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If you are already very knowledgeable about financial planning and investment, you may want to skip ahead for advanced tips and strategies. Otherwise, we recommend you check out the material below.

Did You Know?
The U.S. posted the lowest savings rate in 1993 for all industrialized nations.
As early as 2017, Social Security may only cover 20% of the average person’s retirement needs. Private pensions and other retirement plans may only cover about 30-40% . The balance will have to come from personal savings and other investments.
Up to three-quarters of all Americans approaching retirement are investing too conservatively to meet their needs.
Over the course of your lifetime, a fortune will pass through your hands. The way you manage and spend that money will determine the kind of world you live in.
Six basic things you should consider:
Getting Started
Covering Your Bases
Choosing Investments
Fundamentals of Investing
Retirement: Save Early, Save Often
Taxes: Give me Shelter

Getting Started

The first step toward a sound financial plan is to determine where you are financially and how you got there. Look at your net worth - the difference between your assets and liabilities - and cash flow - the money flowing in and out of your wallet and checking account. Also take account of:

• your personal assets and liabilities,
• your health and happiness,
• how you spend your time, and
• who you can turn to in the event of a crisis.

Your plan should enable you to do what is important to you.

Net Worth = Assets - Liabilities

To calculate your net worth, list all of your assets, including:

• cash on hand,
• investments,
• the market value of possessions like your house, car and furnishings,
• Social Security and other government benefits, and
• employer-provided benefits, such as group life insurance or profit-sharing programs.

Your liabilities are the amounts you still owe lenders for mortgages, car and student loans, and any credit card debts. Subtract your liabilities from your assets and you have your net worth.

Next figure your cash flow, or budget. Everything that contributes to your monthly income and expenses. Any income above your outgoing expenses can go toward building your financial future. If your expenses are greater than your income, however, you would be wise to eliminate some unnecessary spending or increase your income. Financial planners recommend looking at net worth and cash flow at least once a year so you can quickly adapt to changes in your financial situation.

Where does this leave you? To evaluate your overall financial situation you must first Identify short-, medium- and long-term goals. Short-term goals could include buying a home computer, taking a vacation, or continuing an education. Buying a home or sending your kids to college could be medium-term goals. Achieving financial independence, planning your retirement or starting a business could be long-term goals.

You do not have to commit money to your goals all at once, but you do need to prioritize them. By saving for long-term goals early, your money has more time to grow and compound and you will end up with much more in the long run.

Covering Your Bases

A financial plan’s foundation includes:

• handling your living expenses comfortably,
• keeping adequate emergency reserves,
• protecting yourself and your family with insurance and
• making investments to help reach future goals.

Financial planners recommend saving at least 10% of your take-home pay. (And that’s if you start saving for your retirement in your 30s; the longer you wait to get started, the more you’ll have to save.) You should put this money aside first thing each month so that you won’t be tempted to spend it. Budget your expenses around what’s left.

Create your own emergency fund to cover unexpected expenses, such as sudden illness, or major car or house repairs. A reserve of two to six months’ of living expenses can prevent the need to dip into your savings. Set aside a small amount each month and keep it in a bank savings account, money market fund with check writing privileges, or other readily available place.

Insurance is designed to protect you from major financial losses such as death, disability, large medical expenses, or loss or destruction of your property. Choose the type(s) and amount of insurance that provide(s) the most security for you and your family.

In short, before you begin investing you should:

• make sure your income exceeds your expenses
• set up an emergency fund
• secure adequate insurance
• consider owning a house (mortgage interest is tax-deductible)
• consider buying a tax-deferred Individual Retirement Account (IRA)
• bring your debt repayment under control

Choosing Investments

Choosing your investments depends on your age, dependents, income, capital, tax bracket and your values. Compare the liquidity, rate of return, safety and tax benefits of each investment you consider, and view these with your situation and goals in mind. The most common investment vehicles are savings and checking accounts, certificates of deposit (CDs), money market funds, mutual funds, corporate stocks, government and corporate bonds, and U.S. agency or Treasury obligations (T-bills). Here are some of the major choices:

Checking and savings accounts are no-risk, low-yield investments used mainly for money that must be safe and available.

A certificate of deposit (CD) is a deposit made, usually to a bank, for a specified amount of time for a specified rate. Terms vary between one and 120 months, with penalties for early withdrawal. Because the interest rates are only slightly higher than a savings account, certificates of deposit are usually good for short- term investments only.

Treasury bills or T-bills offer a guaranteed return backed by the U.S. Treasury. Minimum purchases are usually between $1,000 and $10,000 and maturities range from three months to 30 years. You can purchase them through banks, branches of the Federal Reserve Bank or through stockbrokers.

