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Consumer Information Center From Here to Security

Consumer Information Center: From Here to Security

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Your Map To Financial Freedom

Saving · Investing Smart Borrowing

A consumer education project sponsored by Nations Bank and the Consumer Federation of America

A Partnership For Financial Planning

Consumer Federation and NationsBank team to help teach Americans better patterns of saving for their futures.

by Ken Lewis
President, NationsBank

Why aren’t Americans better savers? What can be done to help them achieve more of their financial goals?

Finding the answers to these two questions is the goal of a partnership between NationsBank and the Consumer Federation of America, one of the nation’s leading consumer advocacy organizations.  Together, we have launched a sweeping consumer education project: “From Here to Security:  Your Map to Financial Freedom.”

Our first step was a national survey exploring Americans’ financial goals and how they are working to achieve them. Our findings are summarized in "For Successful Savings, the Plan Comes First".

What we learned was a little surprising and, in one sense, encouraging.  While too few Americans are saving enough, our research proved clearly that the most important thing you can do in shaping your financial future is to develop a financial plan. 

In other words, you don't need to know it all financially to financially successful. You primarily need a plan.

This publication is designed to provide just that - an easy to understand "savings map" for Americans of almost any financial circumstances.  The advice, tips and helpful hints are written by experienced consumer advocates and educators

Nations Bank and the Consumer Federation of America are pleased to distribute this publication nationwide through Consumer Action, a national consumer advocacy group based in California.

Together, we also are sponsoring open-to-the-public educational workshops to help you put the principles described in this publication to work for your family.

Through these efforts, and those of others also working to encourage better savings patterns of most Americans, we hope to help you improve the future for you and those you love.

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:

{short description of image} 43% who expect a child to go to college have no funds earmarked for college.

{short description of image} 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.

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

{short description of image} 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.

A Savings Snapshot chart

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.

{short description of image} What does it take to put together a plan?  Read the rest of this publication to find out

Savers with a Financial Plan chart

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.

Accumulated Savings Earning 5%







$ 50/mo
























*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.

Dollar signs floating above a highway graphic

Five Steps To Your Financial Plan

Developing a financial plan doesn't have to be hard -- just take it a step at a time.

Developing A Simple Plan For Your Finances

A few straight forward strategies can help bring order out of chaos an get you started on a regular savings plan.

Developing a financial plan sounds intimidating, but it doesn’t have to be that difficult. A few simple strategies can help put you down the road to financial security.

1. Set Goals

Should you be saving for a down payment on a new home, the college education of your children, a comfortable retirement, or to provide a financial cushion in emergencies?

Figure out what you want out of life over the next five, 10, 20, 30 or more years. Then figure out what that’s likely to cost and how many years you have to build up your funds.

2. Start Saving or Investing

Figure out how much you can set aside each month for each goal, then do it -- no excuses.

The best approach is to put yourself on a budget and make saving and investing a part of your regular monthly expenses, right along with the rent and the phone bill.

If what you can afford to set aside is less than what you need to save and invest to reach your goals, you may have to reexamine your priorities and delay certain goals. But don’t abandon your financial plan. Even if you can’t do everything, whatever you manage to set aside now will reduce the amount you need to set aside later.

3. Match Savings And Investment Products To Goals

Now, the big question: Where should you put your money?

The answer depends on how much time you have to meet your goal, your income, your ability to tolerate risk, and how you intend to use the money.

Start by learning the key characteristics of each of your goals and narrow your selections to savings and investment products that have those characteristics.

Keep in mind: It’s more important to choose the right type of product for your goal than to choose the very “best” product of any one type.

4. Do An Annual Checkup

  • Have your goals changed?
  • Are your savings and investments performing as expected?
  • Do you need to adjust your product mix?
  • Could you be saving more money?
  • Could you be investing more money?

These are the questions you need to ask yourself at least once every year.

Pick a specific date and spend an hour or two giving your financial plan a good close look for possible improvements or needed adjustments to your plan.

5. Choose Help Wisely

You may be able to put together and carry out your financial plan on your own using discount brokers and no-load mutual funds. Public libraries, book stores, and the Internet are all good sources of information about financial planning strategies and saving and investment products.

However, if you decide you need or want the help of a financial professional -- either in developing a plan or in choosing the products to implement that plan -- determine in advance what services you want. Then narrow your selection to two or three properly licensed professionals who specialize in your needed services, are experienced, and have clean disciplinary records.

Make sure you know how your financial adviser is going to be compensated. Those who earn commissions selling products have a potential conflict of interest that can bias their recommendations when it comes to giving advice. However your adviser is compensated, make sure you know the total cost of getting his or her advice and putting it into action.

