Thursday, October 19, 2006

Basic Financial Planning

Here is a good, very basic financial plan. It's a great starting point and really only needs to be changed if you have specific goals. The only thing that it lacks is some international mix which you can set up in your 401(k), IRA, or stock portfolio. I would have the portfolio's stock and bond mix change based upon how far away from retirement you are but that starts to take away from the goal of being a simple financial plan.


What Holds You Back?

Scott Adams, creator of Dilbert, wrote a book called “The Way of the Weasel.”In it, he lays out a one-page list for how to manage your money. While I recognize that a book consisting largely of cartoon is an unorthodox place to find sound financial advice, I think he is spot on – if you do these things you will be fine:


1. Make a will.
2. Pay off your credit cards.
3. Get term life insurance if you have a family to support.
4. Fund your 401(k) to the maximum.
5. Fund your IRA to the maximum.
6. Buy a house if you want to live in a house and can afford it.
7. Put six months expenses in a money market account.
8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.
9. If any of this confuses you, or you have something special going on (retirement, college planning, a tax issue), hire a fee-based financial planner, not one who charges a percentage of your portfolio.

Done. I get it, and if you are here reading this blog you get it also. OK, so how many items on the list have you actually completed? We’ve done four of the first eight, but I believe we can hit all eight by the end of the year – I’m showing the list to my wife and am going to hold us to it.

If you had shown me this list seven years ago I’d have still been working on getting my credit cards paid off – the rest of the list would have seemed a distant dream.

There are really three challenges facing people:

* Knowing what to do (easy, see above)
* Being able to do it, i.e. having money to save, invest or buy a home (hard, a lot of good decision need to be made to get you to this point)
* Making the decision and taking action to fund retirement. You know what to do, you saved the money, and now you just have to do it (should be easy, but it’s not)

Putting money into 401(k)s and funding IRAs is hard. There are always reasons to not do it, but they really boil down to an unwillingness to take action with money. I’ve spoken to friends about why this might be and the reasons vary, but they usually come down to this one thing: we don’t want to make a bad decision, so we don’t make any decisions at all…which is of course a bad decision.

My new goal with money isn’t to get things perfect, and instead get it mostly right, i.e. Get the nine things on the list done. I believe if we do this, over the next 35 years, we’ll be fine when it comes time to retire.

Fear of making a mistake held us back, but I’d be curious to hear from people where they are being held up in their financial goals?

Written by Jason Knight

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