You can't afford not to plan now for your secure future.

Imagine reporting to your board of directors at the annual meeting. One of the directors asks, "Are we on target to meet budget?" You reply, "We're not really using a budget. We know approximately where we're spending our money. There's no need to worry, because there's still money in the bank account."

Someone else asks about your growth target. You respond, "We didn't really set one. However, we're confident that we'll show some growth even if we're not sure of the amount." Finally, the chair requests your plans for the future. You answer, "There are some ideas that we've discussed in staff meetings. Most of them are in our heads."

An incredible scenario? Probably. You'd never run your association without a budget plan. But many people handle their personal finances in exactly that way--without a plan. People find many excuses for not planning their personal finances: "We don't have the time." "I can't afford to." "We'll get around to it." "I don't know where to begin." "I don't know how."

The fact is, a family is no less an economic entity than an association. And just as developing your association's financial plan takes an investment of time, so too does planning your personal financial goals and the path to them.

Most executives would like to be financially independent by the time they retire. Achieving that goal requires careful planning in six key areas of personal finance: cash management, tax planning, insurance or risk management, investments, retirement planning, and estate planning.

Cash management

Before you can make any financial planning decisions, you first need to know how you are spending your money. Set aside some time to prepare a spending plan, or a budget (see sidebar, "A Spending Plan"). We call it a spending plan because that is the objective. You cannot make choices until you know how you spend your money. Remember, if your outgo exceeds your income, your upkeep will be your downfall.

A Spending Plan

To develop your spending plan, use your checkbook register and credit card statements for the previous 12 months. Estimate your cash spending. After compiling all the figures, divide each total by 12 to get a monthly figure.

Annual income

Gross income $

Dividends and interest Child support/alimony Pension, Social Security Other

Total $

Annual taxes

Income tax (federal) $

Income tax (state) Social Security (7.65%) Property taxes

Total $

Annual living expenses (Fixed)

Child support/alimony $

Car payment Loan payment Insurance--car Insurance--disability Insurance--health Insurance--homeowner Insurance--liability Insurance--life Mortgage/rent

Total $ (Discretionary)

Charity $

Clothing Doctors/medication Domestic help Education Entertainment

(recreation, vacation) Food Gifts Household maintenance Interest expense Laundry/dry cleaning Meals out Personal care Professional fees Retirement Transportation Utilities

Total $

Your spending plan should set specific goals for discretionary living expenses, such as how much you plan to spend on clothing and entertainment --and how much you plan to save--each month.

It's advisable to have an emergency fund--enough money to cover three to six months of living expenses if you lost your job or were unable to work for a period. It is wise to keep this money in a liquid investment, such as a money market savings account, a money market mutual fund, certificates of deposit, or U.S. Treasury bills.

It is a good idea to commit yourself to saving a set amount of your earnings every month. Have this amount automatically deducted from your paycheck and deposited in a separate bank account. Consider dedicating a portion of every raise to your regular savings plan. In addition, try these suggestions: * Use debt wisely or avoid it. Place your credit cards in your safe deposit box if you cannot control their use. * Buy a 6-to-12-month supply of nonperishable items when they are on sale. That's a better risk-free return on your money than any bank account. * Differentiate between a shopping trip and a spending trip. On a shopping trip, avoid impulse spending by going to the stores with a set amount of money and no credit cards or checkbook. On a spending trip, go to purchase something you have decided to buy.

After finishing your spending plan, prepare a statement of net worth, also known as a balance sheet (see sidebar, "Net Worth Scorecard"). Your net worth is the difference between what you own and what you owe. Compile this statement as of the same date every year. Using December 31 is easiest because everyone with whom you do financial business sends you a year-end statement.