{short description of image}-- These five steps will put you on the right track to creating a simple financial plan.

About The Authors

Photo of Ms. Roper, Director of Investor Protection for the Consumer Federation of America

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.

Photo of Ms. Detweiler, financial educator

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.

Photo of Mr. Brunette, consumer advocate

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.

Dollar sign going through a goal post

Step 1

Setting Your Financial Goals
What financial goals do your life goals call for? List goals, their expected price tag, and how long you have to reach that goal.
Dollar sign dropping into a piggy bank

Step 2

Getting Started on Your Plan
List any funds you've already set aside for each goal. Figure out how much more you need to set aside each month to reach your goals. Identify any special savings an investment opportunities. Gear your budget toward savings, and get started.
Dollar sign and its reflection

Step 3

Matching Products To Your Goals
Investigate the best ways to save and invest for each of your goals. Learn the important risks and other factors to consider in saving and investing for each goal, then choose savings and investment products that match those characteristics.
Dollar sign with charts

Step 4

Monitoring Your Progress
Once a year, chart your progress. Do your goals still reflect your priorities? Are you on track in reaching those goals? Are your assets still allocated as you want? If not, you will need to readjust you plan.
Dollar sign and financial planners

Step 5

Choosing Your Provider
If you don't need professional advice, save money by using discount brokers an no-load mutual funds. If you do want advice, learn about the different types of advisors, their services, qualifications and compensation. Check them out carefully.

A Glossary Of Terms

Annuity  A non-FDIC-insured, tax-deferred investment, underwritten by an insurance company, providing payments for life or a specified period. Annuities are subject to investment risk including loss of principal.

Asset  Something you own that has value.

Compounding  When money you save or invest earns interest and that interest is added to your savings or investment and begins earning interest as well.

Dividends  Payments some companies make to shareholders representing a share of the profits earned in a given period and usually paid in the form of money or stock.

Hedge  A strategy used to offset a particular risk. For example, a hedge against inflation is a strategy designed to make sure that inflation does not erode the purchasing power of your money.

Inflation  The rise in the prices of goods and services.

No-load Fund  A mutual fund that you buy directly from the mutual fund company, rather than through a salesperson.

Offering Prospectus  Formal written offer to sell securities that is designed to provide key information an investor needs to make an informed decision about investing in an enterprise.

Over-The-Counter Stocks  Share of generally smaller, riskier start-up companies that are not listed or traded on an organized exchange such as the New York Stock Exchange.

Portfolio  The list of investment and savings products you own.

Principal  A sum of money which is either loaned or on deposit on which interest is paid.

Rate-Of-Return  The growth (or loss) in value of money you invest.

Risk  The possibility that money you invest will fail to perform as hoped, often by either losing or failing to gaining value.

Unsecured Debt  Debt, such as credit card debt, that is backed only by the creditworthiness of the borrower and is not supported by collateral.

Volatility  Rapid, frequent or dramatic rises or drops in value.

Step 1: Setting Your Financial Goals

Before you can start your financial journey, you need to figure out where you are headed - and that means setting goals.

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.

Don't Forget: A Will and Insurance

If you have family responsibilities, an important goal is to ensure that your family will be taken care of if something happens to you. That's why you should have a will and factor life and disability insurance into your plan.

Being uninsured or underinsured when an unexpected event occurs can derail your financial progress.

This publication does not deal in detail with estate planning or insurance. But you should research these topics as you develop your financial plan. What you spend on insurance will affect your overall savings plan and how you allocate resources.

A Goals Quiz

Here's a way to define what you know and determine new directions.
Understanding how much financial goals will cost is an important part of developing a financial plan. How much do you know about what the financial experts recommend? (Keep in mind that these are just general guidelines. Everyone's situation is slightly different. You will have to tailor your own savings to fit your personal situation.

1) How many months of living expenses do experts recommend most people keep in an emergency fund?
a. one to two months
b. three to six months
c. seven to nine months
d. 10 to 12 months.

