Financial Forum

Elements of a Sound Financial Plan

Goals Clarification Worksheet
Cash Management & Budgeting
Cash Flow
Cash Reserves
Disability Income
Estate Planning
Retirement Planning
Accumulation
Glossary of Terms

Goals Clarification Worksheet

Goals clarification needs to happen early in the financial planning process.

The goals on this worksheet are simply a starting point from which you can customize your own goals. For married couples, both spouses should have input into the goals clarification process. This may be achieved by each completing a worksheet, or having both work together on filling out one worksheet. Differences in goals need to be reconciled before making any attempt to proceed further.

Please check the goals which you would like to address. Note that some goals my seem to be redundant or overlapping. This is because different people may express the same concept in differing ways. Indicate the priority each goal has relative to the other goals by circling a number to the left of the goals.

Cash Management & Budgeting

	Priority of this Goal
Low		Mediuim	High
1	2	3	4	5

_____To eliminate monthly negative cash flow.
_____To evaluate my/our debt level.
_____To identify expenditures which can be redirected toward financial goals.
_____To establish budgetary control over my/our expenditures.
_____To increase discretionary income as a percentage of gross income.
_____To expand my/our standard of living and be able to:___________________
_____To increase the amount of available savings and investment to $______ or
% of income.
_____To be able to schedule major cash commitments and project my/our cash flow
for the next three to five years.
_____Other:_____________________________________________________

Cash Flow

Income
Salary, bonus or other earned income	$
Investment income (i.e., dividents, interest, rental income)	$
Other	$
Total Income:	$

Fixed Expenses:
Federal Taxes	$
State Taxes	$
FICA Taxes	$
Loan repayment	$
Mortgage/rent (include property taxes & insurance)	$
Utilities:
Gas	$
Electricity	$
Telephone	$
Water/sewer/garbage	$
Miscellaneous Household Espenses:
Dry cleaning	$
Home maintenance	$
Cable television	$
Pet care	$
Postage	$
Food	$
Clothing	$
Personal care	$
Auto Expenses:
Insurance	$
Gasoline	$
Maintenance	$
License fees	$
Parking	$
Dental	$
Life insurance	$
Health insurance	$
Disability insurance	$
Day care	$
Total Fixed Expenses:	$

Discretionary Expenses:
Vacations	$
Dining out	$
Club dues	$
Movies	$
Newspapers/magazines	$
Charities	$
Gifts	$
Mutual funds	$
Money market	$
Savings	$
Total Discretionary Expenses:	$

Surplus/Deficit:	$

Cash Reserves

You lose your job. The roof leaks. An unexpected medical bill arrives. These situations - and many others - can send you scrambling for cash.

Everyone needs an emergency fund to cushion themselves against such unpleasant surprises; especially single people, who must rely on their own resources. Without an emergency fund, short-term needs can create cash flow problems that prevent you from achieving your long-term goals. Establishing such a fund can free you to focus on your more important plans.

Before one can/should commit resources to be invested, it is vital that you consider the following:

Set aside one month’s living expenses in the checking account. This money can be used for short-term needs such as purchasing food, clothing and other immediate needs.
Eliminate all credit card and consumer debt. This provides an immediate "return" of 12% to 21%. Not having to pay interest cost each year is, in effect, the same as achieving the same rate of return on any monies invested by you. Also the "time value of money" is working against you when you owe interest. Therefore, it is the surest and highest form of investment return you can make.
Invest between three and six months’ living expenses in an interest-bearing money market fund. This becomes the emergency fund and, in effect, your own bank. When this fund has been reduced it should be replenished before other investments are made.
Save in an interest bearing account for major purchases. This is a planned purchase such as automobiles, furniture and even the down payment on a home. Most investments require a reasonable time period to perform.
Invest to meet long-term goals.

Disability Income

Income: Your Most Valuable Asset

If you are like most people, everything you have or hope to have for yourself and your family requires that you continue to earn an income. Your ability to earn an income is the foundation that supports your expenses, your lifestyle and your future plans.

If income is interrupted because of an accident or sickness, you may become an income CONSUMER instead of an income PRODUCER.

This chart illustrates how quickly your financial picture can change if a disability strikes. your earning power drops off dramatically while expenses tend to increase, sending you into debt.

All you have been able to save in ten years may be wiped out in ten days. How much would you need if you were unable to earn a living?

