Showing posts with label Building a Financial Plan. Show all posts
Showing posts with label Building a Financial Plan. Show all posts

Tuesday 16 October 2012

Do You Invest Like a Grasshopper or an Ant?



When it comes to retirement planning, are you Aesop’s grasshopper or ant?
Like the ant in the fable, should you hoard and invest as much money as you can now, depriving yourself of little luxuries and gambling that you’ll live to a grand old age? Or should you have a bit of fun, like the grasshopper, spend that cash and then end up in your 90s living on Ramen noodles?
Jim Miller’s article posted earlier on this blog— “How Much Should You Save?” — underlines the challenge everyone working without the backup of a pension faces.
A recent Bloomberg.com article (see article posted below) suggests that more of us may be grasshoppers, but caving into immediate gratification may give our finances as much as a six-figure hit. The article notes that a “unique challenge for retirement planning is that the end goal is so far away that it’s hard to see how actions we take or don’t take today will have a huge impact on our older selves.”
Bloomberg further references a contract created by the Allianz Global Investors Center for Behavioral Finance. The contract, written to help financial advisers hold their clients to the investing course, includes this passage: “Should the portfolio value decline by 25 percent, we commit to avoid the urge to panic and sell the portfolio. Similarly, should the portfolio value increase by 25 percent, we commit to avoid the urge to chase the hottest investments.”
If you really want a look at how your savings will pile up if invested in a retirement plan, it’s worthwhile to play around with the 401(k) savings calculator at Bankrate.com. Then tinker with the retirement income calculator at the same website — a fascinating, but also scary, numbers game that may have you joining the ant farm.



Retrain Your Brain for Financial Success
By Carla Fried - Oct 9, 2012

Dismal market returns haven’t exactly created a tailwind for 401(k) and IRA portfolios over the last decade or so, but an equally pernicious -- and more entrenched -- problem is that our brains are messing with our retirement plans.
“We are wired for financial defeat,” says Rapid City, South Dakota, certified financial planner Rick Kahler. “Whatever has the most emotional juice right now is what gets our attention. Invest $5,000 in your IRA for a retirement that is 10, 20, 30 years away? Or spend the $5,000 for a vacation to the Bahamas?” All too often, the Bahamas wins out.

William Meyer, founder of Social Security Solutions, notes that our thirst for immediate gratification can easily take a six-figure toll. More than two-thirds of folks opt to claim a lower Social Security benefit starting as early as age 62. For a married couple, than can mean leaving as much as $100,000 on the table. “If you wait to claim until age 70, you’re locking in a benefit that is 76 percent larger," says Meyer.

