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A “yes” answer to all of the above questions deserves congratulations. You're well ahead of practically everyone else. Tragically, most people answered “no” to some or all of them. If you find yourself in this category, you may be cheating your future and missing important opportunities to enhance your financial well-being. What’s more, if you’re a member of the “sandwich generation,” you may be coming up short on your obligations to your children and your parents as well. While Americans of all ages can undoubtedly relate to the above, it's the nation's baby boomers -- the 76 million people born between 1946 and 1964 -- who have developed the most unhealthy reliance upon credit and neglect for savings. Indeed, the credit, spending, and savings attitudes and practices of this population stand in stark contrast to those of older generations. Most people who lived through the Great Depression and the financially circumscribed decades that followed learned how to scrimp and save to make ends meet and to make do with what little they had. These experiences taught them how to exercise caution and restraint in their financial affairs and how to get the best value for their hard-earned money. Baby boomers, on the other hand, have reversed this trend. They have given in to a consumptive spirit and adopted “live life for the moment” philosophies. In succumbing to the need for immediate gratification, the 25- to 45-year old population often pays little or no attention to other more distant and probably much more important financial needs. In the final analysis, many baby boomers are living life beyond their means. To finance their current existence, they're sacrificing their futures. If you’re a baby boomer, you’re like everyone else. You must meet day-to-day living expenses and find ways to finance special life events (like the birth of a child, furnishing a home, taking a dream vacation). But, because government entitlement programs are always under assault and pension programs are constantly being winnowed down, you can no longer rely upon these retirement programs to finance adequately your golden years. To maintain your standard of living, you're going to need more -- a lot more -- to see yourself through retirement. In addition, the dream of home ownership may be hampered by difficulties in coughing up the sizable down payments that are normally required. Baby boomers are unique, however, in anther respect. This population is also known as the “sandwich generation.” Not only must they respond to their own financial interests, but they also often find themselves having to tend to the financial affairs of the generations before and after them. They must raise and educate their children. And, with college costs going through the roof, meager or no savings simply won't make the grade. This population must also look after and often provide support for their aging parents and other relatives. Since people are living longer, contributions may be stretched out over protracted periods of time. Such expenses can also be quite costly. Thus, many baby boomers are confronted with formidable financial tasks. While being able to finance your retirement, pay for your children's educations, help see your parents through retirement, and make a down payment on a house are obviously important financial capabilities, obvious questions arise. How do you get to where you need to be financially? How do you get out of debt and start saving? How do you go about socking away enough money to respond to your various needs? How do you take advantage of all of your available retirement savings options? How do you accomplish financial goals while still allowing yourself to enjoy your life? If you find yourself grappling with the above issues, you can rest assured that you are not alone. As the chart below graphically demonstrates, America is a nation of debtors, not a nation of savers. While increases in disposable income and personal debt have pretty much paralleled each other since 1979 (2.68% and 2.43% respectively), the personal savings rate has been lagging far behind (increasing only 1.54% over the same period). What's more, Americans are currently incurring debt at a rate that is 4 1/2 times greater than the rate at which they are saving. [Personal Savings And Debt Chart] Credit and savings have something in common: they both give us convenience and flexibility. They enable us to respond to whatever life serves up; to finance expected and unexpected events and activities. But, over-reliance upon credit or neglect for savings can leave you at a tremendous disadvantage and wreak havoc upon your enjoyment of life. As countless numbers of Americans can attest, financial insecurity is somewhat akin to a plague -- it follows you wherever you go. This need not be the case. What you need to do is take every conceivable action to create a firm foundation upon which the fullest possible enjoyment of your life can be built. Such a foundation will serve you well in the years ahead and adequately prepare you for life's challenges. Most people haven't planned to fail; they have failed to plan. While many people may have already identified other types of goals (e.g., personal, educational, and professional) in their lives, most have failed to plot out their financial futures as well. Rather than allowing financial issues to dictate your life, you need to map out strategies that put you in control. Pro-active rather than reactive financial postures are desired. Everyone, irrespective of their station or financial circumstances, needs to develop financial strategies to accomplish a variety of short-, mid-, and long-term needs in their lives. By affirmatively dealing with financial matters, most people will soon discover that they are not as complex or intimidating as they might initially appear. Most will also find that they can have a tremendous impact upon their financial circumstances. Indeed, people can easily enhance their financial viability if only they take the time and trouble briefly to focus attention upon these important issues. TEN STEPS FOR BECOMING MORE FINANCIALLY ATTRACTIVE The following easy-to-understand and easy-to-use steps will assist you in becoming more financially attractive.
