CLICK HERE TO READ THE SKILLED INVESTOR’s OTHER ARTICLES ABOUT THESE “10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION.”
The single most significant financial lever that individuals control directly is their management of personal expenditures. The second is their lifetime effort to obtain sufficient income. Most people simply do not save enough of their current income to fund their future needs.
Over their lifecycles, individuals must rely increasingly upon assets to replace earned income. Without the good fortune of receiving substantial inheritance and gifts or winning the lottery, a person can only invest if he or she saves. When saving to fund an investment program, people must live within both their current and future economic means.
A positive difference between current income and expenditures usually represents intentional expenditure control and allows for deferred consumption. Personal savings will tend to increase with conscious planning and better expenditure decision-making. Better expenditure control results from a conscious decision at the point of each purchase about whether it fulfills a true need or affordable desire versus being just a passing fancy.
Economists call the potential of each person to earn money, pay current expenses, and still set aside savings as their “human capital.” For most people, their personal human capital is all they have financially, until they convert some of it into more durable investment assets.
A person’s cumulative lifetime labor earnings or human capital is variable, uncertain, and perishable.
Income volatility has increased significantly at all income levels in recent decades and people must exercise increased discipline to restrain spending in a fluctuating income environment. The passage of time steadily diminishes total personal earning potential and human capital. Furthermore, illness and injury can randomly slash the value of one’s potential human capital, disrupting lives, and permanently altering the best-laid financial plans.
Therefore, the first thing an individual must get right is his financial savings program. To ensure that an individual’s personal savings rate is high enough to build up an adequate asset base, he must understand, track, and project his cash flows. He cannot know the adequacy of his savings and progress toward his investment goals without measuring his current progress and comparing it to projections of his future needs.
Concerning plans, any comprehensive cash flow projection must also include planned future cash requirements for living expenses and special requirements, such as a down payment on a house, college expenses, retirement, charitable giving, and estate bequests. Projected personal financial requirements provide the baseline expenditure plan over which an investor can overlay several likely income and investment return/volatility scenarios to test the adequacy of his current savings and investment plans for his lifetime.
These articles about financial planners and investment advisors may also be useful to you:
Selecting a Financial Advisor:
- Preparing to interview a financial planner or investment advisor
- Questions to ask, when hiring an advisor – Part 1, Background and training
- Questions to ask, when hiring an advisor – Part 2, Fees and contracts
- Questions to ask, when hiring an advisor – Part 3, Services and references
Payment of Financial Advisors:
- Does it matter how financial planners and investment advisors are paid?
- Financial planner and investment advisor compensation paid by third parties
- Financial planner and investment advisor compensation paid by clients
- Fee-only compensation aligns the interests of clients and their financial advisors
- Fee-only financial planner and investment advisory groups
- The securities industry calls marketing and selling “advising”
- Many investors are not fooled by an ethically challenged securities industry
Regulation of Financial Advisors:
- Avoiding financial planning and investment advisor frauds and scams – Overview
- Avoiding advisor frauds and scams – The “Never-do” list, Part 1
- Avoiding advisor frauds and scams – The “Never-do” list, Part 2
- Avoiding advisor frauds and scams – The “Never-do” list, Part 3
Tags: investment assets
Personal Financial Planning
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The Standard & Poors 500 stock index is the most common equity index fund benchmark in the U.S. The S and P 500 tracks about 75% of publicly traded U.S. equity market asset value. The dominant issue in choosing among passively managed index mutual funds and ETF funds benchmarked against the S & P 500 [...])
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- Avoid Very Large Actively Managed Mutual Funds (
Avoid very large actively managed mutual funds
Big actively managed mutual fund portfolio positions and higher percentage ownership of any company’s bonds or common stock are not good things for actively managed mutual funds. Nor, are these big positions and high percentages good for you.
Large portfolio size constrains how efficiently an actively managed mutual fund can [...])