More productive planning

Forever tweaking your asset allocation probably won’t get you near the retirement payoff that tweaking your brain will achieve. Consider these strategies for engaging your brain in more productive retirement planning:
Get Thee to a Calculator, Pronto: OK, you know you probably should be saving more for retirement. And when life keeps intervening -- that Bahamas vacation you and yours really really need, or the realization that the kid’s orthodontia isn’t covered by insurance -- you tell yourself that next year, you’ll ramp up your savings rate. You’ve got plenty of time, right?
What you may not realize is how expensive that time is. Research conducted by Craig McKenzie, a psychology professor at the University of California, San Diego, shows that we have a tendency to “massively underestimate the cost of waiting to save. It’s difficult to appreciate the difference between giving yourself 20 years to save and 40 years.”
For example, a 30-year-old who is saving $10,000 a year and earning an annualized 6 percent will have $1.2 million at age 65. Care to guess what someone starting at 45 will have? About $390,000. The younger saver invests $150,000 more than the 45-year-old does, and in return has an ending balance that's $800,000 larger. Even if you’re already past your 20s and 30s, you might find it eye-opening to see how extending your investment timeline by delaying retirement on the back end of the calculation can help matters. Your company retirement plan probably has an online calculator you can play with; or try this one.
Make it Personal: How you frame retirement savings decisions can help boost your ability to delay gratification. When individuals were asked if they'd prefer to have $3,400 in one month or $3,800 in two months, 57 percent chose the latter. When the same scenario was framed in terms of one’s personal age -- “when you are 2 months older” -- 83 percent chose to wait for the bigger payoff.
How does that translate to better retirement planning? Yale School of Management marketing professor Shane Frederick, one of the study’s authors, says a 50-year-old who frames a savings goal as “when I am 65” will likely be more patient to focus on that delayed gratification, than someone who frames it as a more generic “in 15 years.”
Time Travel: Another unique challenge for retirement planning is that the end goal is so far away that it’s hard to see how actions we take or don’t take today will have a huge impact on our older selves. When researchers showed individuals doctored photos of their future selves, the human guinea pigs said they would save more than twice as much for retirement, compared to a control group that wasn’t given a glimpse of their older self.
Work is afoot to bring this visual exercise to a 401(k) plan near you. In the meantime, Hal Hershfield, who led the research, says he wouldn’t recommending using apps that age your face. “They're just not accurate enough, and I think seeing a strange-looking version of your future self may actually have the perverse effect of causing you to identify less.”
Hershfield, an assistant professor of marketing at New York University’s Stern School of Business, says new research that has yet to be published shows that simply writing a letter to your future self can help you become more invested in the welfare of that older person. “In a way, this task is a very low-tech version of the age-progression [photo morphing] techniques: Both have the same goal of creating a more vivid image of the future self.” Hershfield says hanging out with older folks -- parents, grandparents, volunteering with an organization for the elderly -- can also have a beneficial impact on your resolve to save more today.
Channel Ulysses. Most of us suffer from a bad case of recency bias, the tendency to extrapolate that whatever is happening today will keep happening. That’s why it’s so hard to buy low and sell high. If your recent experience is a falling market and bad returns, it’s not exactly easy to belly up to the bar and buy stocks, or simply stay committed to what you already own.
A Ulysses Contract -- a one-page statement that lays out your long-term strategy and the fact that you’re committed to staying the course -- can be a line of defense against over-reacting to current events. Like the Greek warrior, you are pre-planning for how you will circumvent alluring emotional sirens that can thwart your retirement plan.
For example, a sample Ulysses contract -- created by the Allianz Global Investors Center for Behavioral Finance for financial advisers to use with clients -- includes this passage: “Should the portfolio value decline by 25 percent, we commit to avoid the urge to panic and sell the portfolio. Similarly, should the portfolio value increase by 25 percent, we commit to avoid the urge to chase the hottest investments.”
Another useful step is to include a clause in your contract saying that before you ever deviate from your plan, you will write down your rationale. As Nobel Laureate Daniel Kahnemann explained in his book, "Thinking, Fast and Slow," you don’t want to cede all power to the quick-twitch intuitive part of your brain. Slowing down and simply writing down why you want to change course triggers more deliberate rational thinking. That’s the key to getting ahead and staying ahead.

Thursday 4 October 2012

4 Ways To Get A Head Start On Your Financial Career


In the 1970s, financial planners essentially had two career choices: they could become stockbrokers or insurance agents. Their paths were set, and the expectations were simple. Much has changed since then. There are many more choices available, but this also means that students are expected to know more and do more than ever before in fierce competition. Preparing for a career in financial planning requires a great deal more training in areas that were traditionally relegated to other professions, such as accounting and psychology.

In this article we'll explore things that recent and soon-to-be graduates can do to decide where they want their financial planning career to go and to then get a leg-up on the competition.

Prepare Before You Graduate

Perhaps the first and most obvious course of action is to simply choose an appropriate major. These include business, economics, finance or accounting. Personal financial-planning programs are being offered at more universities, both at the graduate and undergraduate levels. These programs can be especially helpful because they also often touch upon a number of topics that other programs fail to cover. These topics include consumer rights, the dynamics of finance within the family and the psychology of retirement.
Traditional financial-planning curricula will only cover material that is directly relevant to the Certified Financial Planner (CFP®) Board exam, such as investments, insurance and taxes. Therefore, choosing financial planning as a major will provide students with a much broader base of knowledge from which to begin their careers. Understanding the psychology of finance and investing will be an invaluable aid when dealing with clients, and is in fact a skill that all financial planners must master to some extent. 

Extracurricular Activities

Of course, choosing the correct major is only one step that students can take to further their careers before graduation. There are a number of other options available to students that will look good on a resume to prospective employers. Here are some examples.

