Resolve to Get Your Finances in Shape

Work for itWhether it’s trimming your waistline or firming your financial profile, the key isn’t making your list of resolutions, it’s sticking with it!

Dickinson Investment Advisors provide planning and investment services that are tailored to our clients’ unique needs and life circumstances, with a goal of achieving wise financial stewardship of their resources in retirement.

Through working with us, our clients can experience the benefits of trust, wisdom, results, regular communication, time savings, and peace of mind.

Here are five steps to get you started on the road to financial fitness.  You don’t have to do everything at once.  But get started.  We believe that as you take one step, then move to another, you’ll feel more confident.  Each step will move you closer to achieving your goals.  And remember, we are willing to come alongside you to help.

Many individuals overestimate what they can accomplish in a month or even a year, and then become discouraged with their rate of progress.   Similarly, they also substantially underestimate what they can accomplish over multiple years, and then fail to set goals or make any progress at all.  The key to achieving astonishing results is not from a big flurry of activity.  Rather, lasting success comes from small intentional steps made steadily over a long period of time, all working toward a well thought out vision for your life.

Here is a good test for decision-making:  The longer term you think, the more successful you will be.  For example, a twenty-year-old’s decision to spend a dollar today may well cost him three to four dollars out of his retirement assets.


Resolution#1:  Create a budget for life

Financially speaking, life can be viewed as a series of cash inflows and outflows.  Saving and investing during your working years should hopefully lead to a rising net worth over time, enabling you to achieve many of your most important goals, like funding your retirement.  Creating your own budget and net worth statement can help you build your road map and stay on track, even during tough times.

Create a budget.

  • Track your spending for at least 30 days.  Our my$View software can help you to do that.
  • Separate out essential and non-essential expenses.
  • Designate savings in your budget first, starting with high-priority goals such as preparing for retirement.
  • Our retirement savings rule of thumb:  Save 10%-15% of pre-tax income starting in your 20s, then add 10% for every decade thereafter.  If you don’t start in your 20s, substantially more savings may be required later.  A good retirement plan projection can help you make plans for a successful life.
  • Consider the impact of taxes – it’s what you keep that counts.

Calculate your personal net worth annually.  (This step is so critical, yet only a fraction of folks actually undertake this task.)

  • It doesn’t have to be complicated.  Make a list of your assets (what you own) and subtract your liabilities (what you owe) to determine your personal net worth.  By making use of our tool called my$View, you can see your net worth updated on a daily basis.
  • While your net worth may temporarily decline during tough market periods, it should generally be rising during your earning years.
  • If you are retired, you will want to plan a drawdown strategy to make your money last as long as you do.

Identify your goals and create a plan to achieve them.

  • With your budget and net worth statement in hand, prioritize your goals.  Give them a ranking, time frame and target savings rate.
  • Revisit your plan annually to check your progress.

Project the cost of near-term, must-have, big-ticket items.

  • Think tuition, property taxes, and vital maintenance (e.g. the roof or major car repairs).
  • Treat that money as if it is already spent.  Keep it in liquid, safe investments like FDIC-insured certificates of deposit (CDs).

If you are retired, invest your living-expense money conservatively.

  • Keep any money needed for the next twelve months in liquid, relatively safe investments like short-term CDs or money market funds.
  • Keep another one- to four-years’ worth of spending laddered in short-term bonds as part of your portfolio’s fixed income allocation.
  • Money in excess of these amounts should be invested to offset inflation over your retirement years.  Don’t be too conservative, as inflation is a risk in itself.

Prepare for emergencies.

  • If you aren’t yet retired, keep at least three-to-six months’ worth of essential living expenses in liquid, relatively safe investments like savings accounts and short-term CDs.  That way, you can avoid having to sell when the market is down or incurring penalties by withdrawing from tax-deferred accounts.


Resolution #2:  Manage your debt

Debt is, more than anything else, the enemy of wealth.  While taking on some debt is a near certainty in everyone’s life – not many of us can afford to pay cash for a house, after all – debt is something that can be managed, reduced, and eventually eliminated from our financial lives.  Problems arise when debt becomes the master of the borrower.  Here’s how to stay in charge:

Keep your total debt load manageable.

  • Don’t confuse what you can borrow with what you should borrow.  Keep the monthly costs of owning a home (principal, interest, taxes, and insurance) to no more than 28% of your gross income.  Your total debt service should not exceed 36% of your gross income.  If you exceed these guidelines, warning bells should go off for you.  Furthermore, do not use these percentages as a license to spend up to these limits.  The most successful individuals have no debt; the reason they have a high net worth is because they did not overspend to the point that debt was necessary.

