Your Map To Financial Freedom

Saving · Investing Smart Borrowing

For Successful Savings, The Plan Comes First

No matter what your income, saving for your future will be easier if you have a financial plan.

By Diane Colasanto
President, Princeton Survey Research Associates

A new survey sponsored by the Consumer Federation of America and NationsBank has surprising findings about how Americans can improve their financial future: Develop a financial plan.

The good news is savers who have put together a plan to reach their financial goals have about twice as much saved or invested as those who lack a plan. The not-so-good news is that two out of three Americans who are saving or investing have neither prepared a financial plan for themselves nor had a professional prepare one for them.

Princeton Survey Research Associates interviewed 1,770 financial decision-makers nationwide about their household’s financial goals, their strategy for saving and investing, and their knowledge about important financial matters. The survey found that most Americans are making some effort to save and invest for their future. For example, two-thirds of U.S. households (68%) have set aside money for emergencies and 64% of non-retired households have set aside money for their retirement. But:

43% who expect a child to go to college have no funds earmarked for college.

46% who want to buy a car, take a major vacation, start a home improvement project, or make a major purchase in the next two years have no money set aside yet.

66% who expect to buy their first house in the next 10 years have no money set aside for a down payment.

82% who expect to help a parent or other relative with living or medical expenses during the next two decades have no savings or investments for that goal.

What’s more, many savers take a haphazard approach to financial planning. They don’t earmark accounts or investments for certain purposes. They don’t use accounts or investments that are best suited to their goals. And they don’t have much money saved or invested.

For example: Only 35% of savers have an emergency fund in a separate, low-risk account that allows them to get their money quickly if they need it. Only 38% of non-retired savers have calculated the amount of money they will need when they retire. Why are some people making progress toward meeting their financial goals while others are not? Why are some savers making better decisions than others about managing their money?

Income, of course, is important. People with high incomes generally can save or invest more money than people with moderate incomes or low incomes.

Being knowledgeable about financial matters is -- surprisingly -- not that important.

What’s crucial is having a comprehensive financial plan. People with a plan tend to save more money, feel better about their progress, and make more appropriate decisions about how to meet their goals.

What’s more, planning makes a big difference at every income level, even for people with modest incomes. This is encouraging news for Americans of all income levels.

What does it take to put together a plan?  Read the rest of this publication to find out

Regular Savings Add Up To Big Money Long Term

Even putting aside small amounts can create a big nest egg if savers have a consistent financial plan.

By Stephen Brobeck
Executive Director, Consumer Federation of America

Saving or investing a little bit regularly can add up to big bucks over the long-term. That’s a key message the Consumer Federation of America and NationsBank are emphasizing in our new campaign to promote consumer savings.

As the table shows, saving or investing just $100 monthly (with a 5% yield) adds up to nearly $60,000 over a 25-year period. Putting away $500 a month for the same time period accumulates savings of nearly $300,000.*

Survey after survey -- including a recent one by Consumer Federation and NationsBank -- proves most Americans don’t save enough for retirement, for emergencies, and for other major expenditures.

*This chart is intended for hypothetical illustration only and does not
represent the return of a particular savings program or investment.

Since 1968, the Consumer Federation of America -- a national, nonprofit association of pro-consumer groups -- has sought to advance the interests of consumers. For years, we have encouraged individuals to reduce high-cost debts. Now, in partnership with NationsBank, one of the largest banks in the country, we are seeking to encourage savings and investment as well.

Ken Lewis’s article ("A Partnership for Financial Planning," above) outlines this joint savings campaign, which we have planned with the assistance of respected experts on survey research and financial education.

If only a handful of individuals and families are persuaded to save or invest regularly, our efforts will have been well worth it.

But our study also offered all prospective savers hope. It found that those with a plan save about twice as much as those without one. An important reason is because successful savers save regularly, taking advantage of the magical powers of interest earning and compounding. As a result, with a 5% return, your money doubles after only 14 years.

Five Steps To Your Financial Plan

Developing A Simple Plan For Your Finances

About The Authors

As director of investor protection for the Consumer Federation of America, Ms. Roper is considered the nation’s leading consumer advocate on investor issues. Since joining the staff of CFA in 1986, she has also served as editor of the organization’s newsletter. Before joining CFA, Ms. Roper had worked as a newspaper reporter and in public information at The Colorado College. She is a graduate of Princeton University.