Corporate or common stock is a purchase of a piece of a corporation’s net worth. When a corporation succeeds, so do its owners - and when it fails, so do its owners. It’s worth consulting financial advisers or stockbrokers when investing in stocks. But keep in mind that you should allow plenty of time for a return; quick profits are rare. Don’t buy individual stocks unless you can diversify by investing in at least five companies in different industries. And remember, it’s more economical to buy in “lots” of at least 100; the transaction cost you pay will be less. To diversify broadly and minimize costs, many investors use mutual funds instead of buying individual stocks  Financial planners often recommend automatically reinvesting your dividends to purchase more shares of stock.

Bond ownership makes you a creditor of a corporation or a government. You loan money and receive a fixed interest rate for the use of it. At the maturity date, you receive all of your principal. However, before the maturity date, the market value is not guaranteed. The value of a bond may increase or decrease depending on changes in interest rates and credit quality. Corporate bonds are usually backed by collateral, or a promise to pay. It’s prudent to check the financial standing of the corporation before purchasing a bond, and the rating of a bond by a professional bond-rating service.

A money market fund is relatively safe, liquid and low-risk. Many offer check-writing privileges. A money market fund is a pool of money invested in high-yielding, short-term vehicles. They allow you to buy a share in a diversified mix of investments that you as an individual would likely not be able to duplicate. As an investor, you receive a share of the yield realized from the fund’s investments. The rate of return for money market funds is usually higher than for a checking account, but the minimum investment is higher, usually $1,000. Like all uninsured products, the yield will fluctuate with varying market conditions

Mutual funds generally invest in common stocks and bonds and offer automatic, broad diversification. Investing in a mutual fund is buying a share of the fund’s portfolio - its particular collection of stocks and bonds. Your investment entitles you to share any dividends or interest income earned by the stocks and bonds, as well as any profits or losses realized from the sale of these securities.

Mutual funds do not guarantee return and pose a higher risk than a savings or money market account. Your principal is at risk. However, investments in one or more mutual funds offer more diversity and greater potential returns than investing directly in the stocks and bonds of a small number of companies. They are generally suited to investors who are looking for diversification and professional management, but lack the resources, time or desire to deal with the research and paperwork that stock investments require.
Some mutual funds invest in a spectrum of securities while others focus on a particular industry or geographical area. Each fund has a stated investment objective outlined in its prospectus. Socially responsible mutual funds also outline their social and environmental criteria in their prospectuses. I

f your objective is long-term appreciation of your investment, look for a growth fund. If you hope to use your return as current income, look for an income fund. A balanced or “growth and income” fund invests in high dividend stocks as well as fixed-income securities that provide for both.

Fundamentals of Investing

Think of your investment strategy as a pyramid. (See diagram).

Reducing Your Risk:

The Pyramid Approach

The pyramid’s base is your foundation, the area where you store the largest portion of your resources. The base includes the money you want to keep safe (low risk with predictable return), and liquid, such as your emergency fund. It also includes the assets you hold for your security such as insurance policies or your home.

If you accumulate assets and feel confident about taking a risk with some of them, you can consider adding investments to the midsection of the pyramid. They can offer a higher return, and more potential for growth and income. You might add mutual funds or high quality stocks. The peak of the pyramid is reserved exclusively for money that you can afford to lose. There are higher risk investments that offer higher potential for return, such as aggressive growth mutual funds, stocks in start-up companies, and commodities.

Key Investment Concepts

Compounding. One of the easiest ways to make your nest egg grow is to reinvest dividends and interest. By simply rolling over these funds, you can make it possible for your investment to flourish. If you had invested $100 in a typical stock at the end of 1926 and spent all of the dividend payments, you would have ended up with less than $3,000 by 1990. If you had reinvested the dividends, you would have had more than $55,000 to your credit!

Asset allocation. This sounds complicated, but all it means is how you divide your investment funds between the three major categories: stocks, bonds, and cash or cash equivalents. (Checking accounts and money-market funds are considered cash equivalents because they are so liquid.) Younger investors will tend to have more money in aggressive stocks with strong growth potential.

Older investors, seeking to generate steady income and preserve their capital, will tend to have more in cash and bonds. One good rule of thumb: take your age and put a percentage sign behind it. Never let your cash holdings (the most conservative and, as a result, lowest-returning investments) exceed the resulting percentage.

Diversification. As is true in most things in life, it doesn’t pay to put all of your eggs in one basket when investing. You can cut your risk of suffering major losses by spreading out your investments across stocks, bonds, and cash, as well as across more than one mutual fund. You should also seek diversification among the types of stocks and mutual funds in which you invest.

Rather than putting all of your assets in high-tech mutual funds, you may also wish to have substantial portions of your nest egg in international funds and tax- free municipal bond funds. The idea is to decrease your exposure to risk and to increase your potential for profit by having at least some of your money in the right place at the right time.

