Financial Planning 101

FINANCIAL PLANNING 101
Nine Essential Tips for a Bright Financial Future

1. See a lawyer and make a Will. If you have a Will make sure it is current and valid in your home state. Make sure that you and your spouse have reviewed each other’s Will – ensuring that both of your wishes will be carried out. Provide for guardianship of minor children, and education and maintenance trusts.
2. Pay off your credit cards. Forty percent of Americans carry an account balance – not good. Create a systematic plan to pay down balances. Don’t fall into the “0% balance transfer game” as it will hurt your FICO score. Credit scores matter not only to credit card companies but to insurance companies as well; you can avoid an unpleasant increase in your insurance rates by managing your credit wisely.
3. Buy term life insurance equal to 6-8 times your annual income. Most consumers don't need a permanent policy (such as whole life or universal life). Also consider purchasing disability insurance; think of it as “paycheck insurance.” Stay-at-home spouses need life insurance, too! Note: Each family’s needs are different. Some families have a need for other kinds of life insurance, so you should review your situation carefully with an insurance professional or two before making decisions in this area.
4. Build a 3 to 6 month emergency fund. Establish a home equity line of credit before you need it – this can take the place of part of your emergency fund.
5. Don't count on social security! Fund your IRA each and every year. If you don’t fund it annually, you lose the opportunity. Fund a Roth IRA over a traditional IRA if you qualify.
6. If offered, contribute to your 401(k), 403(b) or other employer-sponsored saving plan. Use your company's flex spending plan to leverage tax advantages. If you don’t use your flex plan or fund your retirement plan annually, you lose the opportunity – and the tax advantages – for that year.
7. Buy a home if you can afford it. Maintain it properly. Build equity in your property. You’ll have much more to show for your money spent than a box full of rental receipts!
8. Use broad market stock index funds and direct purchase government bonds to reduce risk, minimize costs and diversify your portfolio. If you have limited options, for example in your 401(k) plan, make sure that you diversify across a broad spectrum of options. Don’t over-weight in any one security, especially your employer’s stock – remember ENRON?If you are unsure about your financial affairs or you have financial goals such as retirement planning, college funding, business succession or estate planning that you'd like help achieving, call Blankenship Financial Planning at 217/488-6473 to schedule a no-cost, no-obligation “Get Acquainted” meeting to discuss your situation.

FAQ - Frequently Asked Questions

Listed below are some of the questions that I’ve received recently regarding financial planning in general, my practice, and investing in general.

Q: What is Financial Planning?
A: Financial Planning, as a whole, is the collective act of planning for investments, insurance, income tax, retirement, estate, employee benefits and education planning. A Financial Planner is an individual who is trained to work with individuals and families in order to develop a plan integrating all of the above-listed areas into a working plan.
The Financial Planning engagement doesn’t always cover all of these areas. Most often, an individual or family will be interested in working out a plan for one area of their life, like a retirement plan. By working with a Financial Planner, the client will know that the goal is to develop this plan so that it works together with the other financial circumstances in their life.

Q: Why do I need a Financial Plan?
A: The truth is, you may not need a Financial Plan. However, nearly everyone can use a second opinion on some area of their finances. The beauty of the way Blankenship Financial Planning operates is that you control the engagement, including how much time we spend, and ultimately how much the engagement will cost you. If you just want a second opinion on an insurance policy, or would like assistance on how to invest your 401(k) plan at work, then that’s all we’ll work on.
If, on the other hand, you would like me to help you lay out a comprehensive financial roadmap, then we can work that out, as well.
When you go through major changes in your life, it’s a good time to do a comprehensive review. For example…
… when a new child is born – this will impact insurance, income taxes, education planning, retirement planning, employee benefits, and quite likely investments and estate planning;
… when you change jobs, it impacts retirement, insurance, income taxes, and employee benefits; or
… when you marry or divorce, all areas of your finances are impacted.

Q: What are your office hours?
A: I don’t keep regular “walk-in” office hours for two reasons: 1) many times I need to go to a client’s home or office for a meeting; and 2) if I am meeting with a client at my office, I can’t have someone walk in and interrupt our meeting. I hold all meetings with clients in the strictest of confidentiality, and I will not compromise.
I think you’ll find that, in making an appointment (217-488-6473), I am quite flexible and can fit just about anyone’s schedule. As I indicated before, quite often I go to a client’s home or office for our meetings, rather than the client coming to my office – as a convenience factor to you.
With regard to the confidentiality of meetings, I consider all interactions with clients to be strictly confidential. I am occasionally asked by prospective clients for a list of current clients that they may contact. Since the utmost of confidence is being placed in me through our relationship, I have no intention to even share names of my clients with others without the clients’ express permission.

Q: What do you think of the economy right now?
A: Let me first say that I believe in the American capitalism mode of business, and I think it’s the best thing going. I have been and intend to continue to participate in the American way of doing business, investing, and in democracy in general.
What I see for the up-coming year or so is a period of stagnation, similar to what we’ve seen (overall) in the past couple of years. If there is any gain at all in the stock market, I don’t expect much. Regarding interest rates, I wouldn’t be terribly surprised by a minor increase toward the end of 2004 or early 2005.
With all of the uncertainty across the globe today, regarding terrorism, coupled with the Presidential election in the US this fall, I expect the markets to move pretty much sideways, with a small potential for a downward move retracing some of the gains from the previous twelve months.
The past couple of quarters have shown a small degree of domestic economic growth, which could signal the need for an increase in the Federal Funds Rate by the Federal Reserve Board. I wouldn’t expect any dramatic increase, however, as the inflation numbers are pretty tame by historical standards.