A financial educator, Ms. Detweiler is author of The Ultimate Credit Handbook, and former director of Bankcard Holders of America and the National Council of Individual Investors, both nonprofit consumer education organizations. Her straightforward analysis of the “pocketbook” issues facing today’s Americans has made Ms. Detweiler a frequent resource for dozens of print and television media outlets nationwide.

Mr. Brunette is a nationally known consumer advocate and author who specializes in helping Americans understand complex issues. An attorney, Mr. Brunette recently ended a 14-year tenure as the chief consumer lobbyist for the American Association of Retired Persons. He often participates in consumer and industry group discussions as well as congressional and federal agency proceedings on important consumer issues.

Figuring Out How To Pay For What You Want From Life

From new home to retirement, from kids' education to helping your parents, determining your priorities can be a good way to take charge of your finances.

Financial goals are just personal goals with price tags attached. To define your financial goals, therefore, you'll need to spend some time thinking about what you want out of life.

There is no one-size-fits-all list of goals, but the following are shared by many people and can provide a starting point for your own list:

» Being able to absorb unexpected, non-discretionary expenses without going into debt.

» Retiring in comfort.

»Enabling your children to go to the college of their choice without taking on substantial debt.

» Making a major purchase, such as a home improvement project, a new car, or a special vacation.

»Buying a first home.

»Helping your parents or other older relatives with living or medical expenses.

» Getting out of debt.

You may have other goals. You may want to retire at 50, for example, or go back to school. Whatever your goals are, put them on your list.

Next, put a price tag on each of your goals. This, too, is an individual process, but there are plenty of resources available at the public library, on the Internet, or from local financial services providers to help you estimate how much you will need for each goal.

Finally, include a target date for achieving each goal. For example, if you are 40 and hope to retire at 65, your target date is 25 years from now.

With the right price tags and realistic target dates for each of your goals, you will be on your way.

Paying Off Debt

Too many of us carry too much debt. Here's a way to figure your appropriate debt limits and begin doing something to reduce debt.

If you're like most people, you have a wallet full of credit cards, several of which you are trying to pay off. You may wonder: How much debt is too much? Most financial experts recommend that you keep your non-housing-related debt payments to no more than 10% to 15% of your income.

To see how your debt compares, add up your monthly payments on your credit cards, car loans, and any other loans, except your mortgage. Divide that total by your monthly before-tax income. This will give you your debt-income ratio.

For example, say your monthly income is $1,600 and you have the following monthly loan payments:

Reducing debt, particularly high-rate unsecured debt, can be an important part of your financial plan, since few investments will consistently return the 15% you are likely to be spending to service this debt.

Following are some strategies you can use.

Stop charging. Avoid using credit until you have brought your debt down to a manageable level. Be cautious about taking on credit card lines that exceed 20% of your income.

Figure out where you stand. For each of your credit cards and loans, write down how much you owe, the monthly payment, the interest rate, and the payment due date.

Take it one at a time. Starting with the loan or credit card with the highest interest rate, pay as much as you can toward that loan each month until you've paid it off, while making the minimum payment on each of the other loans. When you've paid off the highest rate loan, use the same strategy for the one with the next highest rate, and so on.

Get help. If you are having trouble keeping up with your bills, consider credit counseling from a nonprofit credit counseling service.

These agencies may be able to assist you by negotiating lower payments and/or lower interest with your creditors:

» National Foundation for Consumer Credit, 1-800-388-2227 (www.nfcc.org)
» Debt Counselors of America, 1-800-680-3328 (www.dca.com)
» National Credit Counseling Services, 1-800-955-0412 (www.nccs.org).

Step 2: Getting Started On Your Plan

Getting Going: Planning Your Route To Financial Security

Once you know where you're headed financially, you need to figure out the best way to get there.

Each of your financial goals will require a slightly different savings or investment strategy. Figuring out your strategy, however, will involve much the same process for each goal.

1.) Figure out your starting point You first need to know where you are starting from. To do that, list any savings or investments you have already set aside toward each of your goals. (Don't forget to include Social Security benefits and your company pensions, if any, in your retirement calculations.)

Then, for each goal, subtract the amount of any funds you already have. This tells you how much further you have to go.

