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Plan Your Financial Future in 10 Simple Steps (Well, Pretty Simple)
by Marc Eisenson, Gerri Detweiler, & Nancy Castleman

      With the possible exception of public speaking or April 15th, no two words spark more dread than financial planning. The International Association for Financial Planning reports more people would rather have a root canal than create a financial plan!

      Too bad. Taking control of your financial life is not nearly as painful as a root canal. And there's so much more at stake.

      Even assuming no dramatic change in your fortunes, you're going to earn a fortune. Say you and your mate are 25, and your family income is the U.S. median, last reported to be $53,091.

      If you both work until you're 65, even if you never get a raise, you're going to bring in over $2,000,000. If your salary goes up just 3% a year, you'll earn over $4 million. If you land a promotion, you'll rake in even more. Welcome to the millionaire's club!

How Much Will You Make?
Turning the Median Salary of $53,091 into Millions
Annual Raises
& Cost of Living
Income Totals
0% $2,123,640
1% 2,595,426
2% 3,206,802
3% 4,003,128
4% 5,045,000
5% 6,413,381
6% 8,216,468
7% 10,598,828
Step 1: Get Out of Debt

      Don't even think about traditional investment strategies if you have huge credit card debts hanging over your head. Paying off your expensive debts is one of the highest-return, safest investments you can make. Start with your high interest credit card bills. When they're paid off, pre-pay your auto, student, and home loans -- the highest interest first.

Step 2: What Do You Really Want?

      Some important goals may not immediately seem appropriate to your financial plan, like spending more time with your family or losing weight. But you may find that they are.

      Spending more time with the kids may mean switching to part-time work, or hiring someone to clean the house. Losing weight may mean joining a gym, or eating out less often.

Step 3: Focus on What's Most Important

      After you've had a chance to really think about your goals, decide which ones are serious and admit which ones are just wistful fantasy (the boat that would be fun to have, but a pain to keep up and a huge money drain). Then put a price tag on each of your goals. For retirement planning, see Issue #10 of The Pocket Change Investor, or you can take advantage of one of those magazine articles, books, or mutual fund brochures that offer worksheets to help you plan ahead.

      But if the number that pops up leaves you gasping for air, remember ... Rome wasn't built in a day, and your future won't be either.

      Set priorities. Adjust your expectations. Revise your time schedule. Seek out alternatives. Be creative. The idea is to get your heart and mind thinking in ways other than pure dollars and cents. If you're very clear and focused on a goal, you may find solutions falling right into your lap. But you have to ask, and be ready to seize opportunity when it comes your way.

Step 4: Pay Yourself First and Stick with It

      You may think it's a clichè, but paying yourself first will put you on the fast track. Choose a comfortable amount to put away each payday, even if it's just pocket change. Don't wait until the end of the month, then save whatever's left, if anything.

      Set a specific goal. For example, saving 10% of your pay. But if that sounds too steep, try 5% and build it up 1% at a time. You can do it!

      Wherever you start, put your savings and investment plan on autopilot. Have your financial institution or mutual fund company deduct payments directly out of your bank account. After a couple of months, you won't miss it.

Step 5: Start Now!

      Whether you're 25 or 55, once you've set your goals and figured out roughly how much you need to get there, starting now is the key.

      The sooner you begin, the more time you'll have to take advantage of compound interest's "magic."

      But be forewarned: there are very few legitimate you-must-act-immediately, once in a lifetime investment opportunities.

Step 6: Choose the Right Places

      There are risks in every kind of investment, except paying off those expensive credit cards. We just can't find a downside there! The risk in parking your stash in super-safe investments like CD's, is that your money won't keep pace with inflation. Stocks are among the riskiest of investments, although when the Dow is on an upswing, it's hard to remember that what goes up often does come down.

      In brief, a high-return, low-risk investment is an oxymoron, with the exception of paying down credit card debt, of course. You want to take appropriate risks based on your comfort level, your time frame, and the nature of your goals.

      If you have a short time before you will (or might) need the money, don't put it in high-risk securities. It may not be there when you need it. On the other hand, if you're saving for a far-off goal, you can afford bigger gambles.

Step 7: Diversify to Limit Risk

      Don't put all your money in one place. Spread it out among several different investment options.

      And stay in for the long haul. Once you've made your choices, don't micromanage your money. When you focus on the short term, you're apt to panic at temporary market dips and switch your money around, missing out on market rallies, and paying an awful lot of commissions in the process. If you've chosen your investment allocation wisely, your portfolio should be able to keep going ... and going ... and going for years, with just periodic tune-ups.

Step 8: Get Smart

      A little time spent learning basic financial strategies can go a long way toward making you more confident, and richer. Just don't try to digest everything at once, or you will feel ill. Pick the topic that's of most interest, or of the greatest urgency, and start there. For example, let's say you want to open an IRA and invest it in mutual funds.

      Start by reading about IRA's and mutual funds in a few books, such as: Terry Savage's New Money Strategies for the 90 's, The Dun & Bradstreet Guide to Your Investments (updated annually) by Nancy Dunnan, The Truth About Money by Ric Edelman, or The Only Investment Guide You'll Ever Need by Andrew Tobias.

