Category Archives for Invest & Retire

Updating My Target Asset Allocation/Investing Strategy

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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For the past three years (since this site was created in fact), I have operated my passive investment strategy around a target overall asset allocation of 25% fixed income and 75% equity investing instruments. Thus far, I have and continue to be very comfortable with this asset allocation, given my age, risk comfort profile, and the number of years I have left working before retirement. 

Using this 25/75% split in overall asset allocation, it boils down to having 5% of my overall assets held in cash. However, during the past year, due to vacation savings, dream and life values savings, and the receipt of a lump-sum inheritance amount (1/4 of which I am keeping in cash for the time being), I have tended to carry around 10% of my overall assets in cash-equivalent accounts. Since I like having this amount of cash on hand being saved for specific purposes, I figure it is time for me to accept the fact that I need to change my target asset allocation percentages to account for this preference.    

In thinking about how to account for this change, I saw two possible options:

1. Maintain my 75/25% overall asset allocation split between equity and fixed income instruments by increasing my cash target allocation to 10% and decreasing my target bond allocation. 
2. Maintain my current asset allocation target for bonds, increase my cash target to 10%, and then decrease the amount of equity holdings I have by 5%.

Overall Asset Allocation

% Equity = 70%
% Cash/fixed income securities = 30%
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Total Portfolio = 100%

Equity Asset Allocation

For the equity portion of my portfolio, my target split is shown below:

% US Domestic Equity = 70% (70% x 0.70 equity = 49% of total portfolio)
% International Equity = 30% (30% x 0.70 equity = 21% of total portfolio)
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Total Equity Portion of Portfolio = 100%

I then break down these broader allocation levels in to subcategories so I can select INDEX mutual funds to give me exposure to these areas, as shown below:

Detailed Allocation Calculations

1. % Cash (money market target 10%)
2. % Non-Inflation Protected Short Term Bond Funds (avoid long term bond funds) (target 12%)
3. % TIPS Bonds (inflation protected bonds -target 8%)
4. % International Equity (Target 10%)
5. % International Emerging Markets (Target 11%)
6. % Domestic Large Cap (Target 7%)
7. % Domestic Small Cap (Target 7%)
8. % Domestic Small Cap Value (Target 13%)
9. % Domestic Large Cap Value (Target 12%)
10.% REIT (Real Estate Investment Trust – target 10%)
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Total Net Worth = 100%

Online Savings Account and Vanguard Index Funds That I Use for My Asset Allocation 

All of these have very low fees, and since they are index mutual funds, you will have higher returns than 70% of investing professionals with active management. You can open an account with Vanguard very easily at http://www.vanguard.com/. There are generally no commissions/fees for buying Vanguard funds through your Vanguard account. All funds require $1000-$3000 of initial principal to buy a particular fund.

1. Cash – Place in DollarSavingsDirect.com high yield savings account.
2. Vanguard Short Term Bond Index (MUTF:VBISX)
3. Vanguard Inflation-Protected Secs (MUTF:VIPSX) – Note: This is an actively managed fund.
4. Vanguard Total Intl Stock Index (MUTF:VGTSX) 
5. Vanguard Emerging Mkts Stock Idx (MUTF:VEIEX)
6. Vanguard Total Stock Mkt Idx (MUTF:VTSMX) 
7. Vanguard Small Cap Index (MUTF:NAESX)
8. Vanguard Small Cap Value Index (MUTF:VISVX)
9. Vanguard Value Index (MUTF:VIVAX)
10.Vanguard REIT Index (MUTF:VGSIX)

Investing New Money when it Comes In –

So, having bought the funds listed above, now what do I when I get my paycheck each month and have new money to invest? This is where dollar-cost averaging and/or rebalancing comes in to play!

Portfolio Rebalancing

Portfolio rebalancing is the process of maintaining the recommended allocation target %’s listed previous in order to maximize return and minimize risk. The rule I follow for when to rebalance is called the 5% rule. For example, the target allocation % for the REIT part of your portfolio is 10%. Following the 5% rule, you would rebalance the portfolio either by selling shares or contributing more money depending on whether the current % of the total portfolio was 15% or 5%, respectively.