Retirement: Save Early, Save Often

Savvy retirement planning starts with your first job and never ends. The security in Social Security is slipping and pensions are shrinking as employers re-examine benefit packages. No matter what your age, figuring retirement income into your financial plan is vital. How much you set aside for retirement depends on your age, your income, how much you want at retirement and when you plan to retire. Remember, saving early and often allows the magic of compounding to work for you.

Open an Individual Retirement Account (IRA) if you can. No tax is paid on any of its dividends, interests or gains until you withdraw. If you’re employed, you can contribute up to $2,000 a year while claiming a tax deduction for that amount, depending on your income level, marital status and participation in a company pension plan. Upon retirement, your tax bracket will likely be lower.

IRAs can be invested in many securities including bank certificates, mutual funds and money market funds which offer professional management of your investment. You can also choose a self-directed IRA for which you or your financial planner buy and sell securities and manage your own investments.

Since the purpose of IRAs is retirement saving, withdrawals are subject to heavy penalties before age 59¹/₂, unless you become disabled. If you’re over that age and still earning, IRAs make an ideal savings account since you can enjoy the tax advantages and be free from penalty withdrawals. You can contribute to your IRA up to the age of 70¹/₂. Then you must start taking distributions, but you can still contribute if you are earning wage income.

For guaranteed monthly income for life, consider an annuity. Annuities are purchased from insurance companies with a single or periodic payments. As with an IRA, the income accumulates tax-free until you begin withdrawals.

Annuity payout options available at retirement:

• A straight life annuity pays income monthly from retirement through death, with no benefits to anyone at your death.
• A life annuity with “installments certain” pays you income for life, with a specified minimum number of years, so that if you die the balance of the income promised to you goes to your beneficiary.
• A refund annuity pays you for life or until the payouts equal the premium paid. If you die before then, your beneficiary receives a refund.

When choosing an annuity plan, compare companies for service charges or loads. Since income payments on annuities are fixed, they won’t keep up with inflation. An annuity is an investment, so keep in mind the minimum interest rate guarantee, the current interest rate, and penalties for withdrawal.

Check with your employer about employer-sponsored 401(k) for “for-profit” companies and 403(b) plans for people working for nonprofit organizations. Both allow savings to accumulate and compound tax-free until retirement.

Self-employed people can have an IRA as well as a Keogh plan that allows them to save up to $30,000 or 25% of their income, whichever is less, on a tax-deferred basis.

A Simplified Employee Pension Plan (SEP), a special type of IRA designed to be an easy-to-manage-retirement plan for small companies allows the employer or self-employed individual to contribute 15% of a worker’s income or $30,000, whichever is less, on a tax-deferred basis. The money can be put in any of the investment vehicles you would use for an IRA, and the withdrawal rules are the same. You can contribute as long as you are earning income even past age 70¹/₂.

A SEP can also include a salary reduction arrangement. Under this arrangement, employees can elect to have part of their pay contributed to their SEP-IRA. The tax on the part contributed is deferred. Your employer needs to sponsor this type of arrangement, but it is worth finding out if yours does, because up to $9,240 can be deferred each calendar year.

It’s best to check with a tax planner or investment adviser first because rules about these plans are complicated. However, as is true of all aspects of financial planning, the most important thing is to get started now!

Taxes: Give Me Shelter

There are ways to save on taxes that can fit into a financial plan.  Home ownership can help, especially if you buy in a good location at a good price, and stay put, at least for several years. You can deduct the interest you pay on your mortgage loan.

Financial advisers encourage investing in retirement plans, especially those offered by employers. If you are saving for retirement through an Individual Retirement Account (IRA) and/or work retirement plan (tax-sheltered annuity, 401(k), 403( b) , or 457) you get the triple advantage of tax-deferred compounding: the interest and dividends earned on your principal, the interest you earn on those interest and dividend earnings, and the interest you earn on the dollars you otherwise would have paid in taxes. These all grow and compound tax-free over the years. Taxes are due upon withdrawal in your retirement years when your tax bracket is likely to be lower.

The interest earned on municipal bonds is totally exempt from federal income taxes, and often state and local taxes as well. Congress has allowed this type of tax- sheltered investment opportunity to encourage investors to support the development of local and regional infrastructure - schools, roads, hospitals, libraries, sewer and water systems. Investors can buy into diversified pools of tax-free municipal bonds through mutual funds. As always, it’s best to consult a professional tax or financial adviser when considering tax-sheltered investments.

There are many ways to donate investments to your favorite charities and social change organizations that can provide tax deductions for you and allow you to continue to receive interest and dividends from the principal, or that will reduce the estate tax burden on your heirs.

Whatever your situation, you can be a responsible investor and let your values guide your investments. You can withhold money from businesses whose products or practices conflict with your values, and direct it toward low-income housing, minority-owned enterprises, renewable energy - whatever you want to support. Financial professionals can help you build a responsible portfolio