Net Worth Scorecard

What you own

Cash $

Checking accounts Savings accounts Money market funds Life insurance (cash value) Stocks Bonds Mutual funds Real estate (investment) Other investments Real estate

(personal home) Vested pension benefits Other assets 

Total assets $

What you owe

Credit cards balance $

Mortgages Home equity loans Auto loans Other loans

  Total liabilities           $
  Net worth (assets minus liabilities)   $

Tax planning

Next, prepare a tax projection. To reduce your tax bill, you first need to project what your taxes will be. When you include state and local taxes, you may find yourself in a combined tax bracket of 28 percent to 40 percent. That means if you can reduce your taxable income or increase your deductions, you will be paying yourself 28 cents to 40 cents on the dollar.

Try to avoid getting a significant tax refund--more than $750. If you're owed a refund, it usually means you didn't claim enough exemptions, so your employer withheld too much money from your paycheck. A refund is an interest-free loan from you to Uncle Sam. If you calculate the correct number of exemptions on a Form W-4 at the beginning of the year, you'll avoid overpaying taxes.

But having too little withheld from your paycheck isn't a good strategy either. To avoid penalties and interest, taxes withheld from your paychecks by December 31 must equal 100 percent of the tax you paid the previous year, or 90 percent of the tax you owe for the current tax year. If you will be in a higher tax bracket this year than next, try to pay all estimated state taxes and deductions, such as charitable contributions and medical expenses, by December 31.

If you have investments that are worth less than you paid for them, and you think they will continue to decline in value, consider selling them before December 31. You can deduct up to $3,000 of net losses in one year. If your net loss is more than $3,000, the excess can be carried over to the next year.

Personal interest is no longer deductible, but interest on a home mortgage is fully deductible as an itemized deduction. Interest on a home equity loan up to $100,000 is also deductible. Consider paying off your personal and consumer debts with a home equity loan. (But if you do, it's advisable to make payments on the loan equal to the amount you were paying on your other debts.)

If your association offers a retirement plan to which you can voluntarily contribute tax-deductible dollars (a 401 (k), 403(b), or Section 457 plan), consider contributing as much as you can afford. Contributions to these plans reduce your taxable income and grow tax-deferred.

Similarly, if your company offers a flexible spending plan (Section 125 Plan), you can use it for unreimbursed health care expenses and other costs, such as dependent care. This will further reduce your taxable income.

In addition to contributing to your association's retirement plan, consider including tax-deferred and tax-free investments, such as annuities and municipal bonds, in your personal investment portfolio.

Consider asking your association to set up a bonus plan to pay your individual life and disability insurance premiums. Doing this is equivalent to paying the premiums with pretax dollars.

Finally, if you omitted deductions in previous years, you may file an amended return (Form 1040X) for up to three years.

Risk management

You face four major risks in your financial life: premature death, disability, illness, and property damage. The best way to protect yourself against these hazards is to buy insurance.

Premature death. Who depends on your income, and how much of that income would your dependents need if you died? By owning life insurance, you create an estate that goes to your beneficiaries at your death.

Like many employees, you may have some form of group life insurance coverage through your employer. For additional coverage or to extend your coverage beyond age 65, you may wish to consider buying a personal life insurance policy.

There are two kinds of life insurance: term and permanent. The advantage of a permanent policy (also called whole life or universal life) is its permanent coverage. Permanent policies have cash values that grow on a tax-deferred basis. They also provide locked-in premiums, unlike term policies for which premiums increase as you grow older.

But if you need insurance only for, say, 15 years or less, a term policy is less expensive. Consult a financial planner or an insurance agent to determine what your insurance needs are. It's advisable to check the insurance company's credit rating before making a purchase.

Disability. More people worry about insuring their lives than insuring against disability. Yet the risk of becoming disabled before age 65 is much greater than the risk of dying prematurely.

An individual disability insurance policy will usually cover 65 percent to 70 percent of your salary. If you are already covered by a group policy, however, an insurance company will only sell you an individual policy for the difference between your group coverage and 65 percent to 70 percent of salary. If you already have a personal policy and later obtain group coverage, you should be able to collect from both policies.

Some disability policies will only pay benefits if you are so disabled you cannot work at all. The best policies specify they will pay out if you are unable to perform the duties of your occupation.