As a general rule, I try to avoid selling shares of mutual funds (except in tax-sheltered accounts) frequently in order to perform rebalancing. Instead, when new money comes in, I buy additional shares in other funds if as needed to maintain my targets.

However, a full rebalancing of your portfolio should be 1X to 2X per year, unless your allocations targets are already aligned from keeping it up throughout the year with monthly investments.

Dollar Cost Averaging

Another method of maintaining your portfolio/deciding how much money to invest and when is called dollar cost averaging. 

In Dollar Cost Averaging, the idea is that a constant amount of money is invested each month in to your account, and therefore, will buy MORE shares when the market is down and LESS shares when the market is up.

How about you all? What is your overall target asset allocation that you use in your investing strategy? Do you ever think about revising it?

Share your experiences by commenting below!

***Photo courtesy of http://www.flickr.com/photos/english-in-vancouver/7359571334/sizes/s/in/photostream/

2012 Year-End Review – Current Asset Allocation and Net Worth Growth – July-December 2012

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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Hello there everyone! Jacob here! The past few months have been quite a whirlwind, fitting in serving as a Teaching Assistant to a Transport Processes class 10-15 hours per week along with my normal Alzheimer’s disease research in graduate school and keeping up with blogging. 

However, aside from being pretty busy, the past few months have also been very productive! In mid November, our Alzheimer’s disease paper got accepted for publication in the journal, Biomacromolecules. Then, the week before Christmas break, I finished defending my Master’s Thesis and also completed the requested revisions to another manuscript we were submitting to the journal, PLoS One, which has some of the strangest capitalization formatting of any word I type these days! haha

Anyhow, with 2012 coming to a close, it’s time to review the progress on my net worth, financial, personal, and blogging goals I’ve realized this year and also think about setting new/revised ones for next year! So, without further ado, let’s get started – first with reviewing my net worth growth during the 2nd half of 2012! As always, if you have any questions, please ask via email or commenting below! 

As I’ve mentioned before, the goal of this running net worth and asset allocation progress update series is twofold:

• 1) To share how I (as a fairly normal non-financial professional) approach various financial issues that come at me throughout life so that you can use my learnings to assist you in your financial decision making, and 
• 2) To make me more accountable in sticking to my various financial goals that I set forth by periodically evaluating my status and making adjustments. 

Overall, the 2nd half of 2012 went amazingly well from a financial perspective, which is pretty intriguing given how little “active” management I did relating to my finances! I’ve been able to make a lot of progress towards my personal, professional, and financial goals. And, I’ve been able to invest significantly in to reaching my blogging goals with the help of several amazing staff writers on the site the past few months! On top of that, the overall market has been doing pretty well during the past 6 months! 

With all of the up and down that has occurred, let’s take a look and see how it affected my net worth progress…shall we?

How about you all? How did you progress with your net worth in July-December 2012? What are your thoughts about the strength of the market right now? 

Do you think universal life insurance policies are a good option for tax-favored investment growth (see details listed above)?

Share your experiences by commenting below!

***Photo courtesy of http://www.flickr.com/photos/mplemmon/3203403862/lightbox/

Why a Homemaker Should Have Life Insurance – And Plenty of it!

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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The following is a post by MPFJ staff writer, Kevin Mercadante, who is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

We normally think of life insurance as a means to replace lost wages. For that reason, the largest amount of life insurance taken out on a family member will typically be on the life of the highest wager. There may be a $500,000 policy on the primary wage earner, and lesser amounts on other members of the household.

Life insurance coverage may drop dramatically for a homemaker. It’s often assumed that since the homemaker has no income to replace, that far less insurance is needed. While a homemaker may not need as much life insurance as the primary wage earner, the need can be much higher than you think.

Should the homemaker die, a number of large expenses will be set motion. This will be especially true if there are children to be cared for.

For final expenses

The most obvious cost that will need to be covered is final expenses. This is a figure that can be easily estimated in advance, and usually falls somewhere between $10,000 and $20,000. That’s a modest amount as life insurance goes, but it’s only the beginning.