Eliminate high-cost, non-deductible consumer debt.

  • Try to avoid borrowing to buy depreciating assets, such as cars.  After you pay off your first car, keep driving it and then save the amount of your monthly payment for your next car.  The amount saved by not paying interest and instead receiving interest can become over your entire lifetime a small retirement nest egg by itself.
  • Pay off your credit card debt.  No excuses.  You simply have to develop this discipline if you ever want to get ahead.

Match repayment terms to your time horizons.

  • If you are likely to move within five to seven years, consider a shorter-maturity loan or an adjustable-rate mortgage (ARM), as long as you can live with upward mortgage payment resets if your plans change.
  • Don’t borrow assuming your home will automatically increase in value.  Historically, long-term home appreciation has significantly lagged behind the total return of a diversified stock portfolio.
  • Don’t buy into the conventional wisdom that claims your house is an investment.  In fact, it is a place to live.
    When you sign on the dotted line for a mortgage, you have given up a substantial claim on your future income.  If there is a risk that this income will be interrupted (such as if it would take both incomes for a couple to make the payment), you are placing your long-term well-being at risk.  Yes, it’s true that your house may go up in value, but so are all your other costs of living.


Resolution #3:  Invest with a plan

Getting better investment results is a goal we all share.  But investing is a means to an end, not an end unto itself.  So stay focused on your goals.  Create a plan that will help you stay disciplined in all kinds of markets.  Follow it and adjust it as needed.  Here’s how:

Focus first and foremost on your overall investment mix.

  • Revisit your asset allocation – the overall mix of stocks, bonds and cash in your portfolio – and make sure it’s still in sync with your long-term goals, risk tolerance and time frame.  To establish asset allocation targets for your investments, you will reap the benefits of working with an experienced financial advisor.

Diversify across and within asset classes.

  • Diversification is the second most important factor in helping you reach your goals.  Mutual funds and exchange-traded funds (ETFs) are great ways to own a diversified basket of securities in just about any asset class.

Consider the impact of taxes on your investments.

  • Place relatively tax-efficient investments in taxable accounts and relatively tax-inefficient investments in tax-advantaged accounts.  For making these decisions, you will experience the benefits of working with a wealth advisor who also is a CPA with advanced education and experience in taxation.
  • To the extent you can, use tax-advantaged accounts to rebalance and harvest losses in taxable accounts when practical.

Monitor and rebalance your portfolio to stay on track.

  • Evaluate your portfolio’s performance using the right benchmarks.  For example, use the S&P 500® Index for U.S. large-caps.
  • Remember, the long-term progress that you make toward your goals is more important than short-term portfolio performance.
  • A financial advisor will monitor your portfolio and periodically rebalance it back to its target asset allocation to stay on track with your plans.


Resolution #4:  Prepare for the unexpected

Risk is a fact of life.  Your financial life can be upended by all kinds of nasty surprises – an illness, job loss, disability, death, natural disasters, or lawsuits.  If you don’t have enough assets to self-insure against major risks, resolve to get your insurance in shape.  Too many people presume that bad things will not happen to them and incorrectly assume that they don’t need the proper amount of insurance.

Protect against large medical expenses with health insurance.

  • Get a health care policy that matches your needs in areas such as coverage, deductibles, copayments and choice of medical providers.

Purchase life insurance to cover those people who are counting on you.

  • If you have liabilities that will continue after your death for which you cannot self-insure, you will need life insurance.  If you have family members who are counting on you to provide for them, be a good steward by buying enough life insurance to cover their needs.
  • Using costly insurance contracts as investment vehicles (like whole life and cash value policies) is usually not as cost effective as purchasing low-cost, term life policies and investing the difference yourself.
  • Take advantage of the policy offered by your employer, but secure outside coverage if the policy is not transferable or if you need additional life insurance.

Protect your earning power with long-term disability insurance.

  • The odds of your becoming disabled are greater than the odds of your dying young.  If you can’t get adequate short- and long-term coverage through work, consider an individual policy.

Protect your physical assets with property-casualty insurance.

  • Check your homeowner and auto policies to make sure your coverage and deductibles are still right for you.

Obtain additional liability coverage if needed.  This type of insurance is cheap but is often overlooked.