2) What is the maximum amount of personal debt (excluding housing-related loans) financial experts recommend you carry relative to your annual take-home pay?
a. 15% to 20% of your annual take-home pay
b. 25% to 30%
c. 35% to 40%
d. approximately 50% of annual take-home pay

3) What percentage of income is the minimum financial experts recommend most people set aside each year throughout their careers for retirement?
a. 2%
b. 5%
c. 10%
d. 20%

4) About what level of pre-retirement income do experts estimate most people will need after they retire to keep their standard of living about the same as it was before they retired?
a. 90%
b. 70%
c. 50%
d. 40%

5) What is the average down payment required to purchase a home?
a. 0% to 2% of the purchase price of the home
b. 5% to 10%
c. 10% to 20%
d. 30%

6) What is the average annual price of tuition, room, and board for four years at a private college today?
a. $25,000
b. $40,000
c. $75,000
d. $150,000

7) What is the average annual price of tuition, room, and board for four years at a public college today?
a. $15,000
b. $30,000
c. $50,000
d. $75,000

8) What is the average cost for a year of nursing home care today?
a. $10,000
b. $22,500
c. $35,000
d. $50,000 or more

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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:

VISA $ 60
MasterCard $ 35
Car Loan $ 195
Student Loan $ 75
TOTAL= $ 365
$365 ÷ $1,600 = .23 or a debt ratio of 23%

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.

{short description of image} 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.

{short description of image} 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.

{short description of image} 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.

{short description of image} Get help. If you are having trouble keeping up with your bills, consider credit counseling from a nonprofit credit counseling service.

{short description of image} 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 (
» Debt Counselors of America, 1-800-680-3328 (
» National Credit Counseling Services, 1-800-955-0412 (

Step 2: Getting Started On Your Plan

Finding the money to save and invest may be difficult, but with a plan mapped out, you'll find it comes easier than you expected.

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.

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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.

Finding The Money

If you're having trouble finding the money to save and invest, here are tips on some hiding places that are forgotten - and unexpected.

If you are like most of us, you fritter away tens or or evens hundreds of dollars each month without really knowing where the money went.

Here are some tips for taking control of your spending and finding that extra money you need to make your financial program a success.

{short description of image} See where your money is going. Buy a pocket-size notebook and use it to jot down every penny you spend for a month. You'll probably be surprised at how much you're spending on incidentals.

{short description of image} Develop a budget. Make a list, adding up income in one column and essential expenditures in another. go through a year's worth of checking account statements and credit card bills to be sure you have a complete list of must-pay- expenses, like rent, food, and car servicing.

Include a certain amount of money for entertainment and incidentals - since crash savings programs, like crash diets, are very hard to maintain - but don't exceed that limit. Budget any remaining money toward savings and investment goals.

{short description of image} Save money on everything you buy. Shop around for the best deals on transportation, food, housing, medicine, financial, and telephone expenses.

A good resource is 66 Ways to Save Money. (To order: Send a check or money order payable to the Superintendent of Documents and a stamped, self-addressed #10 envelope, to Save Money, Pueblo, CO 81009. Cost is $.50 per copy.)

{short description of image} Increase Your Income If you are saving all you can on your expenses, the only other way to find more funds is to increase your income.

If circumstances permit, consider getting a part-time job or encouraging the kids to get summer jobs.

{short description of image} Get money owed to you. Get any personal, business, or insurance reimbursements in a timely fashion.

If you get big tax refunds, consider reducing the number of allowances you take so less money will be deducted from you paycheck. It won't change your tax bill, but it will ensure that the money spends more time in your account and less time in Uncle Sam's.

{short description of image} Take advantage of opportunities. Suppose you get a raise or land a great new job. Earmark that money for savings, since you're already accustomed to living on your old salary. If you sell property or pay off an old loan, put the extra money toward savings.

{short description of image} Put savings and investments on automatic pilot. Have pension fund contributions deducted from your paycheck. Have payments to mutual funds debited from you bank account. It's easier to set aside money if you never get a chance to spend it.

As you try these ways to find extra savings, or develop some of your own, remember that the small sacrifices you make will be offset by the peace of mind that reaching your financial goals will bring.

Step 3: Matching Products To Goals

Purpose, time, return needs, your risk tolerance - these are factors you'll have to confront to select the best products for you.

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:

{short description of image} 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

{short description of image} 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

{short description of image} 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.

{short description of image} 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.

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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:

{short description of image} 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.

{short description of image}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.

{short description of image} 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.

{short description of image} 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.

{short description of image} 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

Deciding on the right asset allocation may be your most important decision.

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

An annual review of your financial plan is important if you want to make sure you're continuing on the path toward your goals.