Unpaid medical bills

The cost of health care is exploding, and it’s not too hard to imagine treatment in the terminal phase of life running into several hundred thousand dollars. If only 10% or 20% of that amount is uncovered by your health insurance for whatever reason, you could be looking at a medical liability in excess of $100,000, in addition to final arrangements.

That’s the kind of liability that can cripple a family financially and would come on the heels of the loss of the homemaker. This factor alone makes a strong case for keeping a life insurance policy on the homemaker at least in the low six figure range.

Childcare

This could be the largest potential liability for the surviving family, especially if they are very young children involved.

Depending upon where you live, the cost of getting full-time childcare for just two children can range anywhere between $1,000 a month and well over $2,000 a month. Taking the midpoint ($1,500 per month), that’s $18,000 per year.

If you have two children, say ages four and two, you’ll probably need full-time childcare for at least eight years. It childcare will cost $18,000 per year, you’ll need at least $144,000 to cover the cost for the full eight years.

Even if your children are a little bit older, let’s say 12 and 10, they’ll probably at least need someone to look in on them in case of emergencies. That won’t cost nearly as much as full-time childcare for younger children, but it is still an expense that will need to be considered.

Paying others to do the jobs the homemaker does

Being a single parent is a tough job. It’s even harder when you also work full-time. If the homemaker should die, dozens of jobs will need to be done around the home that the primary wage earner will not have time for. Some of these jobs will have to be done by others, that will mean still more expenses.

A cleaning service may need to be used to clean house. Someone may also have to be paid to do the grocery shopping. If the primary wager has a particularly busy work schedule, and the children are very young, a laundry service may be needed as well.

All of these services will need to be paid for, and they can add several thousand dollars per year to the household budget. That can make a strong case for adding another $50,000-$100,000 to the homemaker’s life insurance policy.

In order to make adequate provision for the death of a homemaker, a life insurance policy of at least $350,000-$400,000 would be necessary. That gets very close to the $500,000 that might be used to ensure the life of the primary wage earner.

Life insurance for a primary wage earner is mostly about replacing lost wages. Life insurance for a homemaker is mostly about covering expenses that will develop as a result of the loss of the homemaker. This can be just as high as the need to replace income.

If you or your spouse is a homemaker, review your life insurance policy to make sure your family has adequate protection.

How about you all? Do you think a stay-at-home parent should have life insurance? Why or why not?

Share your experiences by commenting below!

***Photo courtesy of http://www.flickr.com/photos/betsssssy/5053519564/

How to Stick to Your Debt Payoff Goals in the New Year

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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The following is a post by MPFJ staff writer, Jeff. Jeff blogs about finances, health and the environment over at Sustainable Life Blog.

It’s December, and for many of us, that means holidays, friends, family and fun. These are some of my favorite parts of the holiday season, and I’ve been enjoying them for years.

About 4 years ago however, I started to look forward to something else in December. Back when I was at the beginning of my personal finances journey, every year I’d tell myself that I wanted to get my finances in better shape in January, and every year, 12 months later, I was either in the same spot or worse off. It happens to everyone, and that’s OK. I wasn’t really serious then, but when I finally got serious, I did a lot of research on how to actually achieve my goals.

Here’s what I learned:

1. Figure out where your journey starts.

I never knew how much debt I had, and I could not predict my income very accurately every month because I worked two part time jobs, and the amount of work I did depended on my free time, which depended on my school schedule.

Essentially, I was missing two crucial pieces of my budgeting process: the amount I was making every month, and the amount I was spending. In addition to that, I often had no idea exactly how far in the hole I was. When I wast starting to make changes, I wrote down the balances on my two credit cards, as well as other monthly expenses like rent and food. I subtracted those from my monthly income (which stabilized in grad school) and for the first time, I had an accurate picture of what my finances were doing every month. Armed with this list, I could then start thinking about my goals. 

If you’re serious about getting your finances turned around in 2013, start by determining your monthly income and expenses. You’ve got until the end of the month to gather all your bills and your paychecks.