2.) Plan the steps along your roadOnce you know how much you need to save and how long you have to reach your goal, you can figure out how much you need to set aside each month for each goal.

For short-term goals, you can simply divide the amount you need to save by the number of months you have in which to save it to get your monthly target.

When calculating you monthly target for your longer term goals, you will have to take into account the interest, dividends, or other gain in value your funds can be expected to earn along the way. While this will decrease the amount you actually need to set aside each month, it also make calculating your monthly target more complicated.

Worksheets are available from a variety of sources - including books, magazines, computer software programs, and financial professionals - to help with the calculations.

Be conservative in estimating the rate of return you expect to earn, since this will minimize the chance that you will come up short of your goals.

3.) Review your route and destination If you can comfortable afford to set aside the amount you need for each of your goals, you are ready to move on to the next step.

If you are like most of us, however, you don't have enough money to fully fund each of your goals. In that case, you'll need to reassess your strategy. First, see if you can find additional money in your budget.

If you are still coming up short, consider delaying your target date for certain goals. Adding an additional five years to your retirement target date, for example, not only gives you five more work years in which to build up your savings, it reduces the number of years of retirement you'll have to fund. That can substantially reduce the amount of money you need to set aside each month toward retirement.

If, despite you best efforts, you still are unable to fully fund all of your goals, you may have to abandon one or more of your goals, at least for now.

But don't get discouraged. Remember, just by getting started you are reducing the savings burden you will face in the future.

4.) Identify special savings and investing options. For certain goals, particularly retirement, you may have special saving and investment strategies.

The most common of these are company pension plans you can contribute to , such as 401(k) plans, and Individual Retirement Accounts. Talk to your company's benefits specialist to determine what, if any, options you have.

401(k) plans are particularly attractive, since the money you contribute is not taxed and your investment grows tax-deferred. Also, many companies will match your contributions up to a certain amount.

For these reasons, most financial professionals recommend that employees take full advantage of such plans as the first step in their retirement strategy.

If you don't have access to a 401(k) plan or if you are already making your full contribution to that plan, you can also consider in investing in an Individual Retirement Account. Depending on your income and your pension status, you may be able to contribute money to your IRA tax-free. Even if you can't, however, you will not have to pay taxes on any money you may earn in your IRA until you withdraw it.

5) Start saving The best plan in the world doesn't do you any good if you don't put it into action. So, once you've figured out how much you're going to save each month, get started.

Pay into your savings and investment accounts just like you pay your rent or the phone bill.

If you find you don't have the discipline to make that monthly payment, look for savings and investments that will provide the discipline for you.

Once you get in the savings habit, you may find you can set aside more money than you ever thought possible.

Step 3: Matching Products To Goals

Choosing The Right Products

Understand your goals and choosing the right products will follow.

For many people, the hardest part of financial planning is choosing savings and investment products. If you understand the important characteristics of your goals, however, you are well on the way to choosing the right products.

1. Understanding the key characteristics of different goals

What investments you choose for each goal will depend on a variety of factors. The following are among the most important to take into account:

Investing Purpose. How you intend to use the money will determine what risks are most relevant to you and what characteristics you should look for in a savings or investment product.

For example, if you must rely on your savings and investments to provide you with income during retirement, the primary risks you will probably be concerned about are those that threaten to interrupt the income stream or cause that income to lose value over time. That will lead you to a very different type of investment than you would choose for an emergency fund, where your primary concern is that your money will be there when you need it and that you will be able to get it at a moment's notice

Time Horizon. Similarly, how much time you have to reach a goal is an important factor in determining how much volatility you can accept.

The sooner you expect to need your funds, the fewer ups and downs you can withstand. Otherwise, you may be experiencing a drop in value right when you need your money. Thus, for emergency funds and short-term goals, you will probably want products with a high degree of safety of principal.

The farther off your goal is, on the other hand, the more danger you face that the value of your savings and investments will be eroded by inflation.

Thus, if you are saving to send your child to college in 15 years, you'll probably want products with a good potential for long-term growth. To earn this long-term growth, you will probably have to accept some added volatility.

