get a picture of the forest, you have got to draw some trees. Take
some time during this holiday season to get your financial affairs
in order and reflect on what and how you're doing financially, and
how it's going to help you get what you want out of life. Have a
joyful and prosperous New Year.
your life goals
What do you want out of life? The trend in financial planning in
the new century is to work with people to help them determine what
they want out of life, and then establish financial objectives that,
if met, will facilitate the client's ability to achieve those life
goals. Money becomes the catalyst instead of a goal. You can make
a cogent argument that financial advisers aren't adequately trained,
or even needed, to help you develop your life goals. That's fine.
Meet with a financial adviser with your life goals in hand and they'll
thank you for giving them a framework to work with to formulate
financial objectives that help you reach those goals.
Develop a spending
Most people have a pretty good handle on the income part of the
equation -- it's the outgo part that remains a mystery. Where did
the money go? Plan for spending and you'll know. The economist in
me knows that consumption vs. investment decisions are a critical
part of allocating income to invest for the future. While I've never
been a member of the "Lose the Latte" club, whose members
advocate that skipping expensive coffee is the answer to saving
for your future, financing a caffeine habit doesn't make any sense
either. Strike a balance between instant and delayed gratification.
(Dr. Don only owns Starbucks® stock within the confines of his
index mutual funds.)
You don't need to have financial planning software
and a computer, or even a Web-based worksheet, although both are
widely available. A piece of paper, a pencil and a four-function
calculator will do just fine. Bankrate's
Budgeting 101: Start your own budget is a good place to begin
even though it's called a budget instead of a spending plan.
If you're outspending your income, something has to
give. Reconsider your spending plan to make room for investing to
build your net worth.
Know your net
This is another simple exercise that's definitely worth the time
spent. List your assets, subtract your debts and what's left is
your net worth. What you own, less what you owe, is what's yours.
Plan to have your net worth next year exceed this year's number.
Live long enough and life is bound to throw you a
setback or two, but you should expect your net worth to increase
over time by spending less than you make and investing the difference
to build the wealth that you'll use to meet your financial objectives.
That's another paper and pencil exercise, though plenty
of online calculators are available, including Bankrate's
Net Worth Calculator.
Keep a little
If you were to die tomorrow, how long would it take your heirs to
put together the pieces of your financial puzzle? Just like with
a puzzle, being able to look at the big picture makes it easier
to fit the pieces together. A notebook with a listing of your bank
accounts, brokerage accounts, retirement accounts, pension rights,
insurance policies, etc., along with a note letting heirs know where
to find an executed copy of your will, is an important list to keep
This is also an act of kindness on your part. Let
your loved ones deal with their grief, not chase down a statement.
Don't have a will yet? It's time to get one, or have an existing
Any color book, save black, will do.
Build an emergency
Keeping some money in reserve for financial emergencies is a sound
practice. For most people it's where they should start investing.
The three main financial assets are stocks, bonds and cash. The
term cash is shorthand for short-term, liquid and safe investments
such as a money market account or a money market mutual fund. As
you build wealth, you can become more flexible in how your emergency
fund is invested, but starting out it's best for the money to be
invested in cash.
A common rule of thumb is to have three to six months'
worth of living expenses available as cash in your emergency fund.
There are plenty of reasons to add, or even reduce, that amount
but it's a reasonable target. Bankrate's article, building
an emergency fund, offers more information.
Review and rebalance your
It's important to take a holistic view of your investments. After
all, it's all your money. Concentrate too much of your wealth in
one investment and you've increased the risk of your portfolio.
Two common examples are being house rich and being too heavily invested
in your company's stock.
Rebalancing forces you to maintain a disciplined approach
to your investments. If your targeted breakdown between stocks,
bonds and cash is 60/30/10 and you have 80 percent of your money
in stocks, then selling off part of your stock portfolio to get
back to your target allocation rebalances your portfolio. You can
get yourself in trouble here if you don't consider the tax implications
of your actions or don't look at the big picture. Target allocations
will also change over time.
My favorite asset allocation calculator, at least
for a quick and dirty estimate of a starting point, is "Jim
Cramer's Asset Allocation Adventure." Read the companion
piece for more insight into asset allocation. SmartMoney
University's Asset-Allocation System is another good choice
to get a read on asset allocation in your portfolio.
At a minimum, you should review your credit reports from the three
major credit bureaus once every two years. Recent federal legislation
requires the bureaus to provide a free copy of your credit report
once a year. National rollout of this program started on the west
coast in December and is working its way east so everyone is eligible
by fall 2005. Bankrate has a map
showing when the free reports will be available to residents of
your state. Mark your calendars.
You'll have three options to request your credit report.
First, you can visit www.annualcreditreport.com,
which is the only authorized source for consumers to access their
annual credit report online for free. Or, call 877-322-8228. Lastly,
you may complete the form on the back of the Annual
Credit Report Request brochure, and mail it to: Annual Credit
Report Request Service, P.O. Box 105281, Atlanta, GA, 30348-5281.