To meet basic expenses:
Expense:	Spouse A	Spouse B
Mortgage/rent	$	$
Food	$	$
Utilities	$	$
Transportation	$	$
Other	$	$
Subtotal:	$	$

To save for your future, educate your children and prepare for other emergencies:
College reserves	$	$
College funds	$	$
Retirement plan	$	$
Subtotal:	$	$
Total:	$	$

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Estate Planning

An unexpected death may end a couple’s financial security. That’s why nearly 80 percent of American households have taken steps to protect themselves from this hardship through insurance.

Life insurance can:

Pay off your mortgage or other debts.
Provide an income for your spouse or aging parents.
Accumulate capital on a tax-deferred basis.
Satisfy business needs or obligations if you own a business.
Be structured to pay your premiums for you during a disability.
Replace a charitable gift.Considerations in the Purchase of Life Insurance

1 How much life insurance is needed? This will depend on the need it is fulfilling. Consider immediate needs such as funeral expenses, debts, mortgage balance due, education funds for children, emergency fund for the survivor and the long-term needs of replacing the lost revenue of an income earner.
2 Choosing a quality company. Experts agree that you should limit your choice of insurance companies to those that have received top ratings from established ratingagencies. To be highly selective, one can look at companies who have received at least an A+ rating from A.M. Best’s.
3 What type of policy should be purchased? A person trained in life insurance can explaining the many different policies available and assist in selecting the one that best fits your needs.
Remember, life insurance has many uses but the primary objective is to provide for your dependents in the event of your death. Your life insurance program should be designed to fit your needs at this particular time. Your needs, as well as the types of insurance policies offered, will change from year to year, so your policies should be reviewed periodically. Make changes when change is beneficial. Insurance policies are not sacred instruments.

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Retirement Planning

Outliving Your Money

Accumulating enough money for retirement is one of life’s largest financial commitments - much bigger than getting a mortgage or car loan. Yet many people spend more time planning their next vacation than planning for their own retirement.

Sources or Retirement Income*

*American Association of Retired Persons (AARP)

Social Security and pensions typically provide half of the average retiree’s income. This means that your personal savings and investments will need to make up the difference.

Experts say that retirees typically need about 70% of their pre-retirement income to live comfortably.

The Cost of Procrastination
(Delaying saving for retirement)

*Hypothetical rate of return for illustrative purposes only.

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Accumulation

Accumulating enough money for children’s college education expenses or retirement is a large financial commitment. Furthermore, the rate of return on investment vehicles you use to accumulate money in and the amount of time you have to meet your goals can make a tremendous difference in the value of your account over time.

A Hypothetical Illustration of Interest
Tables for Accumulating Money

Assuming a hypothetical investment of $100 per month:

	5 YRS	10 YRS	15 YRS	20 YRS	25 YRS	30 YRS	35 YRS	40 YRS
5%	6,801	15,528	26,729	41,103	59,551	83,226	113,609	152,602
6%	6,977	16,388	29,082	46,204	69,299	100,452	142,471	199,149
7%	7,159	17,308	31,696	52,093	81,007	121,997	180,105	262,481
8%	7,348	18,295	34,604	58,902	95,103	149,035	229,388	349,101
9%	7,542	19,351	37,841	66,789	112,112	183,074	294,178	468,132
10%	7,744	20,484	41,447	75,937	132,683	226,049	379,664	632,408
11%	7,952	21,700	45,469	86,564	157,613	280,452	492,830	860,013
12%	8,167	23,004	49,958	98,926	187,885	349,496	643,096	1,176,477
13%	8,389	24,404	54,973	113,324	224,709	437,327	843,184	1,617,907
14%	8,620	25,907	60,579	130,117	264,583	549,297	1,110,295	2,235,438
15%	8,857	27,522	66,851	149,724	324,353	692,328	1,467,718	3,101,605

Assuming a hypothetical investment of $100 lump sum:

	5YRS	10 YRS	15 YRS	20 YRS	25 YRS	30 YRS	35 YRS	40 YRS
5%	12,763	16,289	20,789	26,533	33,864	43,219	55,160	70,400
6%	13,382	17,908	23,966	32,071	42,919	57,435	76,861	102,857
7%	14,026	19,672	27,590	38,697	54,274	76,123	106,766	149,745
8%	14,693	21,589	31,722	46,610	68,485	100,627	147,853	217,245
9%	15,386	23,674	36,425	56,044	86,231	132,677	204,140	314,094
10%	16,105	25,937	41,772	67,275	108,347	174,494	281,024	452,593
11%	16,851	28,394	47,846	80,623	135,855	228,923	385,749	650,009
12%	17,623	31,058	54,736	96,463	170,001	299,599	527,996	930,510
13%	18,424	33,946	62,543	115,231	212,305	391,159	720,685	1,327,816
14%	19,254	37,072	71,379	137,435	264,619	509,502	981,002	1,888,835
15%	20,114	40,456	81,371	163,665	329,190	662,118	1,331,755	2,678,635

The hypothetical investment rates of return shown are for illustrative purposes only and should not be deemed a representation of past or future investment rates of return. Actual rates of return may vary and will depend upon a number of factors.