If you expect to need your funds within three to 10 years, you will probably want to look for products that provide more of a cushion against inflation than you need for your short-term goals, but less volatility than you can withstand in your long-terms goals

Necessary Rate-of-Return. When planning for big ticket, long-term goals, such as retirement, you will probably need to consider what rate of return you have to achieve to reach your goal in the allotted time.

There is a limit to how much risk you should accept in saving and investing for these goals, however. Most products that offer the potential for really spectacular returns also pose a risk of spectacular losses.

Your Personal Risk Tolerance. It's important to choose investments that will allow you to sleep at night and that you won't abandon at the first sign of a drop in value.

But remember, there are all sorts of risk, not the least of which is the risk that inflation will erode the purchasing power of your money even if it sits in a "risk-free" insured account. So, take your risk tolerance into account when selecting products, but do so with a clear understanding of all the different types of risk.

2. Understanding different types of products

Once you have gotten a better understanding of the key characteristics of each of your goals, you are ready to pick the products that best fit those goals. For some goals, such as an emergency fund, a single product is likely to meet your needs. For others, particularly long-term goals such as retirement or college, you will probably end up using a mix of products.

Begin by assessing how various types of products, and product mixes, match up against the characteristics you have listed as important for each of your goals. To do that, it is helpful to understand the characteristics of the three major asset classes--cash, bonds and stocks-- since most of your products probably will come from these three classes.

Once you have a list of appropriate types of saving and investing vehicles, look for products offered by reputable companies with minimum investment requirements you can meet. And keep the following principles in mind:

Don't buy anything you don't understand. Carefully read materials, such as the offering prospectus, so that you understand how the investment works, what has to happen for it to make money, what would cause it to lose money, what its costs are, and how it fits with your investment strategy.

Diversify. This is investment talk for not putting all your eggs in one basket. Mutual funds offer an excellent alternative for average investors who don't have enough money to diversify broadly when buying individual stocks and bonds.

Don't overemphasize short-term performance. Many individuals choose investment products based primarily on one year of hot returns. Keep in mind, however, that past performance is no guarantee of future results. While performance over a long term can be a sign of steady management that has successfully weathered a variety of economic conditions, short-term performance is a far less reliable indicator.

Also, some investments go through more and wider swings than others in achieving the same long-term return. The goal is to minimize the volatility you have to endure to achieve your desired rate of return.

Keep expenses low. A far more reliable way to maximize your returns is to minimize expenses. Keep the amount of money you spend to purchase and maintain your investments as low as possible. With the same performance, a low-cost product beats a high-cost product every time.

Avoid high-risk products. Many products are simply not appropriate for average investors. Commodities, options, futures contracts, collectibles, and penny stocks are examples of investments that only belong in the portfolios of individuals who can afford to lose all of the money they have invested. Particularly for the uninitiated, investing in these products is a lot like including an annual trip to Las Vegas in your retirement plan.

If you feel intimidated, remember, choosing the right type of product, or the right mix of products, is far more important than choosing the very "best" product of a particular type.

Your Asset Allocation Plan

For certain long-term goals, particularly retirement, you will probably want to put your savings into several different types of products, such as stocks, bonds, and cash. How you divide your money between these different asset classes is called an asset allocation plan.

Deciding on the right asset allocation plan may be the most important investment decision you make. Research has shown that more than 90% of the returns investors achieve depends on what types of products they choose, while less than 10% is determined by the specific products they choose and when they buy them.

The time you have to reach your goal, your risk tolerance, and your financial goals will all affect how you allocate your assets. For example, someone in her or his twenties might put 80% of retirement funds in stocks and 20% in bonds, while someone in her or his fifties might divide retirement funds equally between stocks and bonds. (These are just examples; individual plans vary.)

You can ask a financial advisor to help you develop an asset allocation plan, or you can do it yourself using computer software, personal finance books, magazine articles, or the Internet. Once you have a plan, you'll need to monitor your assets and adjust for any changes in value that may have changed your asset allocation.

Your Investment Choices

Asset allocation can help determine long-term investment return

Step 4: Monitoring Your Progress

Giving Your Plan An Annual Tune-up

Take time each year to reassess your financial plan.

Once you have a financial plan and have begun implementing it, you'll still need to re-tune it periodically to keep on track. Indeed, everyone should make an annual appointment with themselves or their financial advisers to get a financial tune-up.

