you progressing toward your long-term goals?
Once you know your objectives, you now must prepare a plan or
a roadmap for reaching them. Preparing a financial plan resembles doing
a jigsaw puzzle in that many pieces must be put together to get a completed
puzzle. These pieces, or variables, include budgeting, record keeping, tax
planning, planning for inflation, selecting competent advisors, buying
insurance, investing your capital, planning for education and retirement,
and estate planning. Some of these financial planning puzzle pieces are
constantly changing shape, especially those affected by law taxes. Tax
laws can literally change overnight, at the whim of Congress. Any tax-related
information in this book should be double-checked against the most current
IRS rules and regulations.
Although you, like many people, may have an overall goal of accumulating
wealth, you must understand that there are many obstacles in your way.
Among these are inflation, taxes, limited number of working hours, recessions,
unemployment, injuries, procrastination, dishonest sellers – the list goes
on. But you should realize that there are very few ways to accumulate real
wealth. You must review these ways in our book, and understand the annuity
concept, leveraging, employing people to work for you, and arbitraging.
This book does not promote a get-rich-quick strategy. It does
not offer a mishmash of euphemisms, hyperbole, and stirring testimonials.
In fact, you should avoid the fast-buck ads that offer you a short road
to riches. Consumers spend an estimated $50 million annually responding
to offers of instant wealth. These "fantastic money-making plans" are often
typo-laden, poorly written books or pamphlets that propose a variety of
outlandish schemes for getting rich through real estate, mail-order sales,
or telemarketing. These get-rich-quick promoters understand the rule about
a fool and his money. Contrary to promoters’ claims, success and wealth
are usually not obtained either quickly or easily. We follow Mark Twain’s
advice about speculation. There are two times when you should not speculate:
when you cannot afford to and when you can.
Making wise investments is a process that requires specialized
knowledge and careful planning. Picking the right advisors is not easy.
You need to understand basic financial concepts; the concept of risk versus
return is basic to any investment strategy. How safe is your principal?
Diversification, dollar cost averaging, a parking lot for your idle funds,
mutual funds, liquidity, and the umbrella of insurance are terms that you
must understand.
Do not wait too long to begin your retirement and estate planning.
There are numerous aspects to consider. As you plan for retirement, are
you socking away some of your monthly earnings into an Individual Retirement
Account, a 401(k) plan, a Keogh plan, a defined benefit plan, or some other
pension or profit-sharing plan? A small increase in your investment return
inside a retirement plan can result in tremendous benefits at your retirement.
Estate planning is really building an estate during your lifetime and passing
it on to your heirs in a form that minimizes income and estate taxes. A
will is essential; a prenuptial agreement may be important. You may wish
to consider using trusts to avoid taxes and to carry out many business
and nonbusiness objectives.
Personal financial planning is complex. It is time-consuming.
It can be frustrating. Financial planning may not make you wealthy. You
may never appear on "Lifestyles of the Rich and Famous." However, lack
of planning is equivalent to planning for failure. Planning will almost
certainly result in your being better off than if you had not planned and
will, we hope, result in your life being fuller and happier. Your financial
success is worth some time and effort. Plan today for your financial well-being.
For more detail, see Keys
to Personal Financial Planning, Barron’s Educational Series, Inc.,
250 Wireless Blvd., Hauppauge, New York 11788. This book answers all of
these questions and more. If you master each of these "Keys", you’ll understand
how to be a success at planning the direction of your personal finances.
Personal
Financial Planning Short Stories
Last Updated: December 4, 2006