2. Pick your most hated debt. 

For me, this was easy. I hated my credit cards for multiple reasons. They represented me paying for an irresponsible, previous version of me that didn’t want to wait and save up for anything, and couldn’t say no. Obviously, I didn’t like acknowledging these traits about myself, so it made me angry. In addition to that, the amount of interest that I paid for this irresponsibility made me angry as well. It was clear to see for me what my most hated debt was. 

Since I hated my credit card debt so much, it was easy for me to pick the first target. In addition to me hating it the most, it was also the highest interest rate debt, so it made lots of mathematical sense and would free up a lot of cash flow when they were paid off.


3. Create a realistic plan.

For years, this tripped me up. When I had a $3500 balance on my credit card at the end of every year, I always wanted to pay off the whole thing come the next year. Of course, it wouldn’t have been impossible, but at the time I was making about $6,600 per year. It wouldn’t have been easy, and given my income, I would have had to spend almost half of my earned income for the year just to credit cards!

Obviously, this wasn’t all that realistic. 

Instead, I settled down with a two part plan. The first part was the simple part: Don’t use the card anymore and raise the balance. Once the balance stopped going up (and started going down slowly), I was able to put the other part of my plan into action. Part two was to pay an extra $100 above the minimum payment to one of my cards until it was paid off. After I got paid every month, I paid my credit cards and sent an extra $100 to one of the cards. Once that started to happen, the balances started dropping every month, instead of staying basically the same or going up like they normally had.


4. See it through.

There’s going to be a lot of hiccups on the way – those are to be expected. Sometimes, you may not be able to spend that extra $100 for the credit card every month. That doesn’t matter much, but what does matter is how you respond the next month. Keep plugging away and your balances will go down, even if you miss an extra payment one month. If something happens in March and that just knocks you off track, you just lost out on an almost $1,000 reduction from your extra payments at the end of the year! You’ll hit bumps in the road for sure, but how you respond to them is what will ensure your success.

While it took some time for me to finally pay off my credit cards, it was totally worth it. Nothing good will happen over night, and if you want it, you’ve got to keep working at it.

How about you all? What tips do you have for paying off some debt and making your new years resolutions stick in 2013?

***Photo courtesy of http://www.flickr.com/photos/birddogger/4930697767/sizes/l/in/photostream/

Smallest Balance or Highest Rate – Which Credit Card Should You Pay Off First?

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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The following post is by MPFJ staff writer, Kevin Mercadante, who is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

If you only have one or two credit cards with balances, this question is really no big deal. But if, like a lot of people, you have several cards with balances, this can be a real issue. You’re not only looking for the best way to pay off your credit cards, you’re also looking to do it in a way that will motivate you to see the process all the way through to the end.

Which method you choose is really more a matter of personal comfort level. The really important issue is that you set a plan to pay off your credit cards, get STARTED and stick to it.

The case for paying off the smallest balance first

Paying off the smallest balance first was made popular by Dave Ramsey’s credit card “snowball” technique. The idea is that, if you have several credit cards that you need to payoff, you start off with the smallest one first. The logic is that the smallest balance will be the easiest one to payoff. Once that card is gone, you move up to the next smallest balance, but you have more confidence and it will be easier to accomplish because one of your credit cards is already gone.

The attraction of this method is that it’s probably the best way to see results quickly and will give you a “quick psychological win.” You’re not concentrating on the amount of debt you have outstanding at this point, you’re really employing a divide and conquer strategy. If you have six credit cards with outstanding balances, and can knock out the smallest one in the first month, right there you’re down to just five cards. That’s progress you can easily see, and that helps with motivation.

It doesn’t hurt either that with the disappearance of the smallest balance, the monthly payment goes away too. By applying the amount for the payment to your next smallest card you should be able get rid of that one quicker than expected too.

As a method of paying off credit card debt, this strategy is hard to beat. It’s kind of like knocking out your credit cards domino style.

If it has a downside, it’s that often by paying off the smallest balance you hardly make a dent in the total amount of debt you have. But, this method is more about psychology than dollars and cents.