  • Preparing Income Tax Returns - This is a good, practical skill that can greatly benefit the student in a number of ways. In addition to providing solid, hands-on experience with customers in the financial industry, it will also teach the student basic tax information that will be tested on the CFP® Board exam.
  • Working at a Bank - Student planners often find that working at a bank provides multiple career benefits. It's a job that easily fits around an academic schedule. The pay is better than many other after-school jobs. It looks good on a resume, gives practical work experience and shows that you are a responsible person.
  • Sitting for the Enrolled Agent Exam - This exam is administered by the IRS every September. The test covers virtually all of the tax material found in the CFP® Board exam. Passing this test and earning this designation will be an impressive credential to present to prospective employers in any field of financial practice. You'll also gain a tremendous advantage over CFP® applicants that have had no previous tax training.
  • Internships - Working as an intern at a financial planning firm will provide obvious benefits for any student. However, while any internship can be beneficial, working at a smaller company will likely provide more hands-on experience with clients and the financial planning process than a larger firm, where interns are often relegated to administrative support or marketing roles.
Finding a Job

Graduates have a number of tools at their disposal that can greatly increase their exposure to the financial community. Obviously, a graduate who completed an internship at a local company has a substantial advantage over an unknown competitor in the job-selection process.

For those who do not have this luxury, the Internet can be an indispensable resource. Websites such as brokerhunter.com continually list all available postings from many companies. Those who prefer to take a face-to-face approach and network themselves (and even those who don't) would be wise to join the local chapter of a financial planning organization, such as the Financial Planning Association or the National Association of Insurance and Financial Advisors. These groups offer many resources to both rookie and veteran planners and are well worth the cost of membership. Their websites often contain job postings, too.

After Graduation

Knowing what job is the best fit for you can be a challenge. Here are some more items to consider when choosing your career path:

  • There are a number of different business models being used in the financial planning industry today. Stockbrokers and insurance agents generally work on commission, while Registered Investment Advisors tend to charge either an hourly fee or a percentage of assets under management as compensation.
  • The size of the company matters. Large companies will provide such amenities as office space, business cards and letterhead. However, larger companies may also have stiff production quotas, lower payouts on commissions and a highly regulated environment.

    In turn, small financial companies offer a more relaxed atmosphere and a more comprehensive array of products and services. Working at a smaller firm can also provide a much broader range of experience for new representatives, who may have the freedom to implement a well-rounded financial plan for a client. This plan could include such things as mortgage planning and income tax preparation. It's doubtful you would have this kind of responsibility at a large company.
  • Training and support differ from company to company. Financial firms such as Smith Barney or Northwestern Mutual will provide their employees with all the necessary education and training that they need in order to pass the requisite tests, as well as thorough sales and product training. Many new advisors will benefit from the training programs offered by the large companies. Even if you ultimately lose out to the competition at a large firm, you will still have marketable skills that are attractive to small firms that can't provide the kind of training and licensing you've received.
  • Finally, regulations from the Financial Industry Regulatory Authority require sponsorship by a broker/dealer in order to sit for any securities licensing exam.


The Bottom Line

College students have many things that they can do to improve their marketability before graduation. Once you're out in the real world, remember that the initial key to success in the financial planning business is persistence. Some graduates will find their place in the field immediately, while others may have to try a few different working environments to find the one that best suits them. Hard work and perseverance will always pay off for those who are willing to risk failure to achieve their dreams.


Read more: http://www.investopedia.com/articles/financialcareers/07/student-advice.asp#ixzz28JX7DuSu

Saturday 23 June 2012

Financial Planning and Reinvesting Your Passive Income




Reinvest money from passive income





My Cash Flow Framework



Cash Flow Diagram


HAVE YOU STARTED YOUR JOURNEY TOWARDS FINANCIAL FREEDOM?


No, what is financial freedom?
  7 (6%)
No, I don't intend to start my journey.
  1 (0%)
No, but I am preparing to start my journey.
  26 (25%)
Yes, I have just started my journey.
  40 (39%)
Yes, I am half-way in my journey.
  17 (16%)
Yes, I have achieved financial freedom already.
  10 (9%)



Source:  




Thursday 22 October 2009

“They did not plan to fail – they just failed to plan.”

Why Don’t Most Financial Planners Plan Finances?

Written by Ed Rempel on Oct 20, 2009
filed under General Finance

“If you don’t know where you are going, you will wind up somewhere else.” – Yogi Berra

We went to a fascinating conference a couple weeks back that showed the inner workings of the financial planning industry in Canada. It was the first annual Financial Planning Week in Canada, so all the “experts” met for a day to discuss how the industry is misunderstood. “Financial planning is still about selling” is the title to Jonathan Chevreau’s article.

While many financial planners claim to do financial planning and provide holistic advice, very few actually provide comprehensive planning with written financial plans, as taught in the CFP courses.