Step 1 At the outset, you need to obtain an accurate assessment of your financial circumstances. Take an inventory of your assets and liabilities. Create a financial balance sheet that shows you exactly where you stand. Identify areas where improvements can be made. Where Is Your Money Going? While you may have some vague notion of where your hard-earned money is going, you probably need to understand precisely where it is being spent. The table below should help you figure out what percentages of your take-home pay are allocated to various types of expenditures. Fill in the actual amount you spend each month for each category. Then, divide this amount by your total monthly take-home pay. Multiply the answer by 100. This will give you the percentage of income you spend on each item each month. After doing these calculations, compare your expenditures with recommended spending levels. Example: If your monthly mortgage payment is $400, and your monthly take-home pay is $1,200, your actual housing percentage is $400 / $1,200 = .33 x 100 = 33% [Recommended Guidelines For Spending Chart] With the exception of the savings category, higher-than-recommended percentages may indicate excessive spending and an area in which expenditures should be re-evaluated or controlled. If your percentages are lower than or equal to those recommended, you fall within the recommended spending guidelines for that category. These figures should be viewed only as guidelines. Individual circumstances will obviously vary. For example, if you have three young children at home, the percentage you pay on child care and related expenses will probably be considerably higher than those recommended. Similarly, if you live in an area where housing costs are extremely high, your housing costs may necessarily consume a disproportionate share of your take-home pay. How Much Do You Owe? To determine the extent of your current indebtedness, list all creditors to whom you owe money. After each debt has been listed, add all outstanding current balances to determine your total indebtedness. [Your Indebtedness Chart] How Much Have You Saved? Short-term savings is the amount of money you could easily get your hands on should you need it in an emergency. This would include money in checking and savings accounts, short-term certificates of deposit, mutual funds, stocks and bonds, and other resources that are readily available to you. To help you gauge where you stand regarding short-term savings, list all of your current savings and investment account balances on the chart below. After you've entered these figures, total up your available short-term savings. [Short-term Savings Chart] Mid-term savings might be held in savings accounts, longer-term certificates of deposits, and other such obligations. Mid-term savings would be any money you might have socked away for special life events (e.g., educational expenses for children, down-payment on a home, money set aside to care for your parents). Record your mid-term savings balances in the spaces provided below and then total them. [Mid-term Savings Chart] Long-term savings is money you have stashed away as your retirement nest egg. This would include balances in individual retirement accounts, simplified employer pension plans, Keogh accounts, 401(k) plans, voluntary and regular pension plans, and other such retirement savings. Enter and total your figures in the appropriate spaces below. [Long-term Savings Chart]
Step 2 Once a position has been determined above, short-, mid-, and long-term financial goals need to be identified. For example, if you lack an adequate savings cushion, steps should be identified to begin the savings process immediately (assuming there are no debt problems to be corrected first). An initial modest savings program might be developed to demonstrate that savings can easily be accomplished and that earnings can quickly mount up. After a period of time at the initial savings level, adjustments might be made to accomplish even greater savings on a regular basis. Goals are obviously going to vary among different age groups. For young college graduates, goals might be to establish a savings program early-on and to develop a credit identity through responsible credit access and usage. People in their twenties and thirties might be interested in paying off credit cards, planning a family, or making a down payment on a home. For middle age persons, goals might include paying for their children's educations, caring for their aging parents, or planning for their own retirement. For older persons, goals might include budgeting to make sure resources are available for anticipated needs, investing wisely to reap the greatest returns, or saving for a special trip. You need to reduce to writing some idea of where you'd like to see your financial affairs in 5-, 10-, 20-, 40-, or 50-years. Make sure to identify special needs (e.g., financing a child's education, saving up for a down-payment on a home, planning for your retirement, assisting your parents with their financial needs in later life).
