Transition Guidance

Success during your transition is the result of an honest self-assessment, developing sound financial and career planning objectives, aggressively pursuing your job search strategies and a little hard work!

Title:Financial Planning Considerations

Author:Robert W. Lindsey. All rights reserved.

Money is obviously important to the individual and family, but the degree of importance depends upon the individual family member. Some think of money as an end in itself, others don't think about it at all. Neither of these extreme views is desirable. You should consider money as a force to be managed towards achieving your most important goals. When thought of in this manner, money tends to be used where it will produce the greatest good and reduce conflict, tension, and the chance of financial difficulties.

Set Specific Goals:

Specific goals, mutually agreed upon with significant others, are the foundation for success of the individual or family. Don't skip this foundational step. In setting goals, think of your current needs, wants and limitations. Then think of future needs (e.g., auto replacement, emergencies, repayment of loans, down-payment on a home, education of children, weddings, retirement, estates, and special interests, hobbies, traveling, vacations, etc.) Agree on short-term and long-range goals (See Self Assessment is Key). Be specific; clarify what, when and how much money you'll need to achieve each goal. Get in the practice of writing down your goals and financial needs. Review these goals and needs periodically (preferably monthly or quarterly), with your significant other, updating them as conditions change.

Keep a Financial Inventory:

Know where you stand financially. Take an inventory of your assets and liabilities. Do it now; use bank statements, investment reports, credit card statements, etc. ASSETS include: cash on hand, checking and savings account(s), stocks and bonds, investment funds, cash value of term life insurance policies, military retirement and separation pay, market value of real estate, market value of personal property, and cash value of retirement funds, IRAs, etc. LIABILITIES include: outstanding bills, loans, credit card bills, mortgage, educational loans, etc. The difference between total assets and total liabilities is your NET WORTH. In business this computation is called a balance sheet. It tells you where you stand financially on the day it's computed. When computed monthly or quarterly, it shows your progress (hopefully positive!) towards your goals. Get in the habit of keeping a monthly financial inventory with supporting files and records.

Manage Your Income:

Compute your income and how you spend it. Know your gross income withholdings and take-home pay. If you do not receive income on a regular basis, make an estimate. Compute your expenses and expenditure categories, i.e., what you plan to spend your money on. Prepare a forecast for each month of the coming year. Be realistic; if planned expenses exceed planned income, find a way to reduce expenses and/or increase income.

Balance monthly income and expenses, compute monthly averages, and prepare a cash-flow budget. Next, manage your money and exercise disciplined spending within each expense category. Pay normal living costs at the end of the month in which they occur (or as bills are due), pay off outstanding bills and loans as soon as practicable, and provide savings for future expenses (goals). Avoid waste and unnecessary debt. Be prepared to meet changing conditions.

In summary, prepare annual income and expenditure forecasts. Divide your forecasts by 12 to get monthly forecasts. Use these monthly forecasts to prepare a monthly cash flow budget. Keep actual income and expenditure amounts, and record them monthly. See if you are meeting your goals or exceeding your means. Adjust your spending accordingly and keep supporting files and records for end-of-year tax preparation. This system is worth the time and effort.

But what if you know you can't or won't prepare this budget and keep these records? Not everyone has the time, ability or inclination to keep detailed records. If not, then manage your money using the following "10-10-30-50 Rule" for after-tax income:

  • 10% to long range savings, e.g., retirement, down payment, etc.
  • 10% to short range savings emergency and opportunity funds.
  • 30% to rent or mortgage payments, and
  • 50% to live on.

To control your living expenses, keep a daily record on a calendar of your expenses, evaluate this record weekly to see "where all the money went," and adjust your spending habits accordingly. At the end of the month, compare your actual expenses to your forecasted income.

Protect Against Loss:

You can't protect against all risks and losses. You can and should protect against certain financial calamities. Prepare an up-to-date WILL, to transfer your assets where you want them to go and prevent the loss of a portion of your estate. When practicable, purchase insurance policies to protect personal liability, disability, major medical, health, home, property, life and auto. Insurance represents money spent and its only purpose is to restore value in an emergency. Review these policies yearly to avoid under or over-insuring. Keep supporting files and records.

Make Your Net Worth Grow:

Form the good habit of saving and investing to achieve specific short and long range goals. Invest in harmony with your goals: safety, liquidity and modest returns for short term goals and some risk, less liquidity and higher returns for long range goals. Don't make risky investments. Avoid get-rich-quick schemes. Instead, let time and compound interest growth work for you. Try to save and invest 20% of your monthly after-tax income; 10% in short term and 10% in long range investments.

Also, buy heavy consumption items in advance, on sale, and in bulk. Keep a 6 to 12 month contingency fund in U.S. treasury bills, insured certificates of deposit, insured savings accounts, or highly rated money market funds; and diversify other investments among: mortgage payments, no-load mutual funds, income producing real estate, and specialties, e.g., gold, silver, gems, foreign currencies, collectibles and commodities. Invest in things that you understand. Seek professional investment advice if you are unsure about good investments. Keep supporting files and records, for budgeting and tax preparation.

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