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

  Examples: Checking accounts, savings accounts, money market deposit accounts, certificates of deposit and U.S. Treasury bills. (Money market mutual funds may invest in all of these and are often used as a substitute for these products because of their general safety of principal and returns. However, money market mutual funds are not insured or backed by the federal government or any other entity. Although considered safer than other mutual funds, they can lose money.) Bonds are securities traded in the open market that represent a loan from the investor to a borrower. Examples: U.S. Treasury bond, U.S. savings bonds (unlike the other bonds listed, U.S. savings bonds are not traded on the open market) federal agency bonds (e.g., FANNIE MAE, FREDDIE MAC), municipal bonds, corporate bonds Stocks represent partial ownership in a corporation. Investors purchase stocks in the hopes that the value of the corporation will increase over time. Some stocks also pay out a portion of the firm's yearly profits, if any, in dividends. Stocks can be purchased either directly or through mutual funds. Examples: Growth stocks, value stocks, small-, mid-, and large-cap stocks, foreign company stocks
Safety of Principal There is very little chance that, when you cash in your investment, you will lose any of your initial investment in any of these products. All but money market mutual funds are insured or backed by the federal government. Money market mutual funds can only invest in extremely safe products. Safety of principal varies greatly depending on the credit-worthiness of the borrower. U.S. Treasury bonds are backed by the full faith and credit of the federal government and are considered among the safest of investments, while "junk" bonds, those issued by borrowers with low credit ratings, are considered highly speculative. The rest fall in between. If you are forced to sell your stock when the price is lower than you paid, you can lose some or all of your initial investment. Some types of stocks - including small-cap, growth and foreign stocks - tend to experience more volatile price swings.
Liquidity These products vary in how quickly and easily you can get your money out when you need it, but they are genuinely highly liquid. CDs, for example, are sold in maturities from one month to 10 years, but penalties for early withdrawal from short-term CDs generally are not very substantial. Bonds are issued for maturities from two to thirty years. Bonds can be sold, but, if interest rates have risen, you may receive less than you paid. With the exception of over-the-counter stocks, for which there often is a limited market, stock investments are generally highly liquid, but the price you receive when you sell may be less than what you paid.
Income There is very little likelihood that any of these investments will fail to make promised interest payments. Because interest payments may respond to changes in interest rates, however, income can fluctuate dramatically. Bonds are considered among the best sources of investment income. The reliability of that income varies according to the credit quality of the borrower, however. Also, investors in long-term bonds face the risk that interest rates will rise, eroding the purchase power of the payments. Many stocks pay dividends, providing a source of current income, but these dividends are not guaranteed.
Volatility These are among the most stable investments. Bond prices fluctuate in response to changes in interest rates. Generally, as interest rates rise, bond prices fall, and, conversely, bond prices generally rise when interest rates fall. Those who invest through bond mutual funds can expect similar fluctuation in share prices. Stocks are among the most volatile of investments. Historically, holding stocks over a longer period has helped to minimize the effects of this volatility, particularly when dividends are reinvested and holdings are diversified.
Returns Historically, returns in cash reserves have barely outpaced inflation. CDs and money market mutual funds have generally offered higher returns than federally insured bank accounts. Returns on bonds vary greatly, depending on the credit quality of the borrower and the length of the loan, with longer term bonds and lower quality borrowers generally paying higher returns to compensate borrowers for the added risks they assume. As a class, bonds historically have provided returns that are higher than those for cash equivalents and several points higher than the rate of inflation, but lower than those on stocks. Returns have varied substantially from year to year. Remember, all bond prices fluctuate and are subject to interest rate and credit risks. As a class, stocks historically have outperformed both cash and bonds, particularly when held for 10 years or more. (It is important to note, however, that, between 1926 and 1995, there were two 10-year periods in which stock values dropped.) Also, individual stocks will not necessarily match the performance of the overall market. Like every other type of investments, stocks are subject to market and business risks.
Appropriate Uses Cash equivalents are generally the best place for money you can't afford to lose and money that you are likely to need in emergencies. Because their returns generally barely outpace inflation, they are poor instrument if your goal is long-term growth. Because their returns may be highly sensitive to changes in interest rates, they are also generally considered a poor income instrument. Bonds from credit-worthy borrowers are considered among the best investments for current income. Most experts also recommend that bonds be included as part of virtually all investors' retirement portfolio, with the amount of the portfolio invested in bonds increasing as retirement approaches. Stocks have historically provided the best hedge against inflation and the greatest potential of the three major asset classes for long-term growth. Most experts recommend, therefore, that stocks make up a major portion of most investors' portfolios for long-term investments, such as retirement or long-term education funding. Because of their dramatic short-term price swings, however, they are inappropriate investments if you need access to your money on short notice.

Step 5: Choosing Your Providers

There are many fine options for assistance in financial planning. But be sure you make your selection carefully, based on your needs.