Step 3 The first thing you will probably need to do in developing a plan for accomplishing your goals is to create a budget. This will entail re-evaluating your spending patterns and identifying ways of maximizing your available resources. This budget, which is based on household values and priorities, should allow for the accomplishment of financial and personal goals. It must take into consideration the needs and views of every member of your household. Your budget should not be developed hastily; take whatever time you need to think each decision through. Keep it simple. Your budget must be practical; do not strap yourself down to a plan you cannot realistically achieve. Since you cannot possibly anticipate all your upcoming spending needs, your budget must be flexible -- you must allow room for give and take. Chances are good that if you devise a three-year budget today, it may need to be adjusted to reflect changed circumstances at least a couple of times during its existence. You should try to reduce expenditures in every budgetary category. Many expenditures will probably have to be curtailed -- by cutting back on or doing without things you have become accustomed to. However, there may be little flexibility with some expenses, like mortgage or car payments. Therefore, the areas where spending reductions can be made will probably be dictated by the structure of your current expenses. After expenses have been reduced and minimal spending levels identified for each budget category, the remainder of your available funds should be earmarked for your financial goals. Put your budget in writing and share it with the members of your household. It is important for everyone affected to be familiar with budgetary expectations. If different members will be responsible for different expenses, identify who will be handling which budget items. Remember, you and the members of your household are responsible for the success or failure of your budget. If you are tempted to make an unbudgeted-for expenditure, think about the impact such an expenditure will have on your plan. Impulse buying or unnecessary purchases must be avoided. Purchases should be made only after careful thought, planning, and consideration of their long-term repercussions. Use the following form to create your own household budget. [Your Household Budget Chart] After you've created a budget, you next need to develop a plan for accomplishing your financial goals within your budgetary constraints. If you've got a significant amount of outstanding debt, your first priority should be to bring your indebtedness within tolerable limits. If you're getting a late start on planning for retirement, you may need to concentrate your efforts on saving to make up for lost time. Map out a strategy for getting where you want to be when you need to be there.
Step 4 Before financial plans can be pursued, many people are going to have to abandon existing and deeply rooted core beliefs about their lives. These will need to be replaced with constructive ideas about what's truly important in the grander scheme of things. A re-orientation away from immediate gratification probably needs to be accomplished. Focus should be shifted away from what may be desired today towards what may be required tomorrow.
Step 5 Very few consumers have a working knowledge of essential, important consumer financial information. For example, few Americans could tell you how much debt is too much, identify recommended savings cushions for meeting short- and mid-term needs, or come up with a ball park figure about how much money will be needed for retirement. This is basic information that, regrettably, few have even contemplated. How Much Should You Owe? Your debt-to-income ratio should not be out of balance or exceed tolerable limits. Installment debts (like automobile loans, credit cards, store charge accounts, personal loans, or student loans) should not exceed more than 20% of your annual take-home pay. Anything in excess of 20% is generally considered an over-extension of credit obligations. While 20% represents the tolerable maximum, a 15% limit is recommended as a more comfortable level of indebtedness. At 15%, your debts will be more manageable than at a higher rate and you will have greater flexibility in meeting any unplanned or sudden expenditures. The chart below indicates tolerable limits on credit obligations for different income levels. You should determine your income level and identify your “comfortable” and “maximum” credit obligation amounts. These should then be compared with the actual amount of your total indebtedness. [Suggested Income-To-Debt Ratios By Income Level Chart] Once your percentages have been determined, they should be evaluated as follows
The 15% and 20% limits are flexible and are intended only as guidelines for assessing general credit conditions. Your own specific situation should be taken into consideration when applying the guidelines. For example, because purchasing a new car may make you exceed the above guidelines, you may need to be cautious with future purchases, making certain to keep your obligations within your ability to repay. How Much Should You Save? It is recommended that you have a short-term savings cushion of from three- to six-months of your annual take-home pay available to assist you in responding to life's exigencies. Use the savings figure you calculated above to determine the percentage of your annual take-home pay you currently have available in short-term savings. To assist you, the table below identifies recommended savings levels for different income levels. [Suggested Short-Term Savings-To-Pay Ratios By Income Level Chart] Mid-term savings needs vary according to your financial needs and circumstances. Consider the following three examples of mid-term savings: Educational Expenses If your child entered a public college in 1993, the four-year cost for tuition, fees, room and board will total about $32,000; four years at a private school will run you about $80,000. Since college costs are expected to rise at least 6% per year, you must keep your sights focused upon a moving target. The chart below reveals how much college will likely cost for students entering in the