      At least a few of these titles should be at your library. (Or you can order them through us.)

      While you're at the library, look through recent issues of personal finance magazines like Kiplinger's, Money, and Your Money for articles on IRA's and mutual funds. Also review personal finance articles in BusinessWeek, Forbes, and Fortune.

      Look at their mutual fund ratings and pick a few whose goals (long term, short term, bond, stock, options, foreign) match yours. Don't be surprised to discover some contradictory advice. If the market weren't full of differing opinions, there'd be no one to buy when you wanted to sell, and no one willing to sell when you wanted to buy. Listen to the experts, then go with what makes sense to you.

      Ask the reference librarian for a copy of Morningstar or Value Line Mutual Fund Survey. Look up some funds and study their track records, management, and outlook. (But remember that past history does not guarantee future performance.) Finally, when you've narrowed your choice to a couple, call the companies for their prospectuses, and look them over before you invest.

      Be sure to comparison shop. Always ask about expenses, such as commission costs, marketing fees, and administrative charges. Get them in writing.

Step 9: Protect Yourself and Your Family

      Besides saving and investing, there are a few other important parts of a financial plan you must take care of, like life insurance, a will, and possibly an estate plan. They're not fun details, but they're essential to your peace of mind, and the future of those you love.

      For some of our pearls on the will subject, see Issue #6. If you want to create your own will, get the WillMaker Software, from Nolo Press (800-992-6656 or www.nolo.com).

       The best resource on insurance questions is Smarter Insurance Solutions, by Janet Bamford.

      If you don't have a will or adequate insurance, get it taken care of now!

Step 10: When You Need Help, Get It!

      We encourage you to learn as much as you can. But you might want an expert's personalized advice to:

      A good advisor will empower you by helping you learn. There are no dumb questions when it comes to your financial education. Assume nothing, question everything, and you're likely to learn a lot along the way. And remember: no one is omniscient. Even those high salaried mutual fund managers only beat the market about 20% of the time.

Finding a Planner

      So how do you find a financial advisor? First you have to know what you want. The more specific you can be, the better. You also have to choose the kind of planner you want.

      There are a few ways that financial professionals get paid:

      There's a lot of controversy about these different compensation methods. Some folks say you should never work with someone who is paid on commission because they may recommend products that are best for their financial future, not necessarily yours.

      On the other hand, fee-only financial planners can be expensive and out-of-reach for someone starting out, or with a modest amount to invest. The truth is, there are good advisors in all of the camps.

      There are four primary sources for financial planners, each one of which offers useful, free brochures and referrals:

  1. The American Institute of Certified Public Accountants offers referrals to CPAs with specialized experience in financial planning (888-999-9256, www.aicpa.org).
  2. The Institute of Certified Financial Planners offers referrals to professionals who have received the Certified Financial Planner (CFP) designation (888-237-6275, www.cfp.net).
  3. The International Association for Financial Planning (888-806-PLAN, www.iafp.org).
  4. The National Association of Personal Financial Advisors offers referrals to fee-only planners (800-366-2732, www.napfa.org).
      Select at least three planners who seem appropriate for your needs, then interview them just as you would if you were hiring them for a job, which you are. Find out why they expect they can do a good job for you, how they are paid, and how much they charge. And realize you will pay them, whether or not you directly write out a check.

      Ask about their experience and credentials, and speak to at least three client references. (Just don't expect them to talk to you about their money.) Ask to see a sample financial plan and ask how the planner would tailor it for you.

      Always check out backgrounds before handing over your money. You can get a free disciplinary report that will tell you about most securities violations from the National Association of Securities Dealers (800-289-9999).

      Or you can order a more comprehensive disciplinary report from the National Fraud Exchange, which searches disciplinary records in the securities industry, plus real estate, banking, and more. (The fee is $39 for the first search, and $20 for additional searches ordered at the same time: 800-822-0416, ext. 34.)

      If what you really want is for someone else to manage your investments, call AdvisorLink (800-348-3601) which can refer you to a money manager who'll handle accounts as small as $15,000. Ask for its free investor kit.

The Pocket Change Investor
The Secrets to Getting Ahead -- Even If You Have a Pile of Credit Card Bills, Hefty Mortgage Payments,
Loans Out on a Clunker or Two, & a Bad Case of the "I'm Tired of Living Payday to Payday" Blues.

The Pocket Change Windfall: Each of our 34 back issues offers painless ways to get out of debt and save on the many expenses that confront us all -- taxes, credit card bills, mortgages, insurance, food, you name it. You can get all 34 for just $29.95 -- that's less than $1 each. To order, write to us at:
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"... Marc Eisenson, an advocate of paying off debt and living simply ... and his partner, Nancy Castleman, caused me to rethink my new definition of necessities. Clearly Marc and Nancy could earn -- and spend -- a lot more money. But they decided some years ago to create a more basic life for themselves. They publish The Pocket Change Investor, ... live in a comfortable house stuffed with books, and they travel regularly, but they think carefully about every nickel they spend. An immense garden, in which they both love to work, provides many of their needs."
-- Mary Rowland
Woman's Day

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From The Pocket Change Investor, Issue #21
© 1998, Marc Eisenson & Nancy Castleman
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