  • A personal liability “umbrella” policy is a cost-effective way to increase your liability coverage by $1 million or more.
  • Obtain business or professional liability insurance if needed, as umbrella policies don’t cover business-related liabilities.

Consider the pros and cons of long-term care insurance.

  • Most people would not even consider going without homeowners insurance, yet the odds of your house burning down are 1 in 1,250.  In contrast, the odds for you having a nursing home stay are nearly 1 in 2, yet many people choose to be under- insured for a cost that can amount to hundreds of thousands of dollars.
  • About 59% of people over 65 do not spend any time in a nursing home.  However, for those who do, the average stay is 2.5 years.1
  • Look for a policy that is guaranteed renewable with locked-in premium rates.
  • Find out such things as what type of care is covered (skilled nursing, custodial care, home-assisted living), eligibility criteria, benefit period, elimination period, maximum daily benefit, whether there is inflation coverage and how solid the insurer is.
  • Seek out independent sources of information such as your state insurance commissioner.

Create a disaster plan for your safety and peace of mind.

  • Review your homeowner’s or renter’s policy to see what’s covered and what’s not.  Talk to your agent about flood or earthquake insurance if either is a concern for your area.
  • Keep an updated video inventory of valuable household items and possessions along with any professional appraisals
    and estimates of replacement values in a safe place away from your home (e.g. a safe-deposit box or with an out-of-town relative).
  • If you have to evacuate immediately, it’s a good idea to have copies of birth certificates, passports, wills, trust documents, records of home improvements and insurance policies in a small “evacuation box” (the fireproof, waterproof kind you can lock is best) that you can grab in a hurry on your way out the door.  If you’re tech-savvy, consider scanning your important documents into a computer file you can store online or on a CD, along with a backup of your personal computer files (again, kept in a safe place away from your home).
  • Keep some petty cash on hand for emergencies.  Local ATMs might be out of commission for quite some time.  You don’t want to keep too much cash on hand, but enough to get by for a few days is a good idea.  If you can’t get back to work for an extended period, having an emergency fund in your bank or brokerage accounts can help.  A standby home equity line of credit you can tap in an emergency will also be handy.


Resolution #5:  Protect your estate

Without an estate plan, the fate of your assets or minor children may be decided by attorneys, government bureaucrats and tax agencies.  Taxes and attorneys’ fees can eat away at your estate, and delay the distribution of assets just when your heirs need those assets most.  Here’s how to protect your estate – and your loved ones.

Update your will so your final wishes are fulfilled.

  • A will can provide for support and care of your dependents, and help you avoid the costs and delays associated with dying without one.

Coordinate asset titling with the rest of your estate plan.

  • The titling of your property and non-retirement account can affect the ultimate disposition and taxation of your assets.
  • Keep information on beneficiaries up-to-date to ensure the proceeds of life insurance policies and retirement accounts get to your heirs quickly, without having to pass through the probate process.

Have in place durable powers of attorney and health care advance directives.  In these documents, appoint trusted and competent confidants to make decisions on your behalf if you become incapacitated.

Consider creating a revocable living trust.  This is especially important if your estate is large and complex.

Take care of important estate documents.  Make sure a trusted and competent family member or close friend knows the location of your important estate documents.

Finally, remember you don’t have to do everything at once.  Take one step at a time.  As you do, you can make some real progress toward fine-tuning your financial figure this year.


1. Source: National Association of Insurance Commissioners.

[Reference:  “Get Your Finances in Shape for 2011.”  Rande Spiegelman CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial Research.  December 22, 2010.]


Important Disclosures

Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000.

Please read the prospectus carefully before investing.

Past performance is no guarantee of future results and your investment value and return will fluctuate such that shares, when redeemed, may be worth more or less than original cost.

An investment in a money market fund is neither insured nor guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.

Some specialized exchange-traded funds can be subject to additional market risks. Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost.

Diversification and asset allocation strategies do not assure a profit and do not protect against losses in declining markets.

The S&P 500 Index is an index of widely traded stocks. Indexes are unmanaged, do not incur fees or expenses and cannot be invested in directly.

Certificates of deposit offer a fixed rate of return and are FDIC-insured.  Penalty for early withdrawal may apply.

Fixed income investments are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, corporate events, tax ramifications and other factors.

This report is for informational purposes only and is not an offer, solicitation or recommendation that any particular investor should purchase or sell any particular security or pursue a particular investment strategy. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Examples provided are for illustrative purposes only and are not representative of intended results that a client should expect to achieve.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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