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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: winning the lottery
Personal Financial Planning
- How Investment Sales Loads and One Time Investment Fees Work (Understanding one-time investment fees, such as sales loads
Sales load charges and commissions on investment purchases differ from the financial service industry's numerous other recurring methods of charging fees to their retail consumers.
Sales loads are less straightforward to analyze for investment lifetime cost-effectiveness, compared to annually recurring charges. (See: Pay less to get more)
If you have [...])
- 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 [...])
- 10 Personal Financial and Investment Planning Steps in the Right Direction (Increase your knowledge and accelerate your ability to take leadership in the management of your own personal finances and lifetime investing.
This ten-step personal financial planning process will help you optimize the management of your financial planning and investment management affairs over your lifetime, while greatly reducing the unnecessary waste of your money and your time.
- Developing Fund Authority Scores for ETFs and Mutual Funds (
Select mutual funds and ETFs with the most important economic factors that affect long term, diversified, and risk-adjusted investment fund returns
Good things are born small and grow over time. Regularly, The Skilled Investor evaluates individual mutual funds and ETFs and adds new articles that use the Fund Authority Score rating system. To be alerted when [...])
- The Biggest Personal Finance Story of the Past 30 Years (
The Biggest Personal Finance Story of the Past 30 Years - Part 1
What could the biggest personal finance story of three decades be?
The growth of mutual funds and ETFs? Nope.
The dot com boom and bust? Nope.
Vanishing pensions? Nope.
The not-so-high quality of mortgage bonds? Nope.
A 0% personal savings rate nationally? [...])
- Earned Income Drives the Personal Finances of Most People (Do-It-Yourself Financial Planning - Earned income drives the personal finances of most people
The ability to project your various income sources automatically over your lifetime is one of the first steps in creating a useful do-it-yourself personal financial plan. Whether from wages and salary or from self-employment, personal earned income drives the lifetime finances of most [...])
- Dodge and Cox Stock Fund (DODGX) picks up a +8 Fund Authority Score (The table below in this article presents The Skilled Investor's Fund Authority Score and other information for the Dodge and Cox Stock Fund (DODGX).
The diversified investment fund strategy of the Dodge and Cox Stock mutual fund (DODGX)
According to its website and its prospectus filing on the U.S. Securities and Exchange Commission EDGAR system, the investment [...])
- Choose Lower Mutual Fund and ETF Management Fees (Choose mutual funds and ETFs with MUCH LOWER investment management expenses
Investment fund management fees can only be justified by individual investors, if higher net returns more than compensate for these fees. Sadly, this is most often not the case with actively managed equity and bond mutual funds and exchange-traded funds (ETFs). In addition, you have [...])
- Early Retirement for Renters through Investment Cost Reductions (Early retirement for renters due to investment cost improvements and higher savings rates
Improving on Fran and Fred's lifetime financial plan with earlier retirement
Fran and Fred Frugal, both age 30, are a married working couple with $100,000 in combined annual earned income. They want to understand how valuable different personal finance strategies could be to their [...])
- The Lifetime Value You Have Lost by Paying Investment Sales Loads (VeriPlan can estimate the lost lifetime value of investment sales loads that you have already paid in the past
Your personal investment portfolio losses related to past investment sales load payments can and should be measured, when you evaluate the cost-efficiency of your investment strategy.
However, you cannot recapture any of the lost returns (past or future) [...])
- Using Google Scholar to Find Financial Articles (
Using Google Scholar to Find Finance Articles
If you want to do some research about financial planning and investing by yourself, try using Google Scholar.
Be prepared for a lot of the material you find to be esoteric. Nevertheless, Google Scholar is littered with diamonds that can improve your understanding of personal finance and save you money.
- Excessive Investment Expenses Take 2% of Individual Investor Assets Every Year (Excessive investment expenses take 2% of individual investor's assets every year
Year after year, millions of people lose large amounts of money on unnecessary and unproductive investment costs and investment expenses.
The typical investor loses about 2% of portfolio assets every year by paying too much and getting too little in return.
This wasted 2% is not a [...])
- Choose Sufficiently Mature Mutual Funds and ETFs (Choose sufficiently mature mutual funds and ETFs
Investing in more mature equity and bond mutual funds and exhanged-traded funds (ETFs) allows you to evaluate the historical consistency of a fund's record.
On average, the future portfolio returns of more mature funds are probably no more predictable than for very young funds with a similar style or strategy. [...])
- Schwab S&P 500 Index Fund – Select Shares (SWPPX) capture the Best +10 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, objective, and realistic summaries of mutual funds and ETFs for comparisons within [...])
- 15 Value-Added Individual Investor Activities (Before estimating the investment value that you might add or take away from your portfolio, you first need to determine whether your strategies are or are not likely to lead to optimal risk-adjusted investment returns.
This value estimation is separate from any hourly opportunity cost related to spending time on your investments versus an alternative use [...])