The issue is best highlighted by Alan Goldhar, Professor of Financial Planning at York University and Manager for the Ontario Public Trustee. The Public Trustee takes over the finances for people that are mentally unable to make financial decisions. They have taken over more than $500 million in investments for 10,000 clients, most of which had a financial planner, broker or bank advisor. They interview the client and the family and then send in a team to obtain all financial documents.

The shocking fact is that, of the 10,000 clients they took over, none had a financial plan! Not one!

We have reviewed the finances for about 2,000 families and found the same result – none of them had a proper written financial plan prepared in Canada.

Alan Goldhar also teaches Finance at York University, where he says most financial planning students don’t bother completing the CFP designation, because “the industry has jobs for salespeople, not for professional financial planners. It’s like graduating from medical school and then being allowed only to check temperatures and change band aids.”

Cary List, CEO of the Financial Planners Standards Council (FPSC), says: “The single most common misunderstanding about financial planning is that it is all about investing.”

First, to make the issue clear, a financial plan, as defined by the FPSC, is a written document customized for you that gives you complete advice on all areas of your finances, including:

1.Cash Flow- Helping you understand how you spend your money.
2.Debt/Asset Management – Structuring your debts and your assets in the most effective way.
3.Life Goals, including Retirement Plan – Identify your financial goals in detail and strategies to help you achieve them.
4.Income Tax Planning- Determine most effective strategies to minimize tax over your lifetime.
5.Estate Planning- Determining the most effective way to transfer your assets to your beneficiaries.
6.Risk Management- Determine your needs for insurance and which type is the cheapest/most effective for you.
7.Investment Management- Recommending the strategies and investments appropriate for your plan and keeping you focused on your goals.

In short, it is a complete “road map” to the life you want that allows you to make decisions with your overall plan in mind, instead of making each decision on its own. A plan is not an investment projection, a questionnaire, a goal based on a rule of thumb, or a document with nice graphs printed out in 15 minutes or less.

From experience, we find that the benefits of having and following a plan are far more significant than people realize – and far more significant than Investment A vs. Investment B. For example, the main reason most Canadians will retire at a much lower standard of living than they want is because they never figured out how much they need to invest or what kind of strategies/investments they need to reach their goal.

Just keeping you focused on your goals alone can be the most obvious benefit of a plan. Anyone that lost focus and sold investments since last fall has wiped out years of gains.

“They did not plan to fail – they just failed to plan.”

Why is the industry focused on sales, instead of financial planning? What needs to happen so that Canadians will get real professional plans from their financial planners?

Here are the main suggestions at the conference for why most financial planners don’t plan finances:

1.Blame the public – Financial planning is misunderstood by the public. Most people think short term and do not understand why they need a financial plan. Canadians do not ask that their advisor to do a comprehensive, written plan for them.
2.Blame the schools – Financial education is not taught in schools, even though it is a basic life skill.
3.Blame the industry organizations – They have not effectively educated the public on the need for a plan. They also have a confusing list of degrees, instead of focusing on the CFP designation.
4.Blame “financial planners” – Most advisors focus on the investments or insurance that make them money and consider financial planning to be unpaid service work.
5.Blame the banks, insurance companies and planning firms – They have not been able to figure out a good business model that includes financial planning.
6.Blame the regulators – They focus regulation on products and disclosure related to products, and do not make allowances for advice that is part of a comprehensive plan.
7.Blame the government – There are no national restrictions on who can call themselves a “financial planner” or “financial advisor”. Those that do not write professional financial plans and have the qualifications should have to call themselves what they are: “mutual fund salesperson” or “insurance rep”.
8.Blame the industry –The industry has effectively taught the public that most “financial planners” are just salespeople. Most people have met with or know a “financial planner” and the planner did not do a plan, but mainly just tried to sell them a mutual fund or insurance.

What do you think? Why don’t most financial planners plan finances?

Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.

http://www.milliondollarjourney.com/why-don%E2%80%99t-most-financial-planners-plan-finances.htm

Wednesday 9 September 2009

Building a Financial Plan

Sales forecast
Two to three years
Detailed assumptions
  • Sales per customer
  • Number of customers
  • Sales growth rate

Cost forecast
Costs of operating and costs per sale

Income statement and balance sheet
a/r, a/p

Cash flow forecast

Summary statement of sources & uses of cash



http://w4.stern.nyu.edu/berkley/docs/Glenn_Okun.ppt#19