TIDBITS - College Savings

*Brightstart, Illinois’ 529 Savings Plansavings plan, was recently awarded 4 ½ Caps out of 5 (for Illinois residents) in the “Cap Rating” system from website www.SavingForCollege.com.

* According to The Southern Illinoisan, Southern Illinois University at Carbondale (SIU-C) will increase its tuition rate by 16% for the Fall 2004 semester, bringing the total cost (tuition, fees, room and board) to $11,540 per year, up from $11,180.
Some other Illinois universities’ costs:

Here are some other Illinois universities’ costs for the 2003-2004 school year:

Bradley University (Peoria) - $22,910
Illinois State University (Normal) - $14,828
University of Illinois (Urbana) - $15,734
Western Illinois University (Macomb) - $9,281

* Check out www.2save4college.com – it has had an “extreme makeover”. Let me know what you think. I’ve tried to include as much usable information as possible – but if you are looking for more information, let me know and I’ll do what I can to find or provide it.

REALLOCATING IN 5 EASY STEPS

Now is a good time to reallocate your retirement plan investments. You’ve probably heard of this before – but what does reallocating really mean?

There are five steps listed below, and it seems complicated, but really it’s pretty simple:

1) Reallocating, sometimes referred to as “rebalancing”, requires taking a look at your overall retirement portfolio. You need to bring together all of your different investment and savings accounts that are earmarked for retirement. You might put this information on a spreadsheet on your computer, or just on a sheet of notebook paper.

For some people, this could take quite a while – if you have several bank accounts, retirement plans, maybe a brokerage account or two, and then some savings bonds, for example, it can take quite a while to pull all of this together. This is why many people don’t bother with reallocation. Believe me, it’s worth every minute of effort! I have a report that describes what could happen if you don’t take the time to re-allocate, and it’s quite ugly. I’ll summarize the report in this newsletter soon, or you can call me and I’ll send it over.

So anyway, go ahead and pull all of the account information together.

2) Once you’ve done this, break down your overall retirement portfolio into three categories – cash, bonds, and stocks. For our purposes, you should consider bond mutual funds, individual bonds, and preferred stocks in the “bonds” category. Likewise, consider individual stocks and stock mutual funds in the “stocks” category. Real estate investments should be considered as a fourth category, if you have those.

3) Now that you have the categories split up, add up each category of items separately, and divide that amount by the overall total. This will give you your current ratio.

4) The next step is a little more difficult. It requires you to think about what kind of “split” you’d like for your investments. For each individual, this split will be a little different. There are rules of thumb that you could use, but in the end, this split is a personal decision for you to make. There are websites that you could use to help you to determine this split (see list at the end of this article).

Some of the factors that you need to consider are your age, the number of years until retirement, your health, and the same factors for your spouse. In addition, consider your children’s education expenses, as these often cut in to the amounts available for your retirement.

Bear in mind that this split ratio will be a number that will change as time passes. For example, a person at age 25 may have a ratio of 90% stocks, 5% real estate, and 5% bonds. When this person reaches age 40, they might wish to have a lower-risk exposure, so they have changed their ratio to 70% stocks, 20% real estate, and 10% bonds. As this example individual nears retirement age, say around age 55, the ratio might adjust to 50% stocks, 20% real estate, and 30% bonds. (Note: these ratios are only for example. As stated, each individual should determine the appropriate ratio for their own personal situation.)

5) Once you’ve determined the ratio that works best for you, compare it to the real ratio that we calculated in step 3 above. All you have left to finish your re-allocation is to adjust your current holdings to match the ideal ratio that you’ve come up with for yourself.

Most retirement plan websites have a facility or toolset that allows you to do this re-allocation quite simply. If that’s not the case for your plan, simply determine which of your holdings that you need to buy and/or sell in order to make your allocation match the ratio that you’ve decided upon for yourself.

And you’re done! That was actually pretty painless, wasn’t it? This process will be much easier next time around (it should be done once a year, by the way!) since you’ve already gone through it once. You’re on your way to financial independence, believe it or not!

If you’re finding this a little more complicated than you feel you can work out on your own, hire a financial advisor to assist you with the task. A fee-only financial advisor will assist you with this kind of task without trying to sell you investments. If you’re interested in is some assistance in reallocating your investment account, especially if it’s your employer-sponsored retirement account, a fee-only advisor is your best bet.

Next time around, we’ll tackle some allocation issues within each classification of investments. For example, we’ll briefly discuss small, medium and large cap stocks, as well as value and growth equities. In addition, we’ll go into an overview of the concept of duration within a bond holding.

Here are some websites that you may find useful as you develop your overall portfolio mix strategy:

www.moneycentral.msn.com – MicrosoftMicrosoft’s MoneyCentral
www.fool.com – The Motley Fool
www.vanguard.com – Vanguard Funds
www.smartmoney.com – Smart Money magazine online

Did You Know?

DID YOU KNOW…The average investor’s return over the past decade has been 2.57%, when the overall market returned over 12%? This can be mostly attributed to fear of market downturn, and not having (and sticking to) a solid investment plan.