- Own Investment Mutual Funds and ETFs – Not Individual Securities (Own Investment Mutual Funds and ETFs - Not Individual Securities
Owning individual stock and bond securities is just a big waste of your valuable time and money
Individual investors tend to be terrible investment portfolio managers. Almost everyone can hire an index fund manager to do a much better job for far less time, money, risk, and [...])
- American Funds – The Investment Company of America – Class A Shares (AIVSX) net a +3 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise and objective summaries of mutual funds and ETFs for comparisons within investment [...])
- Screening Index Mutual Funds with IndexUniverse.com (Screening index mutual funds on-line with IndexUniverse.com
In this article, The Skilled Investor discusses how to screen index mutual funds on-line. This article focuses on using the free index mutual fund screener and database available at IndexUniverse.com.
We also discuss how to apply our seven scientifically based mutual fund screening criteria.
In a previous article, The Skilled Investor [...])
- Benefits of Traditional IRA Contributions for Renters (
In a series of articles, The Skilled Investor compares different lifetime financial planning projections for Fran and Fred Frugal to illustrate the relative value of adopting different financial planning strategies. Fran and Fred, both age 30, are a married working couple with $100,000 in combined annual earned income. (See the "Fran and Fred's Baseline Lifetime [...])
- Pay Lower Investment Expenses To Get Higher Investment Returns (
Pay Lower Investment Expenses To Get Higher Investment Returns - Part 1
Excessive investment costs are a plague on your personal financial planning.
Excessive investment expenses are one of the most significant barriers to lifelong family financial security. While financial services industry sales people tell you that you need to pay more to get more, the correct [...])
- 2006 and 2007 Personal Income Tax Rates for the 50 States and DC (
2006 and 2007 personal income tax rates for the 50 states and D.C.
The Skilled Investor has made available for downloading a spreadsheet that contains graduated personal income tax rates and other personal income tax rate information for the 50 states and the District of Columbia.
If you want to know about specific U.S. state personal graduated [...])
- How Many Mutual Funds are Needed for a Well-Diversified Portfolio? – Evidence (Actively-managed mutual funds are not created equally. Performance can vary significantly - even when funds pursue similar strategies or "styles."
This article addresses the impact on portfolio diversification of holding more than one actively-managed mutual fund. (For the companion article to this, see: How many mutual funds are needed for a well-diversified portfolio? – a commentary)
- Reduce investment expenses and control taxation – Step 7 of 10 Financial Planning Steps in the Right Direction (CLICK HERE TO READ THE SKILLED INVESTOR's OTHER ARTICLES ABOUT THESE "10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION
Even with optimal investment strategies, there is still substantial room to improve upon net investment performance through continued and vigilant focus on controlling investment costs and tax realization.
The fees extracted by the financial securities industry increased substantially [...])
- Publish your blog news articles on traditional media center and newspaper websites (
An easy way to publish and syndicate your best news articles on some of the big news and media websites
Web content is more plentiful that grains of sand on the beach. However, really good and newsworthy web content is much more scarce. The cyberspace audience is discerning, but it takes time to attract them, and [...])
- I Write to the President of CitiBank Customer Service (PIRATES OF THE CREDIT SEA -- Part 5: I write to the President of CitiBank Customer Service
My saga to recover my credit card treasure continues. Previous articles have covered the particulars of my situation, and I will not repeat them.
In summary, for fifteen years I have always done my best to conform to my AT&T [...])
- Fee-Only Financial Planner and Investment Advisor Groups (
Members of certain financial and investment advisory groups have chosen to work with their clients solely on a client-paid "fee-only" basis.
Members of certain fee-only advisory organizations have pledged to work with their clients through fee-only compensation arrangements. These organizations do not issue certifications. They are membership organizations.
National Association of Personal Financial Advisors (NAPFA)
NAPFA registered financial [...])
- Use Caution with Classical Investment Books (Use Caution with Classical Investment Books - A Tip from The Skilled Investor
Individual investors should exercise caution when applying the tactics of classical investment books to current markets. The more handcrafted, seat-of-the-pants, and individual actor approach to the securities markets in the pre-computer, pre-networking era has given way to different practices. What might have worked [...])