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Characters: The Heck family (Patricia Heaton and Neil Flynn)
The Hecks live in a suburban Indiana town and embody the typical middle class family. Mom, Frankie, lost her job at a dentist's office and now works, somewhat unsuccessfully, as a saleswoman at a car dealership. Mike, the dad, manages a quarry. As a family with three kids and average salaries, Frankie and Mike sometimes struggle to make ends meet.
- College savings for three kids.
- Retirement savings for mom and dad.
- Emergency savings to cover unexpected expenses.
- Saving for vacations.
- Get rid of debt and establish an emergency fund.
- Balance expenses with savings goals.
- Insurance needs.
- Long-term savings.
Advised by: Frank Armstrong, Certified Financial Planner and founder and principal of Investor Solutions in Miami.
Get rid of debt and establish an emergency fund
If the family has any consumer debt, they have to get rid of that right away. It is just so ugly. Cut up the cards if you can't keep from using and relying on them.
In order to protect their finances from emergencies and avoid debt, the Hecks need an emergency fund. You never know what can happen: Mike might get laid off, Frankie might crash her car, the roof could blow off the house, and they don't want to have to dip into long-term assets in order to finance the routine emergency stuff.
Balancing today's expenses with savings goals
Budgeting is the key to efficiently managing household finances -- but savings have to come first.
Saving is really the key to financial security. There's a lot of financial research about how people prioritize things. Distant goals are very important but are discounted in comparison to something that happens today.
For instance, "I'm fat, I want to lose weight. It's really important to me. It's life-threatening that I'm fat, but that chocolate bar looks so good."' "I want to save for retirement. It's really important to me that I save for retirement, but that new iPod is so sweet."
The family has to prioritize spending and the parents' retirement needs to be up there.
It doesn't do the family any good to have this ambitious savings plan but never live to complete it. Insurances have a place and provide a foundation and safety net.
We first need to determine what the family's insurance needs are. Typically, long-term disability, health insurance and life insurance are areas to explore.
It won't do them any good to save $100 a paycheck if Frankie or Mike became disabled and never got another paycheck.
For the Hecks, a single long-term savings plan can be developed that could meet several objectives based on their expected cash flows. The savings goals could be due at different times over the years: college education, maybe a second home and retirement. We would design a single asset allocation plan that meets those needs.
We might want to spread that out across accounts. It could be advantageous to save in tax-favored accounts for some of the goals, including 401(k)s, IRAs and 529 accounts.
That is probably the most economical and effective way to meet different objectives. Create one plan that meets several objectives so it is easy to manage and visualize as well as economical to run. The Hecks can even get software to manage their plan and cash flows. It will really simplify everything.