An individual policy should be noncancelable, guaranteed renewable, and should pay benefits to age 65 or for life. Choosing a waiting period of three to six months before benefits are payable will reduce your premiums. (Your emergency fund should be sufficient to cover your living expenses during this waiting period.)

Illness. Most employees are covered by a group health insurance policy at work. Your risk is usually limited to deductibles and copayments. Typical plans provide major medical coverage up to $1 million.

Property damage. Your home is almost certainly the most valuable thing you own. Home insurance should cover 100 percent of the cost of rebuilding your home. It isn't necessary to insure for your home's full market value, but if you improve your home by adding an extension or a deck, you should increase your insurance coverage. It's a good idea to review your home coverage annually to be sure it is still adequate.

The personal property in your house should also be covered for its replacement cost. Consider doing a video inventory of every room in your house, so you have a record of the contents in case of a total loss. Additional coverage for valuables such as jewelry, silver, and art is recommended.

You can lower the cost of home insurance by increasing the deductible and by paying your premiums annually. An "umbrella" liability policy provides additional protection against accidents and liability claims. This type of policy supplements the ordinary liability coverage in your home or car policy. A $1 million policy costs about $150-$200 a year. A $1 million judgment against you in an accident case is unlikely but not unimaginable. The risk may be low, but so is the cost of the policy.

Investments

There are only two places to invest your money: in debt-based assets and in equity-based assets. A debt-based asset is a loan. Bank savings accounts and certificates of deposit, annuities purchased from insurance companies, municipal and corporate bonds, and U.S. Government Treasury bills are all debt-based assets.

The major advantage of a debt-based asset is its fixed return. The interest rate is usually fixed for a specified time period. At the end of the period, you get your principal back. The disadvantage of a fixed return is that it may not keep up with inflation.

Equity-based assets represent ownership. Common stock in a corporation, real estate, natural resources such as oil and timber, and precious metals like gold are all equity-based assets. So is owning your own business.

The major advantage of an equity-based asset is its variable return. It can appreciate in value and outpace inflation. But it can also decrease in value. If this happens when you need to sell, you suffer a loss.

The key to successful, long-term investing is diversification--spreading your risk among the different classes of assets. The balance depends on your objectives (are you primarily interested in safety, income, or growth?) and your risk tolerance (are you an aggressive, moderate, or conservative investor?). When asked where to invest money, the financier J.P. Morgan responded, "That depends on whether you want to eat better or sleep better."

If you are a conservative investor, a good balance would be to have 75 percent to 80 percent of your portfolio in debt-based assets. For an aggressive investor, a balanced portfolio would be 75 percent to 80 percent equity-based. Younger investors, who have more time to achieve their financial goals, can afford to be more aggressive.

For most people, mutual funds or variable annuities are better investments than individual company stocks because they offer professional management, diversification, and flexibility. A good source of information about mutual funds is Mutual Fund Values, by Morningstar, [phone].

Consider investing on a regular, monthly basis--even when the market is down. Successful investors have patience and discipline. Asset Allocation--Balancing Financial Risk, written by Roger Gibson and published by Dow-Jones Irwin, is recommended reading for those who want to learn more about investing.

Retirement planning

For purposes of this article, retirement is the time when you have accumulated enough personal capital and vested pension value to choose to work as much, or as little, as you want to. Retirement income can come from three sources: an employer retirement plan, Social Security, and a personal portfolio of accumulated capital.

Many people assume a pension from their employer is all they'll need to support themselves in retirement. But with employers cutting back on retirement benefits and Congress placing restrictions on both contribution and benefit levels, this is no longer a wise assumption. To get an idea what you're likely to receive from your association's retirement plan, ask your personel or human resources department for your current vested value and a projection of retirement income.

Social Security currently provides a retirement benefit equal to at most 30 percent of your earnings. If you earn more than $53,400, the percentage will be lower. In the future, the Social Security system will make people wait longer to collect benefits by extending the retirement age beyond the current 65. To request your earnings and benefit statement, write to Social Security Administration, P.O. Box 20, Wilkes-Barre, PA 18703.

