You would be amazed by the large number of intelligent people who don’t know how to achieve their life goals, provide for their families, or plan for the death of the main income earner.
“In this world nothing is certain but death and taxes” – Ben Franklin
12 Financial Mistakes Often Repeated
- Only one family member is involved in financial affairs. Both spouses should be involved in the financial planning and in meetings with accountants and lawyers.
- Life goals are not on paper. For it to be a goal, it must be written down. Each goal, with the dollar amount attached to it, prioritized by importance.
- No family budget. You must know what you’re spending. It’s easier to change what you spend than to change what you earn.
- No excess liability (umbrella) insurance. Purchasing this type of insurance could be one of the wisest investments you ever make. Umbrella Insurance provides high limits of additional liability coverage above the limits of your homeowners and auto policy. In addition, it provides coverage that may be excluded by other liability policies.
- Underinsuring the contents of your home. To maintain your standard of living, buy replacement-cost coverage.
- Insufficient liquidity (cash/credit on hand) to handle emergencies or opportunities. Create a “war chest.” Emergency funds should equal 6 months of spending money. Use your budget to calculate exact amount.
- Devoting too much time to tax reduction. Concentrate on accumulating wealth.
- Employee benefit package poorly understood. Maximize contributions to payroll savings and 401(k) plans, especially if they offer corporate matching. Make sure you have adequate group disability coverage. Find out what is the “own occupation” definition of the group plan.
- Investments are not diversified.
- Using the wrong type of attorney to draft wills, trusts and durable powers-of-attorney. Consult and estate-planning specialist!
- No tax projections made. Read the financial pages regularly and consult with tax professionals. People don’t plan to fail…they fail to plan.
- Breadwinners have no disability insurance. Know your disability coverage needs and get adequate protection. What would the impact be on your family if you became disabled for 3 months, 6 months, 1 year, life?
How to Apply Sophisticated Business Financial Techniques to Personal Finances
Use existing analytical tools to uncomplicate your financial affairs. Many of these tools were developed for corporate use, but work equally well for diagnosing personal financial health.
|Tool||Formula||What It Shows|
|Liquidity Ratio||Liquid Assets/Current Liabilities||Are liquid assets sufficient to meet short-tem obligations?|
|Expense Coverage Ratio||Liquid Assets/Monthly Expenses||How many months’ expenses will your liquid assets cover?|
|Debt Ratio||Total Assets/Total Debt||How Aggressive is your Balance Sheet?|
|Working Assets Ratio||Investment Assets/Total Assets||How much of your net worth is working for you?|
|Marginal Tax Rate||Tax rate (federal) paid on your last-earned dollar||What percentage of each additional dollar will go for taxes?|
|Work ratio||Earned Income/Total Income||How dependent are you on your job to meet income needs?|
|Fixed Expenses as Percentage of Total Income||Fixed Expenses/ Total Income||How much of your income goes to cover expenses over which you have no control?|
|After-tax Return on Investment Assets||[Taxable Investment Income x (1-Marginal Tax Rate)] + Non-taxable Income/ Taxable Investment Assests|
A Plan To Double Your Wealth
The two things you need to accumulate wealth are Time and an Income Producing Investment. In and of themselves they will eventually double your wealth without you having to do anything. However, to double you wealth in a specified period of time requires planning.
If your invested capital remains constant, you can use the “Rule of 72” to calculate the return needed to double your wealth in a specified period of time.
Here’s how it works.
The Rule of 72
The rule of 72 is based on a mathematical axiom.
When you divide the number 72 by the number of years you want to double your worth. The resulting number is the percentage you must earn on your investment.
Lets say you want to double your savings in 10 years. 72 divided by 10 (years) means that you would need an investment that yielded at least 7.2% annually. To double your money in 5 years -14.4%; in 2 years – 36%.
Find out what you current investments are earning? This includes your 401(k), 503(b), IRA, Roth IRA and any other savings accounts.
Consider liquidating poorly performing investments and reinvesting the capital. If you’re unsure about what to do or how to do it, get the help of a qualified financial planning professional.
I recommend everyone get a copy of Pay Yourself First. Author Jesse Brown reminds us that we gain financial success and security when we pay ourselves first. Achieve your financial freedom with step-by-step instructions from award-winning investment manager Jesse B. Brown. Discover the easy-to-follow, down-to-earth secret to living your dreams, whether it’s buying a new home, buying a new car, sending your children to college, retiring rich, or going on that once-in-a-lifetime vacation.
Online Financial Planning Tools
Investopedia – Retirement, Investment, Future & Present Value Calculators
National Institute On Retirement Security – New research finds retirement insecurity across the nation. Americans say access to pensions would reduce anxiety and express strong support for government action to ease the way for employers to offer pensions.