indicated years: [Estimated Costs Of Public/Private Colleges Chart] Given the large amounts of money needed for college, it's very important that educational savings begin early. If you start putting away money for the education of a child born today, you'll need to sock away $2,650 a year (assuming an average annual return of 7%) for public college attendance, and $6,740 a year for a private school. If you have a ten-year old child and you're just now beginning to save for his or her education, your task will be more difficult. To make up the difference, you'll need to set aside $4,970 a year for each of the remaining eight years before your child enters a public college. This figure increases to $12,400 a year if your child will be attending a private school. If you haven't adequately planned ahead for your children's educational expenses, you may have your work cut out for you. Your financial dilemma obviously increases proportionately for each college-bound child you have. Purchase Of A Home Another one of your goals might be to amass funds to purchase a home. A down-payment of anywhere from 10% to 20% of the purchase price of the home is normally required at the time of purchase. In addition, closing costs usually run about 4% of the home's purchase price. Depending upon the pricing of the mortgage you ultimately receive, you may also need to pay points and other costs up-front as part of your initial outlays. Given this, your initial costs may be greater than indicated below. The following chart gives you a pretty good idea of the up-front costs normally required: [Home Purchase Expense Chart] As the above chart demonstrates, the dream of home ownership comes with a hefty price tag attached. Depending upon your circumstances, you'll need to cough up a sizable amount. For example, if you need $12,500 in up-front purchase costs, you'd have to put away $2,200 a year (assuming an average annual return of 7%) for five years, or you'd need $6,000 saved over each of two years. Similarly, if your goal is to come up with $30,000 in up-front purchase costs, you'll need to sock away $2,200 a year over ten years. You'd need to save $5,200 a year over a five-year period to purchase your home. Assist Parents During Their Retirement Another mid-term goal may be to assist your parents during their retirement years. There are a couple of things to take into consideration here. One or both of your parents may wind up spending some of their final years in a nursing home. Since the average cost of nursing home care runs around $30,000 a year (and is not covered under most health care programs), many families have to scramble hard to find the money to finance a relative's nursing home stay. Even if your parents are able to remain in their homes, they may be confronted with sizable out-of-pocket expenditures you may need to help cover. These could include: un-reimbursed medical expenses, costs of prescription drugs, home health care assistance, housing, and energy costs. In addition, most of us are normally called upon to help finance burial expenses (which can usually run several thousand dollars) when a loved one dies. Depending upon your parent's circumstances, you may need to make contributions toward their livelihoods during their retirements. Anywhere from a couple of hundred to several thousand dollars a month may be needed to help see them comfortably through retirement. Not knowing what to expect, it's a good idea to start a savings program that you'll have available to help your parents respond to their financial needs. Long-term savings (retirement savings) is a particular area of concern for most of us. Did you know that you are going to need approximately 70% of your pre-retirement income to maintain your lifestyle and standard of living after retirement? So, if your take-home pay was $30,000 a year the last year you were working, you're going to need about $21,000 a year to finance your retirement in the manner in which you are accustomed to living. Consider the following. In 1994, the average retired worker Social Security benefit is only $674 a month or $8,088 a year. The average Social Security benefit for an aged couple who are both receiving benefits in 1994 is $1,140 a month. Even if you earned at the maximum rate each and every year you were in the work force and you worked until you were 65, your Social Security benefit in 1994 would only be $1,147 a month ($13,764 for the year). While annual cost of living increases will obviously help you keep up, such adjustments nudge these figures upwards at a very slow pace. To determine the size of your projected Social Security benefit based upon your current wage earnings history, call the Social Security Administration at 1-800-xxx-xxxx for a free copy of your latest information. If you're close to retirement, this could be helpful in giving you some idea of the size of your upcoming Social Security checks. If you've got several more years left in the work force, you'll probably be surprised at how little you're likely to get in Social Security payments when you get ready to retire. Based upon the example above, after you're subtracted the average and maximum Social Security benefits from the $21,000 in take-home pay you're going to need, you've still got to make up the $7,000 to $13,000 difference. At this juncture, you should be able to rely upon pension earnings, money in retirement accounts, life savings and investments to see you through. You may be in for trouble if you have no such resources upon which to rely or if you have not accumulated sufficient resources to respond. Everyone needs to chart out their retirement earnings progress. Consider the following recommendations regarding the levels of retirement savings people should have amassed at various ages for three different income categories. [Required Savings For Retirement Chart] Because countless numbers of people are way off the mark in the financial planning department, many face the same daunting task of having to play catch-up with their financial futures. It's important, therefore, to begin the retirement savings process as early in life as possible when you have a plethora of options available to you and while time is still on your side.