It's a good idea to do this at about the same time each year. Choose a date you're not likely to forget, like your birthday, New Year's Day, or April 16, when you still have all your financial records handy. Sit down with your list of goals and evaluate your progress toward each. Check where you are against where you hoped to be. If you're meeting goals or are ahead of schedule, give yourself a pat on the back.

If you're falling a little short, you may need to do some fine-tuning. If you're way off the mark, a major overhaul may be in order. In either case, try to figure out what went wrong with your old plan. If the cause can be remedied, fix it. If not, develop a new strategy that you can maintain.

A very important part of this annual review is to reevaluate your asset allocation to make sure it still fits your goals and you are still on target. For example, suppose your strategy is to keep 70% of your portfolio in stocks and 30% in bonds, but your investment in stocks did so well last year that they now make up 80% of your portfolio. If your original strategy still fits your goal, either gradually sell some stocks to buy bonds (being careful to consider the tax implications), or put more of your money into bonds until your portfolio is back in balance. You can adopt this same approach if you feel it is time to change your asset allocation.

There are other compelling reasons to conduct an annual financial review. goals and priorities change. Your marital status or job situation may change. You may buy a new house or have a baby. In such cases, last year's strategy may no longer meet this year's needs.

If you are working with a financial adviser, she or he should provide an annual review of your progress. If not, there are a number computer software programs, books, magazine articles, and financial worksheets available to help you do this on your own.

Whatever approach you take, keep that annual appointment for your financial tune-up. The two or three hours you invest in reviewing your financial plan can pay big dividends in the long run.

An Overview of the Three Major Asset Classes

Step 5: Choosing Your Providers

Finding the Right Provider

Here are ground rules for selecting and working with a financial adviser.

At some point in the financial planning process, you will need to rely on the assistance of a financial services provider, if only to buy the savings or investment products to implement your plan.

Here are a few tips to guide your selection:

First, decide to what degree you want advice - either in developing a financial plan or in choosing the products to implement that plan.

If you expect to do your own planning and make your own product. selections, your choice of providers will be determined by the availability of the products you want and the cost of those products. Take advantage of the lower prices offered by discount brokers and no-load mutual funds.

If you want help either with planning or in selecting products, a variety of financial services providers are available to help you, but your selection process will be more complicated. (For more information on the various types of financial services providers and the services they offer, see the chart below.)

Look for competent, honest professionals who gives sound advice at an affordable price.

Get references from friends, family members and co-workers. Look for someone with strong educational background and experience, including experience dealing with clients whose circumstances are similar to yours.

Call your state securities regulator or the National Association of Securities Dealers to check on the registration status and disciplinary history of securities industry professionals. (For the number of your state securities division, call the North American Securities Administrators Association at 1-202-737-0900. The NASD hotline is 1-800-289-9999.)

Avoid individuals who are not properly registered or who have a serious infraction in their past, such as churning, unsuitable recommendations, or unauthorized trades.

Once you have narrowed your selection, it is a good idea to interview two or three candidates. Ask about their experience and background, what services they offer, how they deal with clients, and how they are compensated.

When financial advisers earn some or all of their money selling products to implement their recommendations, this creates a conflict between your interest in developing least-cost strategies to achieve your financial goals and the providers need to generate commission income for his or her practice.

Not all those who operate with this conflict give biased advice. However, if you choose to work with an adviser who also sells products, you should take special care to determine whether it is affecting your adviser's recommendations. Look for one who is willing to fully disclose commissions up-front.

Also, be sure you understand at the outset what the advice is likely to cost, including the costs to implement recommendations.

Commission-only advisers or those who charge a low initial fee can look like a bargain until you see what you'll pay in commissions implementing the plan. In contrast, many fee-only planners charge relatively high fees, but they often can save you enough money implementing your plan to more than make up the difference.

If you do choose to rely on a salesperson for advice, even if it is just help in selecting the best products, look for one who is interested in understanding your financial goals and attitudes and who can explain how his or her recommendations fit into your overall plan.

Avoid salespeople who immediately start recommending products without asking about your financial goals and personal situation.

Also, check up on your adviser's recommendations. Use personal finance books and magazine articles to learn more about the products being recommended to make sure they fit your goals and risk tolerance.

Ultimately, no matter how good your adviser is, it's your responsibility to protect your own interests.

A Review of Financial Services Providers