Set your personal savings and other financial goals – Step 2 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.”
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
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 [...])
- Vanguard Total Stock Market Index Fund (VTSMX) achieves a +9 Fund Authority Score (
The diversified investment fund strategy of the Vanguard Total Stock Market Index Fund
According to the Vanguard website, the investment strategy of the Vanguard Total Stock Market Index mutual fund is to use a "passive management—or indexing—investment approach designed to track the performance of the MSCI® US Broad Market Index, which represents 99.5% or more of [...])
- The Never Do List – Avoid Financial Advisor Frauds and Scams (
Part 2 of the The Never-Do List - 22 Good Ways to Avoid Financial Advisor and Investment Counselor Frauds and Scams
This article discusses things that you should “never do” with a financial planner or investment advisor, and it covers fees, payments, and proprietary investments.
You should never do certain things with a financial planning or investment [...])
- American Funds – Washington Mutual Investors Fund – Class A Shares (AWSHX) acquire a +2 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 [...])
- Passive Index Investment Strategies are Superior (Passive index investment strategies are superior, because they narrow the range of outcomes and lower your investment risk
A previous article, “The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that individuals are much better off with a well-considered financial viewpoint. A stable [...])
- Factors Favoring Roth IRA and Roth 401k Plan Contributions – Part 2 (Factors that tend to favor Roth tax-advantaged plan contributions - Part 2
(Continued from Part 1...)
In a recent article, "Traditional versus Roth tax-advantaged plan contributions," The Skilled Investor discussed why the average taxpayer would tend to benefit more by contributing to traditional rather than to Roth tax-advantaged IRA and 401k retirement plans. This follow-up article in [...])
- Insurable Risks Could Destroy Your Best Laid Financial Plans (
Do not ignore insurable risks that could destroy your best laid financial plans
A previous financial article, “The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that investors are much better off with a well-considered financial plan. A stable set of financial beliefs [...])
- If Personal Finance is Difficult – Carefully Hire a Good Advisor (
If personal finance is difficult for you, carefully hire a good financial and investment adviser
A previous financial article, “The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that investors are much better off with a well-considered financial plan. A stable set of [...])
- 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)
- 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 [...])
- 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 [...])
- Your Valuable Assets Are Simply Your Evolving Estate (
Your investment portfolio and other property assets are simply your evolving estate
A previous financial article, “The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that investors are much better off with a well-considered financial plan. A stable set of financial beliefs can [...])
- Advisor Costs and Strategies Determine Your Return on their Services (Financial advisor costs and the value of their investment strategies determine your return on investment from these investment advisor services
A previous financial article, “The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that investors are much better off with a well-considered financial [...])
- Are Your Financial Planning and Investing Strategies Scientific? (
Your financial planning and investing strategies should have a scientific basis
A previous article, "The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient," suggested that individuals are much better off with a well-considered financial viewpoint. A stable set of financial beliefs can help you [...])
- Taking the Snake Oil Out of Mutual Fund Evaluation (Superior mutual fund and ETF performance charts are the sales tools of modern financial snake oil salesmen
Historical performance charts allow investment fund promoters to market selectively their supposedly superior funds and to allege that their excessively high fees are worth it. Lured in by superior past performance, most often individual investors will get mediocre future [...])
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