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Glossary of Terms

Bonds	A bond is an IOU issued by a corporation or government. It is a legal contract to pay the bondholder a specific amount of interest and face value at specified times.
Common Stock	Common stock is a share of ownership in the issuing corporation. Stockholders have certain rights of corporate ownership, which give them some decision-making power (right to vote) in the management of the corporation. Stockholders may receive dividends and the stock may increase or decrease in value, but no specific returns are guaranteed.
Series EE U.S. Savings Bonds	Series EE U.S. Savings Bonds are sold by the Treasury and may be purchased by individuals at major banks. Face value of the bond range from $50 to 10,000 and the bonds are sold at half of this value. Investors can redeem the bonds at any time after six months, but it they are held for at least five years, a higher minimum rate is guaranteed. Rates are twice per year based on 85% of the average yield of 5-year Treasury securities. The interest earned is received when the bonds are redeemed. Interest is not taxed by state or local governments
GNMA-FNMA	Government National Mortgage Association (GNMA) securities are issued by a government agency, and Federal National Mortgage Association (FNMA) securities are issued by a government sponsored corporation. The most familiar of these securities are units of ownership in a pool of residential mortgages. GNMAs pay monthly payments, which contain both principal and interest, paid by homeowners. Payments can vary as homeowners pay off mortgages early. These have an initial maturity of 30 years, but an average life of 12 years because mortgages are paid off as homeowners sell, refinance or accelerate mortgage payments
Treasury Bills	Treasury bills do not pay coupon interest to the investor, but instead are issued at a discount. The initial minimum investment for Treasury bills is $10,000. The Treasury issues new bills frequently.
Treasury Bonds and Notes	Treasury bonds are issued by the U.S. Treasury and are considered to be a very safe long-term investment. Treasury securities with 1 to 10 years to maturity when issued are called Treasury notes. Treasury bonds have from 10 to 30 years to maturity when issued. Treasury notes and bonds pay coupon interest twice a year (semiannually) and the face value is paid at maturity.
Municipal Bonds	Municipal bonds are issued by state, city and county governments and by water districts, port authorities and other public projects. They pay semiannual coupon interest and have various face amounts, but $5,000 is common. The interest on some municipal bonds is federal and state tax-free.
Corporate Bonds	Corporate bonds are issued by corporations and may be zero-coupon or pay semiannual interest. They usually are issued with a $1,000 face value and have various maturities. Interest and capital gains are taxed at all levels.
Zero Coupon Bonds	Zero coupon bonds are issued with no coupons and are sold at a deep discount from par value. The purchaser receives no interest payments during the life of the bond. Taxes must be paid each year on the accruing interest as though interest was actually received, unless the bonds are held in a tax-sheltered plan such as an IRA.
REITs	REITs are professionally managed real estates investments. The REIT managers purchase and manage properties, finance properties or invest in mortgage-backed securities. REITs give investors many of the same advantages as mutual funds, including diversification, professional management, limited liability, pooling of resources, and small minimum investment.
Mutual Funds	Mutual funds offer the investor immediate diversification into carefully selected and managed securities. Many mutual funds have a broad spectrum of funds to meet the need and temperaments of various investors
	Types of Mutual Funds: Money Market Funds Invest in short term money market instruments Yields fluctuate dailyGood during periods of high interest rates Municipal Bonds Funds Invest only in Muni Bonds Provide TAX-FREE income May be state tax exempt May be subject to Alternative Minimum Tax Bonds Funds Invest in debt-type instruments Relatively high yield Market value fluctuates inversely to interest rates Income Bonds Seek maximum income Invest in bonds, preferred or high-yield stocks Sector Funds Concentrate on a particular area of the economy Typical areas include: technology, health, energy, utilities, precious metals, etc Aggressive Growth Funds Very volatile Invest in high-performing stocks High risk/high return potential Growth Funds Invest mainly for capital growth Vary greatly — read offering prospectus to establish objectives of fun Growth & Income Funds Also called balanced funds Seek capital appreciation and income from dividends or fixed income investments

There are several risk factors to consider when investing in Mutual Funds, including principal risk, purchasing power risk (inflation), credit risk, economic and political instability and currency fluctuations.

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