The bottom line: Whether you like it or not, you are being expected to take more responsibility for providing your retirement income. Your personal portfolio will play an increasingly important part in helping you achieve a financially secure retirement.

To estimate your retirement income needs, take a look at your spending plan, which tells you what your current living expenses are. Make adjustments for expenses that will stop at retirement, such as the cost of business clothing and commuting to work, and for new expenses that will begin at retirement, such as travel, entertainment, and health care.

The sidebar "How Much Will You Need?" shows you how to estimate the effect of inflation on your future living costs. This calculation tells you how much income you will need at retirement to maintain your current standard of living. The size of this number will probably frighten you.

How Much Will You Need?

This chart shows you how to estimate the effect of inflation on your retirement spending power. For example, you think you will need $2,000 a month (in current dollars) to cover your living expenses when you retire in 20 years, and you estimate inflation will be 8 percent a year. Multiplying $2,000 by the inflation factor of 4.7 gives you $9,400. That is the monthly income you will need in 20 years to cover living expenses of $2,000 a month in today's dollars.

Years             Inflation rate per year
to          4%    5%    6%    7%    8%
retirement
5           1.2   1.3   1.3   1.4   1.5
10          1.5   1.6   1.8   2.0   2.2
15          1.8   2.1   2.4   2.8   3.2
20          2.2   2.7   3.2   3.9   4.7
25          2.7   3.4   4.3   5.4   6.8
30          3.2   4.3   5.7   7.6   10.1

Now add up all your sources of retirement income. Estimate income taxes and subtract them from the total. Subtract your estimated retirement living expenses from your estimated after-tax retirement income. The difference is the amount of income you will need to generate from investments.

A good rule of thumb is to figure you will need $15,000-$16,000 of accumulated capital to generate $1,000 of after-tax income when you retire.

Estate planning

It has been said that only the estates of lazy people have large tax liabilities. The goals of estate planning are to minimize both the tax liability of your estate and the time you and your loved ones have to deal with the courts. An estate of $600,000 or less passes to your heirs free of federal estate tax. But before you breathe a sigh of relief, add up the value of your home, pension plans, investments, and life insurance policies. You'll find it doesn't take long to exceed $600,000.

On estates worth more than that amount, the federal tax rate starts at 37 percent and goes up to 55 percent. State laws governing the taxing of estates vary but may kick in at less than $600,000.

If you are married, transfer of your entire estate to your spouse is exempt from federal estate tax. The tax problem comes up on the death of your spouse. Both your estate and that of your spouse can be structured so that each can take advantage of the $600,000 exemption. But as the ad on television warns, do not try this at home. Consult an attorney who specializes in estate planning.

How many of you have made a will? The correct answer is all of you. If you have not personally written a will, you have one anyway in the intestate law of your state. If you die without a will, a court will decide who gets your assets and who will be the guardian(s) of your minor children. A will is your personal letter to the court, telling it how you want these issues settled after your death.

Probate is the legal process of validating your will and implementing its instructions. It can take a year or more, but with careful planning you can minimize the assets tied up in probate. Again, it's advisable to seek advice from an attorney.

Other documents you should consider signing are

* Durable power of attorney. This is a grant of authority by you to a trusted person, enabling him or her to act on your behalf if you become incapacitated or incompetent.

* Living will. This states the medical care you wish to receive in a terminal illness.

* Medical power of attorney. This is a durable power of attorney in which you grant authority to a trusted person to make medical decisions for you if you are unable to make them yourself.

Time invested in planning for your long-term financial health will reap you long-term dividends. When you're tempted not to bother, remember this: You can't afford not to.

Robert S. Hausman, a certified public accountant, is a financial planner and instructor with Financial Seminars Institute, Inc. Larry E. Paul is a certified financial planner and president of Financial Seminars Institute, Inc., Bethesda, Maryland.