The case for paying off the highest rate first

From a pure financial standpoint, paying off the cards with the highest rate makes the most sense. Interest is a pure expense, and by going after the high rate cards first, you’re doing a better job of reducing the actual expense, if not the overall monthly payment.

If you payoff smaller balances with lower interest rates before paying off the higher rate cards, you’re actually allowing your interest expense to accumulate.

As you payoff the higher interest rate cards first, you’re ensuring that more of your monthly payment will go to principal repayment. Ultimately, that should enable you to pay off all of your credit cards more quickly.

This method has a downside too. Since high interest rates consume more of your monthly payment it will be more difficult to payoff a single high interest rate card. You won’t see as much progress with this method, especially early on.

And then, Plan C – payoff the card with the highest payment

Let’s add a wrinkle to the mix; let’s add still another method. Let’s say that the best credit card payoff strategy might be to first concentrate on the credit card with the highest monthly payment. This method has at least two significant advantages.

Generally speaking, the credit card with the highest monthly payment is also the one that is most threatening to your budget. By eliminating this card first, you will be removing the largest payment from your budget. That will have an important psychological effect – you will see the most immediate benefit to your cash flow once the card is gone.

The second major advantage, and probably the bigger of the two, is that once the card with the biggest monthly payment is paid off, you will free up the largest amount of money to concentrate on paying off your other cards.

There is a downside to this method as well. It’s a very likely that the card with the highest monthly payment also has the highest total balance. If that’s the case it will take a long time just to payoff a single card.

One way to counterbalance this would be to match payments versus card balances. For example, if you have a credit card that has a balance of $3,000 and a monthly payment of $100, you may want to payoff that card before tackling one with a $5,000 balance and $100 monthly payment. The card with the smaller balance will go away faster.

The important thing is to start paying your credit cards off

As you can see, there are various ways to payoff credit cards, no matter how many you need to payoff or what the balances are.

Choose the method that will most motivate you to finish the job. If eliminating the number of cards you have balances on appeals you, then begin by paying off the smallest one first. If the size of the payment is biggest concern, concentrate on the card and biggest payment. If it’s interest rate then start with the card with the rate that’s the highest.

Also, you don’t have to use a single strategy. You could for example, choose to payoff the card with the highest monthly payment first. Once that’s done, you can shift to paying off the smallest balances first.

The most important consideration is finding the method that will make it easiest for you to make your credit card balances go away.

How about you all? Have you used any of these strategies to payoff your credit cards? Which would you recommend?

***Photo courtesy of http://www.flickr.com/photos/dno1967b/6426867439/

Easy Like Sunday Morning Recap and Roundup – # 11 – December 9th, 2012

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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Each time, the purpose of the Easy Like Sunday Morning Recap and Roundup series is the same – for me to be able to connect with you, the readers, on a more personal (non personal finance informational transmission only) level, encourage community, and also to give back to the other bloggers around the blogosphere who have mentioned My Personal Finance Journey throughout the past few weeks or so. It’s been about a month since the last roundup, so we definitely have some catching up to do! 

As far as the theme goes, the title of the roundup gives it away. The roundup theme is named after the Lionel Richie song, Easy Like Sunday Morning (which I play once each time I put this together), to remind us of the importance of slowing down at least every once in a while to take appreciation for that which transpired over the past few days.

So, without further ado, let’s get started with this edition’s roundup!