Step 6 Credit, savings, and investment products of varying shapes and sizes abound. Familiar products may be changing; new products are emerging daily. In this environment, you need to: do your homework, learn more about different offerings, shop around, and find products that are best suited to your unique circumstances, spending patterns, savings and investment objectives, and lifestyle. You also need to look for investment and savings opportunities around you. For example, does your employer offer a pension program or savings options that you might wish to pursue? Do you qualify for an IRA? Even if not, did you realize that you can still sock $2,000 (individual) or $2,250 (couple) a year into an IRA and accrue tax-deferred earnings?
Step 7 After you've developed short-, mid-, and long-term financial goals and devised a plan for achieving them, you need to earmark your savings for different purposes. There are some very practical and compelling reasons for doing this. It's probably not a good idea to throw all of your savings into a common account. You're likely to forget which money is to go to which purposes. If you've commingled your “mad money” with money that has been designated for special life events, you may be tempted to use this money for a variety of unintended purposes. Instead, segment your money; find different places to put it so you won't be tempted to misuse it or create a situation where money for different purposes is confused into a common account. This will help you to keep your financial affairs in order and will allow you to monitor your progress in different savings categories.
Step 8 Many savings and investment products allow you to make automatic deposits into your accounts. This is an ideal way to make regular monthly payments without having to mail in a check or make a deposit. It is also a convenient way of saving, since the money is withdrawn from your account before you even realize it is there. Similarly, employer-provided pension and savings products often allow you to have money withheld from your paycheck and directed towards retirement and other savings accounts. By using such an approach, you routinely reserve money for yourself in the form of retirement savings and investments before you get your hands on your paycheck. This automatic withdrawal off the top of your paycheck is an ideal means of “forced savings.” Another excellent way of streamlining your financial affairs is to utilize direct deposit. This allows you to designate specific recurring payments you may receive (payroll checks, Social Security benefits, pension, annuity, and other retirement checks, government assistance checks, dividends, and other similar payments) to be automatically deposited into your account on a regular basis. By arranging to have payments directly deposited, you receive funds more conveniently and securely. And, if your money is directly deposited into an interest-bearing account or an investment product, your earnings start when your deposit is received, not when you finally make it to your financial institution with your deposit.
Step 9 You also need to be on the lookout for and avoid common pitfalls which may undermine your financial position. Indeed, today's marketplace is a veritable mine field that consumers need to navigate while responding to financial challenges. The landscape is strewn with seemingly reputable persons and organizations which exploit the vulnerabilities of people in financial trouble or the financially unsophisticated. For example, consumers with credit problems have precious few places to turn for responsible, affordable advice. Faced with these circumstances, many debtors are falling prey to credit “repair” agencies and clinics, which promise the moon and provide little, if any, real help in resolving troublesome credit and spending practices and problems. These organizations and their dubious services also siphon limited available resources away from responsible repayment activities. This money would be better spent repaying bills. Still others find themselves in a bankruptcy attorney's office, discussing solutions to credit problems with someone whose advice might be tainted and who has a vested economic interest in promoting bankruptcy as a preferred option. For the vast majority of people, bankruptcy is not a recommended option. Most people with credit problems simply need to back themselves out of their difficulties rather than running away from them through bankruptcy. In addition, few people understand that bankruptcy can effectively ruin a person's financial viability for the rest of one's life. Some people have turned to various types of financial planners for assistance in charting their financial futures. Many consumers have unwittingly fallen prey to incompetent and inexperienced planners who gave them bad advice. Others have relied upon unscrupulous planners who bilked them out of their hard-earned savings. In some cases, even relatively affluent people have been forced into poverty. Many of those fortunate enough to have found someone who was competent have often been duped into purchasing products (on which the planner earns a commission) which may have been inappropriate for their individual circumstances.
Step 10 The key for most people is to start somewhere. There's no better time than the present. Make a commitment to yourself, to your family, to your work colleagues, to your friends and loved ones to start saving money. Take the first step towards your financial future today. What you'll soon realize is that savings can quickly mount up. A modest savings program begun today may turn out to be a God-send later on. You may find that saving money is easier than you expected. While you might choose to start off slow, look for ways to increase your contributions as your financial circumstances allow. For example, since you have become accustomed to living life on your current salary, consider throwing the money from your next salary increase into your savings account. Remember, money in a savings account does not normally evaporate into thin air. It's there to assist you in a variety of endeavors. Savings creates a sense of financial security. Rather than having your life turned upside down by unexpected events, you enjoy the peace of mind in knowing that you're prepared to weather the storm. You can also take comfort in the notion that your hard-earned money is working to help you accomplish your dreams and to extract the fullest possible enjoyment out of life. |