If something's not right then you need to use the
dispute process of the Fair Credit Reporting Act (FCRA) to attempt
to correct your credit report. The credit bureaus make it easy to
file a dispute online, but I feel it's better to make your case
in a letter. If you don't give them tangible evidence to go on,
it diminishes your chances of winning the dispute. The credit bureaus
have 30 days to rule on the disputed item. If you lose the dispute,
you can write a short note explaining your position for distribution
with your credit report.
The Federal Trade Commission's Facts for Consumers
series publishes How
to Dispute Credit Report Errors. That along with Bankrate's
guide should improve your odds of winning a dispute.
How to be left
Value your privacy as much as Garbo? Sign up for the do-not-call
list. Many of you did that with your landlines last summer, but
you can put your cell phones on the list too. The Federal Trade
Commission's Web site links to www.donotcall.gov,
where you can register up to three phone numbers at a time. There
was a hoax e-mail that made the rounds this fall warning people
who they only had until Dec. 15th to register their cell phones
on the registry. That's not true, although it prompted me to register
my cell phone.
Stop getting those pesky credit card or insurance
offers in the mail by calling 1-888-5-OPT-OUT or by going online
Unless you change your mind at a later date, the restrictions are
in place for five years. You'll save some trees and reduce the chance
of someone using the mailing for identity theft purposes. You can
always shop credit cards on Bankrate using its Credit
The Direct Marketing Association also maintains listings of consumers
who prefer not to receive mail or telephone solicitations. The DMA
can provide information about opting out of lists produced by companies
that subscribe to its Mail and Telephone Preference Services. There's
a nominal charge to request the service online, but it's free if
you mail in your request. Visit its Web
site for more information.
I don't see the need to register for the telephone
solicitation list if you sign up for the national do-not-call registry
but signing up for the mailing list should expand the number of
firms that know you don't want to be bothered with their marketing
your retirement nest egg needs
All the talk about the need for Social Security change this year
has me thinking about investing more in my retirement accounts.
If you're over 25 and have been contributing to Social Security,
the Social Security Administration sends you an annual statement
about three months before your birthday that provides you with an
estimate of what your Social Security benefits will be in retirement.
Too many people have a $1 million bogey for retirement.
They think that if they can build a retirement portfolio of a million
dollars they'll be set for life. Pulling a number out of the air
isn't retirement planning. If you choose too low a number, you risk
outliving your portfolio; too high a number, you stay on the job
longer than necessary to meet your income needs in retirement.
Retirement Worksheets take a two-step approach to sizing the
nest egg. First you are asked to estimate how much income you'll
need in retirement using today's dollars. Take your current income
needs and subtract out what you expect to receive in Social Security
and pension benefits in today's dollars. The Social Security statement
provides the estimate in today's dollars and your annual pension
statement should do that as well.
If you construct a spending plan, you could use the
total annual expenses as a guide to what you might need in retirement.
Financial advisers recommend different things here. Some say you
need only 75 percent of these annual expenses in retirement because
you're not commuting to work, etc., but other advisers say budget
for a full 100 percent because your retirement hobbies and travel
will take up any slack. I'm in the latter camp.
Holy mackerel! Phishing is an Internet scam that uses spam or pop-up
messages to trick you into disclosing your bank account, credit
cards, Social Security number and personal identification number
(PIN) or other financially sensitive information. It's an insidious
attempt at identity theft. The FTC has a Phishing
guide designed to help you protect yourself against this problem.
Here are a few tips from that guide:
If you get an e-mail or pop-up message that asks
for personal or financial information, do not reply or click on
the link in the message.
Don't e-mail personal or financial information.
E-mail is not a secure method of transmitting personal information.
If you initiate a transaction and want to provide your personal
or financial information through an organization's Web site, look
for indicators that the site is secure, such as a lock icon on
the browser's status bar or a URL for a Web site that begins "https:"
(the "s" stands for "secure"). Unfortunately,
no indicator is foolproof. Some phishers have forged security
Review credit card and bank account statements
as soon as you receive them to determine whether there are any
unauthorized charges. If your statement is late by more than a
couple of days, call your credit card company or bank to confirm
your billing address and account balances.
Use anti-virus software and keep it up to date.
A firewall helps make you invisible on the Internet
and blocks all communications from unauthorized sources. It's
especially important to run a firewall if you have a broadband
connection. Finally, your operating system (such as Windows or
Linux), may offer free software "patches" to close holes
in the system that hackers or phishers could exploit.
Be a part of your community
Everyone wants to live in a great community, but it's people, not
houses, that make a community great. Be a better person and you
get a better community. Volunteer your time and get involved in
your community. You'll make a difference and feel great doing it.
great financial strategies for 2005