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

Accountants Accountants generally specialize in tax advice, though some offer more broad-based financial advisory services, and some also sell products to implement their recommendations. Most charge hourly or flat fees for advice, but some also earn commissions selling products. Most states have an accountancy board that regulates use of the title Certified Public Accountant. These boards do not regulate the financial planning services of CPAs. When accountants market themselves as financial planners or investment advisers, they are required to register as investment advisers at the state and/or federal level. CPAs have passed an extensive test of accounting principles and practices. Some also meet education and testing standards for the Accredited Personal financial Specialist, which cover a broader range of topics.
Banks In addition to offering federal insured savings products, many banks sell uninsured products, either directly or through an affiliated broker-dealer. Some also offer financial advisory services either directly or through an affiliated instrument adviser firm. Bank-affiliated brokerage firms and investment advisory firms operating under similar compensation arrangements as those operating independently. Banks are regulated for solvency and other conduct through state and federal banking regulators. Bank-affiliated brokerage or investment advisory firms are regulated under state and federal securities laws. When banks engage in the direct sale of securities or investment advice, however, they are generally exempt from the registration and certain other provisions of the securities laws. Bank employees who engage in the direct sales of securities are required to have training that is substantially equivalent to training required for persons who sell securities as registered representatives.
Brokers (discount) Discount brokers offer a whole range of investment products to customers but do not assist them in selecting products. Discount brokers are compensated on a transaction basis and may charge some additional account fees. Their fees are generally substantially lower than those of full-service brokers. Discount brokers are subject to state and federal securities laws and to oversight by industry self-regulatory organizations. NA
Brokers (full service) Full-service brokers recommend and sell a full ranges of investment products. Some also offer additional advisory services. Full-service brokers generally earn commissions and markups (the difference between the price at which they buy and the price at which they sell certain products) when they buy and sell products for clients. Most also charge account fees. Some charge special fees (flat or a percentage of assets under management) for special planning or advisory services. Brokers and registered representatives of brokerage firms are subject to state and federal securities laws and to oversight by industry self-regulatory organizations. When recommending products, they are required to learn about their clients' financial situation and sophistication and make generally suitable recommendations. When they earn special compensation for advisory services, brokers are subject to state and federal investment adviser laws. Brokers' registered representatives are licensed by the states and the National Association of Securities Dealers Inc., which offers a series of tests of both broad and more specialized securities knowledge.
Financial Planners Financial Planners assist clients in identifying goals and developing strategies to reach those goals. Most also sell products to implement their recommendations. Most charge fees for their advice and earn commissions selling products to implement their recommendations. A much smaller number are compensated entirely by fees paid by the client, while others earn only commissions. The term financial planner is not legally defined and can be used by anyone to describe any service. Most planners generally fit the definition of investment adviser and will be subject either to state or federal regulation as such. When planners sell securities or insurance, those product sales also are regulated by state and/or federal regulators. The CFP (Certified Financial Planner) is awarded to planners who pass a test of financial planning topics. Some planners, generally those who come from an insurance background, earn a similar designation, the CFC (Chartered Financial Consultant).
Insurance Agents In addition to selling insurance policies, some insurance agents also offer financial advice to clients and sell other products, such as mutual funds and annuities. Insurance agents are generally compensated by commissions on product sales. Agents are regulated by state insurance commissions. Insurance laws lack the disclosure requirements and sales practice rules included in securities laws. When insurance agents also sell securities, those products sales are subject to state and federal securities laws. Agents can earn the CLU (Certified Life Underwriter). Those who complete course work and pass a test on broader financial planning issues also receive the ChFC.
Investment Advisers Investment advisors give advice about securities, including money management and asset management. Investment advisers typically charge flat or hourly fees or a percentage of assets under management. Some investment advisers may earn commissions from product sales. Investment advisers are subject to oversight by state or federal securities regulators, depending on the size of the firm. They are required to place clients' interests ahead of their own and to disclose information about how they operate, including any potential conflicts of interest. In addition to the financial planning certifications, some earn the CFA (Certified Financial Analyst), which requires extensive course work and passage of a test on securities analysis principles and practices.
No-load Mutual Funds Companies No-load companies sell shares in their mutual funds directly to the public, rather than through commissioned salespeople. They charge so sales commission, though their funds may carry other fees an expenses. Many offer information - printed materials, 800-numbers, computer programs - on retirement planning, college planning and other investment topics. Like all mutual funds, no-load funds have annual expenses that cover the company's cost of operating. Some also charge separate fees [known as 12(b-1) fees] to cover promotional costs. Some of the investor information, such as a newsletter, is offered free. Other items, such as books and computer programs, are sold separately. Mutual fund companies are regulated by the Securities and Exchange Commission under the Investment Company Act of 1940. Advisers to mutual funds are regulated by the SEC under the Investment Advisers Act of 1940. State securities regulators also have authority over mutual fund sales practices. NA
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