UPDATES FROM JACOB’S PERSONAL FINANCE JOURNEY AND LIFE 

• As far as my life in general, the months of November and December have been pretty busy, but also enjoyable! Below are some of the highlights:
• In my graduate school Alzheimer’s disease research, we were finally able to finish up the follow-up experiments required to respond to the manuscript reviewer’s comments. And, with some luck, it got accepted without further revisions needed! 
• If you’re interested in reading up on the type of research I do, you can view the article at the following link in the journal, Biomacromolecules. 
• Having finished getting this article submitted, we also decided to turn it in to my Master’s Thesis, so I’ll be doing my defense for that before Christmas this year, and the degree will be conferred/finalized in May 2013. Only a couple more years of grad school now! 
• I’m also now 3 months in serving as a Teaching Assistant for a Transport Processes / Fluid Dynamics 3rd year undergraduate chemical engineering class. I’ve really enjoyed the role so far, as it’s given me a chance to teach problem sets for the homework each week.
• We just had our last class on Friday, and so now, all we have to do is prepare for the final and that will be over with. Right now, I’m not assigned to be a TA next semester. 
• Another thing that I’m very proud to report is that my sister will move in to her new condo that she bought this coming week. Due to the severely-depressed real estate market these days, she was able to get a killer deal/value! Congrats to her for making this big leap! 
• At the beginning of November, our younger greyhound, Charlie passed away after losing his battle with some stomach problems that had been pretty severe since June of this year. Below is the last picture we got of Charlie the night before he died on 11/1/2012. RIP 🙂

• Today, we’re actually going to a golden retriever kennel to look in to adopting Crystal (see picture below). I’ve wanted a golden retriever for quite some time now, so we’re looking forward to meeting her. She is 8 years old. 

• As far as my personal finances, the months of November and December so far have been going very well. 
• First, in October of this year, I maxed out my Roth IRA contributions. 
• Next, in November, I received a very unexpected lump sum inheritance that had been passed down from my great-grandparents. With the help of this, I was able to max out my Individual 401k contributions for the year along with my normal contributions to my taxable Vanguard mutual fund account this month. 
• As far as my blog goes, November was the second month for My Personal Finance Journey to feature posts by our staff writing team!
• As I mentioned in the September roundup, I added several new staff writers to contribute articles for the site on a regular basis to prevent having one to two week breaks between my regular posts while I am busy in graduate school and leaving you all out to dry. Listed below are the awesome staff writers for My Personal Finance Journey! They are all doing a great job so far.
• Miss T from Prairie Eco-Thrifter.
• ADP from American Debt Project.
• Travis Pizel, a writer for Care One and Enemy of Debt.
• Kelly from Cordelia Calls it Quits.
• Melissa from Mom’s Plans.
• Kevin from Out of Your Rut.
• Jeff from Sustainable Life Blog.
• Tahyna from DinksFinances.
• Toi Williams from Fine Tuned Finances.
• Greg from Club Thrifty
• Shondell from Call me What You Want Even Cheap.
• While this definitely reduces the net profit of my site (and vis-a-vis the amount that I have available for the 10% income give back – in the month of November, I broke even), I view this as a HIGHLY worthwhile long-term investment for my site building for the future, so am more than happy to have each and every one of the writers above!  

GUEST POSTS FROM PERSONAL FINANCE BLOGGERS ON MY PERSONAL FINANCE JOURNEY

Since the last roundup, there was one guest post here at My Personal Finance Journey.

The Fundamentals of Corporate Finance

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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The following is a guest post. Enjoy! 

Short Term Decisions

Long Term Planning

How about you all? Have you had to deal much with corporate finances in your day-to-day job? What are the main differences you see in it vs. personal finance?

Share your experiences by commenting below!

***Photo courtesy of http://www.flickr.com/photos/ell-r-brown/3854320166/sizes/l/in/photostream/

Financial Planning for Late Starters

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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The following article is by MPFJ staff writer, Miss T, from Prairie Eco-Thrifter. If you want to learn how to live your dream life in a sustainable, healthy, and money savvy way, check out her site here.

A ‘late starter’ in financial terms generally refers to those who are over forty and have not yet developed any sort of financial plan for funding their retirement.

If that’s you, don’t feel bad; there are plenty more folks out there in the same boat.

Luckily, it’s never too late to get into financial planning. I mean, it would have been better if we’d all started yesterday, or last month, or ten years ago for that matter, but the main thing is to realize the need to get started right now.

Financial planning is slightly different for late starters, although the basics are much the same.

What Should Your Financial Plan Include?

A financial plan, at any age, needs to address your financial needs in the present, as well as the short-, medium- and long-terms. It’s not much use saving huge amounts for a great retirement if you are struggling from day to day right now.

