Financial Know-How Is The Key

Parents with growing children and big dreams have much to manage. You’ll want financial assurance that your family will be taken care of should something happen to one or both of you. You know you need to protect your income, save for your children’s education, build a secure retirement plan, and be prepared for a host of eventualities.

It’s a lot to keep on your plate, but with a carefully managed financial plan, you should be able to sleep well at night and arise every morning eager to face the day’s challenges.

Basic Financial Guidelines
Both saving and investing have places in your family’s financial picture. Your savings principal, which typically remains constant and earns interest or dividends, is usually kept in certificates of deposit (CDs), checking accounts, money market accounts, and passbook savings accounts. By comparison, investments can go up or down in value and may or may not pay interest or dividends. Examples include stocks, bonds, mutual funds, precious metals, and real estate.

Financial counselors generally adhere to these basic financial guidelines.

• Being prepared with at least six months of living expenses is one of the first steps to managing finances wisely. Establishing an automatic savings plan with a fixed amount deducted from every paycheck is a smart move.
• Have an investment strategy that fits your stage of life and your family’s expectations. If you are younger and comfortable taking risks, allocate a larger portion of your funds to earn higher returns on stocks. You may want to be fully invested in the stock market, with a nicely diversified portfolio designed for growth.
• Plans such as 401(k) plans make it easy to save, offer investment flexibility and help you to reduce your taxes. See if your employer will contribute to or match your contributions. If you can afford it, consider contributions to an IRA or Roth IRA. The tax-deferred compounding aspects of these plans enable your funds to grow more quickly.
• Save as much as you can in a collection of low-cost index funds, dividing your money among stocks, bonds and other investments according to age and risk tolerance.

But investing is only one part of your financial life. The fundamentals of buying a home, mortgages, taxes, college savings, insurance, buying a car, and debt are other important financial matters you need to consider. Begin by doing some research on your own and talking everything over with your spouse. And, take some time to check out the numerous topics on this “Take Away The Worry” web site.

Other ways to educate yourself are by sorting through current online financial web sites (being careful to protect yourself from those who may be trying to subtly “sell” you something), attending seminars, listening to Smart Money segments on radio and TV talk shows, or hiring a financial planner to help.

Setting Priorities
Begin your personal financial planning by setting priorities.
 

• Clearly identify your family’s goals and why they matter to you. Which are the most important?
• Rank your goals in order of their importance to you (e.g. building an emergency fund, getting out of debt, buying a new home for your growing family, saving for your children’s education)
• Don’t be afraid to spend for fun – within reason – so long as your long-range needs are taken into consideration
• After prioritizing your goals, keep your spending on course. Ask yourself: Is this expenditure taking us nearer to our primary goals or leading us further away from them?
• Be sure to include a spouse or significant other in all goal-setting discussions
• Recognize  that your goals (based on needs and desires) will change as you and your children age – reexamine your priorities at least every five years

Gaining Control of Your Financial Life

1. After establishing your goals and priorities, you need to organize your finances and track your expenses and income until you can develop a yearly statement (cash/flow statement). List all your assets and what you owe. Subtract your debts from your assets to get your current net worth (balance sheet). Update yearly.
2. Once you have established your balance sheet, you can develop your budget. Your goal in establishing a budget is to increase your income by reducing your expenditures. Many of us have a tendency to procrastinate about developing a household budget, but do it! It’s essential to getting yourself on the path toward wise financial management. Maybe calling it your “household spending analysis” or another term will make it more palatable. You also may want to check out Farmers’ free and easy-to-use budgeting workbook, “From Garage Sales to Gucci: How to Understand Your Financial Type and Make Budgeting Work For You.”
3. Don’t be afraid to use credit when you absolutely have to, but always pay more than the required monthly minimum and eliminate the high interest by paying off credit card debt before you let yourself buy new clothes or entertainment items. Consider using only credit cards with lower rates, although you may have to resort to the higher-rate cards until you have proven your ability to manage paying down your credit wisely.
4. Consider whether you can deduct mortgage interest, state and local taxes, charitable contributions and certain medical expenses from your income taxes.
5. Make sure your possessions, life and health are adequately insured. Check out www.Takeawaytheworry.com and www.farmersinsurance.com for guidelines on having the right amount of insurance.
6. Develop your estate plan. A well-planned strategy should take advantage of tax breaks where you can, but also should include a durable power of attorney to make financial decisions if you are not able to do so, and medical decisions if you are incapacitated (durable power of attorney for health care).
7. Try looking at your taxes to see if they can be reduced. Consult a tax attorney if necessary. Analyze your debt to see if it can be consolidated into a lower interest rate. (Maybe a home equity loan might work.) Review your spending practices. Are your financial goals worth driving an older automobile? Are you shopping for the best prices? What current expenses are unnecessary?

Finding a Planner
Whether you need a financial planner depends on your own comfort level. If you have the time and energy to educate yourself, you may not need assistance. A financial planner can help you define your goals, make a spending plan, decide on the level of risk that’s right for you, and help you instill the habit of financial discipline.

Professionals advise you to interview at least three financial planners before choosing one. References from friends and colleagues are a good way to start your search.

Look for an affordable planner – one who understands your financial picture, rather than one who has clients worth millions. And, carefully check credentials and certifications. While credentials are not always a 100 percent guarantee, they provide assurance that you will work with an expert trained in a professional, ethical manner. Look for financial planners who have a CFP (Certified Financial Planner) credential. Or look for a certified public accountant who has earned the Personal Financial specialist credential (CPA/PFS) from the American Institute of Certified Public Accountants. (These must be licensed in your state.)