Skip to main content

Sound Advice: September 23, 2020

Financial Planning: The Basic Recipe 

In the simplest terms, financial planning is about the question all of us should be thinking about: "Will I have enough?" 

The answer to that question requires a fair amount of information gathering in four areas: What you own, what you owe, your income, and your expenses.  Few people really have a handle on this.  So until you get a grip on where you are today, it's quite difficult to make a plan to get you where you hope to be tomorrow. 

Three of the four parts of the equation are easy enough to figure out.  The hitch, however, is on the expense side.  More often than not, the task of coming up with reasonable numbers for a couple of dozen or more key categories is a trip into the unknown.  You probably won't have much difficulty pinpointing the cost of things like cable TV and heating, but do you really know what you've been spending on gasoline and groceries?  Probably not.  How about gifts, clothing or eating out?

Still, let's assume that you have somehow managed to put together a budget and identified your assets and your liabilities.  If everything remains constant from now until some day in the distant future, the task would be close to a no-brainer. 

But things change.  When you plug in numbers, they will almost always change over time.  And when you retire, your income will shift from employment earnings to such things as earnings on investments, pensions, and social security.  With the exception of fixed-interest securities, your returns on investments will vary from year to year.  Pensions (if you are fortunate enough to have one) usually remain constant, though a few have built-in cost-of-living adjustments.  Social security is still around, but its future is anything but certain.

The expense side of the equation is also murky.  Although we'd all like to think that we'll be around for a long time, it's essential to prepare for changes in expenses upon retirement as well as changes in expenses when there is only one surviving spouse.

Add to that occasions when there is an unusual expense, perhaps a new roof or a new car.  Or for younger families, the cost of educating children.  Shocking as it may be, the cost of educating today's newborns could be $500,000 or more.  For these kinds of things, you can't just wing it.  Planning for children's education needs attention on Day One.

Along the way, there will often be such nonrecurring items as inheritances or perhaps funds from the sale of a larger home when downsizing.  Whatever the case, the point is that a proper financial plan must be a dynamic instrument.  It's something that needs to reviewed regularly and modified as your situation changes.

For all plans, the bottom line is that either you will have enough to continue living in your hoped-for lifestyle or you will have to work longer, spend less or increase the return on your investments.

The earlier you address these issues, the more likely that you will have enough.

N. Russell Wayne, CFP®

Comments

Popular posts from this blog

Sound Advice: May 13, 2020

Reality Check

On the heels of the market plunge of late February and most of March, investors did a sharp about-face in April, bidding up shares at one of the fastest rates in recent history.  Although this recovery probably provided at least temporary comfort from the plunge, it would be unreasonable to view the rebound as a sign that things are all better.  They are not.
For one thing, we are now in the midst of earnings reason, when companies report their quarterly results.  Some may have good news for the March quarter, but as we move through the current calendar quarter, only a few will be able to show continuing improvement.  Against the broad backdrop of U.S. business history, the months just ahead will almost certainly prove to be among the worst, from the standpoint of year-to-year comparison.
With more than 30 million people filing claims for unemployment insurance, it would be difficult to expect anything other than bad economic news.  Who knows how many of these folks will go…

Sound Advice: July 8, 2020

Jobs Are Up, But So Are New Infections
Through the spring months, most of the economic data was extremely negative, with record declines in employment and consumer spending.  The speed of that decline had no modern precedent.
We are now in a recession.  
The shortest recession on record occurred in 1980 and lasted just six months.  Second place goes to a seven-month recession in 1918-19, which was tied to the Spanish flu pandemic.  The big question is: When will this recession end? Given surprisingly strong data in May, April may have been the bottom of this economic cycle.  If so, it will have been the shortest recession on record.  With massive support from the Federal Reserve, the federal government, and the reopening of previously closed businesses, employment surged unexpectedly.  At the same time, pent-up demand, stimulus checks, and generous unemployment benefits led to a reacceleration of commercial activity. Still, not all is rosy.   In his recent testimony before Congress, Fed Chie…

Sound Advice: July 22, 2020

Fixed Income: In a Fix
Typically, the construction of an investment portfolio has begun with an approximate balance of 60% in equities and 40% in fixed income instruments.Fixed income generally means bonds, but that includes bond funds and exchange-traded funds holding bonds.The equity portion is intended to be the driver of capital appreciation over extended periods of time and the fixed income portion is supposed to provide stable, albeit more moderate ongoing rates of return.
The theory behind this approach is that as the time periods measured have lengthened, the relative risk of holding equities has diminished while the returns they have generated have been higher than those of other asset classes.What equities do in the short term, even a year or two, is often anybody’s guess.
To the extent that fundamental analysis can help toward determining future equity values, investors need to look ahead three, four, five years or more before reasonably expecting that the odds will be on thei…