This article was published in the "Martinelli Newspapers" in the February 23rd, 2006 weekly issue of The Westchester Crusader, The Rye Chronicle, The Eastchester Record, The Pelham Sun, The Sound View News Home News & Times, The Mt. Vernon Independent, Harrison Independent
and North Castle News

Life and Money - Financial Planning Basics - Part 1

By Frank Sisco, CPA, PFS

Copyright 2006 Frank Sisco

(Word count = 1,106 including 67 words for About the Author)

Last week's column focused on trust, and its effect on personal finances, as well as offering suggested guidelines in a world where our trust in institutions and people has been shaken.   This week's column covers several of the basics of effective financial planning.  Thanks for your feedback so I can write essays that you consider being pertinent and valuable.

Personal financial planning does not need to be complicated or stressful, especially if you are mindful of certain general principles. As you get more involved in the financial planning process and the related key decisions, either on your own or with the guidance of financial advisors, you should develop a keen understanding of these basic principles that will guide you.  Nine basic principles are as follows.  More will be covered in future columns.  Of course these are general guidelines and all of them may not apply to your own situation.

1. Be personal - As discussed in prior columns, it is essential that you get clear about what are your particular financial circumstances in the context of your relationships, responsibilities, psychology, risk tolerance, past experiences, education and financial knowledge, network, assets and income, etc.  Being honest with yourself, and with your advisor, about what you want and what you can handle are matters to be continually evaluated each step of the way in planning.  Don't take on measures you really do not understand or will not follow as time unfolds.

2. Stay in as much control as possible - Most people want to be in control over their own financial destiny.  Unless you are very wealthy, you should avoid strategies that involve giving away large portions of your assets, as you may later regret the decision and feel vulnerable.  There are ways you can stay in control while setting up provisions to take care of issues of disability or incompetence (e.g., revocable trusts instead of irrevocable trusts).  Some seniors give away assets and then need the money back to handle medical catastrophic expenses.

3.  Be conservative and protective - Why take chances if you don't absolutely need to or if you get stressed out?   Often, in a quest of a higher return on their money, investors place too high a portion of their money in variable investments, like equity mutual funds or stocks, only to find themselves fearful when the prices go down, and they then bail out at a loss.  Also, get and stay sufficiently insured (e.g. health, life, disability, long-term care, home, auto). 

4.  Strive for simplicity - You should be able to understand and explain to someone else in a few short sentences each of your assets and liabilities and the underlying strategies.  Minimize the number of banks, brokers and insurance companies, as well as the number of people on your financial planning team.   Too often, people become prisoners of a recurring avalanche of statements, confirmations, phone calls and emails.

5.  Focus on making more money from your skills - Put more emphasis on boosting your earned income, either through a new and different business, career or job position.  This can have a much bigger positive effect on your financial health than decisions about investments or expenses.

6.  Be frugal with money and time - The old adage "a penny saved is a penny earned" is very appropriate in today's times when consumerism has run amok dragging many of us along with it.  Make a concerted effort to minimize your buying and spending and shift your money and your time into more creative efforts like secondary businesses, physical activities, the arts, and community activities.  Your passions and hobbies could even become sideline incomes.

7.  Prioritize - Because financial planning can become extensive in scope, and even overwhelming, you should first focus on the most important areas no matter how tough.  Examples follow:  If you are over 50 with less than two million dollars in liquid assets, I believe you (and your spouse or partner) probably should get some long-term care insurance, well before trying to tweak your investment portfolio.  If you are not on target to retire by age 72, get help to find ways to increase earned income significantly, including changing a career or business.   If detailed plans are not in place to handle the possibility of death, disability or incompetence, you should get these done in the next few weeks and before you toy with tax strategies that might save you mere hundreds of dollars.

8.  Increase your value to others - Whether you are an employee or self-employed, your income represents compensation for the value that you provide.  Usually, the more value you provide the more the marketplace rewards you.  However, many people hang on too long to an outdated view of the monetary value of their own work.  Here are a few examples: small businessmen in old-fashioned distributorship businesses with excessive margins, and not in tune with the efficiencies and lower prices of Internet commerce.  Or middle-level management white-collar workers pushing pencils and figures around on pages to justify decisions for which they have little input.  Or factory workers toiling at repetitive tasks when robots do the same tasks 3,000 miles away at one-fifth the cost.  Please get it straight.  In today's challenging world, no one owes you a job or a business.  You've got to fight for it by being as forward thinking and creative as possible. Reflect on what you can do to give more value in whatever you do.  The more you give out the more you get back.

9.  Leverage relationships and time - Before you consider acquiring properties or expanding a business by leveraging credit, I suggest that you consider leveraging people and time instead.  Leveraging credit is a pleasant term for the unpleasant experience of taking on more liabilities, which can lead to excessive debt if the related venture does not produce ample cash to pay down the debt.  Furthermore, with debt the leverage factor is finite. Leveraging people, with a much smaller amount of credit, can have a much bigger impact. Using a network of people for customers, clients, advisors, and associates in your business can have an exponential effect.

Additional general principles will be covered in next week's column.

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About the author

Frank Sisco is a CPA and Personal Financial Specialist, and author of several articles about personal finance and issues of life and money.   His firm, Financial Management Corporation, is located in Harrison, NY.  Frank makes his home with his wife and daughter in New Rochelle, NY.  He can be reached at 914.381.3737 or by email at ideasmoney@aol.com, or visit his website at www.LifeAndMoney.com, which includes these columns.