Determine Whether Your Income Covers Your Current Expenses

The first thing to do is work out whether your income covers your expenses at the moment. If you don’t know this off the top of your head, then I’m guessing you don’t have a written budget. You can’t have financial security if you don’t have a budget, so that becomes your first job.

We’ve written about this before, but the basics of a good budget include all your income, added up to get a monthly or weekly figure (whichever works for you). Then, you list every expense – fixed amounts like rent or mortgage; variable amounts like food, transport, clothing, utilities, entertainment etc. Average all your expenses out to get a weekly or monthly figure, like your income. When you subtract your total expenses from your total income, you’ll see clearly if you spend more than you earn.

If your expenditure is more than your income, you have some work to do to cut your spending in some areas, until you do spend less than you earn.

If your budget balances, that is, you earn enough to cover all your expenses, and you don’t have a savings amount in there, you also need to cut some spending.

If you’re over forty, you need to be able to save much more from every pay check than you would if you were still in your twenties.

So, where do you stand with a budget?

Do you have one?

Does it balance?

Do you have an allowance for savings in it?

You need to answer ‘yes’ to each of these questions before you can plan for your financial security.

Effective Financial Planning Strategies for Late Starters

What are the best short-term strategies for late starters? Here are some ideas that will give you the best results in a shorter time.

• You need to know how much you are going to need for your retirement fund before you can know how much you need to save from every pay check. 
• Obviously, the older you are, the more you will need to find each week for retirement savings. 
• Work out a weekly and annual figure for retirement spending, multiply by the average number of years (usually 20 years) you will be retired; then divide this by how many years you still are going to work. 
• Bring this figure down to an amount per pay period.

• Chances are you are going to need to restrict your spending, so you need to look for ways to do this in your budget. 
• Cutting back on new clothes and shoes may not be enough, especially if you are in your fifties, so consider more drastic measures like down-sizing your home, moving to a less-expensive area, taking a second job etc.

• Consolidate your debts to reduce your obligations and the total cost of the debts. 
• A financial consultant is the best person to help you do this. Make sure all money saved is put into your retirement savings account.

• Consider investments, but avoid anything too risky where your savings are exposed. 
• Remember that some long-term investments can be maintained during your retirement – you can spend the earnings but keep the principle intact to keep earning. 
• Well-researched stocks and mutual funds are good options.

• Even at this late stage, employer 401Ks are a good option, especially if your employer also contributes. 
• Good returns are also available with IRAs and other retirement funds. While maximum contributions apply, older workers are often allowed to go over these limits. Utilize the tax benefits of these funds to your advantage.

• Delaying retirement and working part time in retirement are two important strategies.
•  The longer you keep working, the bigger retirement fund you will have, even if you just work a few years past the normal retirement age.

Now, this last point may seem tough, but you need to consider your future financial security. If your kids have left home and have a job, let them make their own way. Don’t continue to support them; you are going to need every cent for your own retirement. It’s time to put yourself first so that you can continue to live the way you want, well into your senior years.

How about you all? How have you approached retirement planning?

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My Personal Investment Journey

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How I started investing

Where I learned about investing

Common mistakes made by new investors

Share your experiences by commenting below!

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Seven Simple Tips For Smart Investing

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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Click here to enter my free $60 giveaway for a chance to win 5% of My Personal Finance Journey blog income and give another 5% to a charity of your choosing! Deadline to enter is November 30th, 2012.

Here are some simple tips that you can use to become a smart investor.

Keep It Simple

A great example of an investing platform that keeps things very straightforward is Betterment.com. You simply specify the asset allocation that you’d like to maintain, and they automatically rebalance your portfolio of passively managed index ETFs as the market fluctuates.

Begin With Your Retirement Fund

If you’re interested in opening up a Roth or Traditional IRA account, this can be done either at a traditional mutual fund company, such as Vanguard of Fidelity, or at one of the many discount brokerages available online, such as Sharebuilder (currently offering $50 of free money with a simple promo code), Scottrade, ETrade Financial, TradeKing, or TradeMonster.

Monitor Your Risk

Don’t Chase Results

Choose Low Fee Investments

Diversify Your Portfolio

Stick To Your Plan

Conclusion

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