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Don't get stuck in financial gridlock. By learning the basics, you can steer your finances onto the road to prosperity.

IT'S TIME FOR YOU TO SHIFT INTO HIGH GEAR. YOU'VE decided that you want to move your financial life forward. Now. all you have to figure out is how to steer yourself in the right direction.

In the last issue of BLACK ENTERPRISE, we shared with you the principles underlying the Black Wealth Initiative. our comprehensive program of financial empowerment. The centerpiece of the initiative is the BE Declaration of Financial Empowerment, or DOFE, a document that lays out your commitment to 10 specific financial objectives. In this article, we will discuss how you can implement two related principles of DOFE: the practice of saving and investing 10% to 15% of your after-tax income and the process of becoming a proactive and informed investor.

Why are these principles so important? For the most part, African Americans continue to play catch-up when it comes to investing. Some do not start investing until they're almost 30, which means that they have lost at least a decade or more in which to accumulate, assets through such investment vehicles as stocks, bonds and mutual funds. According to the financial health survey, the average age at which our respondents joined the ranks of investors was 28.4. And others surveyed decided not to get on the investment highway at all, missing out on the most spectacular bull market in history. The reasons: 55% felt they did not have adequate funds: 36.5% said they lacked information; and 22.6% feared losing money. "Those that haven't invested their money have really missed out on an opportunity to achieve the American Dream--to be independently wealthy," says Ira G. Turpin Jr., an investment advisor with Edward Jones Investments in Bowie, Maryland. "And the longer they wait. the more wealth-building opportunities will pass them by."

How do you get started? To design a solid savings and investment program, you should apply the following guidelines:

* Pay yourself first. It's mandatory that you allocate a portion of your income for savings and investment. In fact, get your employer to autoumatically direct 10% to 15% of your paycheck into a savings, money market or mutual fund account. Make sure that these directed dollars are separate from those placed in your employer's 401(k) or tax-deferred company-sponsored retirement plan.

* Calculate the amount that you need to save. The process begins with establishing specific goals. Outline the reasons why you are saving and investing your money. Do you seek early retirement? Are you trying to finance your child's education? Do you want to buy a home? After figuring out each goal, establish a time frame and dollar amount to achieve it. (The guide in the BE Wealth-Building Kit includes a worksheet that will help you organize such objectives.) It will make it easier for you to hit your targets by categorizing your needs into short-, intermediate- and long-term objectives.

Factor into your plans adequate funds for emergencies and unplanned expenses such as unemployment, catastrophic illness or necessary home repairs. How much should you park in your contingency fund? Three to six months' worth of fixed and variable expenses in checking, money market, savings or short-term certificates of deposit.

* Determine where you need to save and invest. Set up a separate account for each goal and prioritize them according to the time frame you establish. By creating different accounts, you can start diversifying your portfolio while developing a manageable way of monitoring your holdings. Know the difference, however, between marketable and liquid assets. Emergency funds should be liquid, giving you the flexibility to convert an asset into cash without suffering a significant loss. Long-term objectives should be tied to marketable accounts such as mutual funds, since they are subject to movements in either the stock or bond markets and their returns will vary.

* Seek professional help. As you map out your financial goals and identify the vehicles to achieve them, consult a top-flight financial planner. Such an advisor will help you assess your financial position and spending patterns as well as provide guidance on how you can make adjustments. (See "The Right Stuff," May 1999.)

The key to growing your money, however, is the development of a solid investment plan. The average yield on a money market account is 3.5%, which can easily be eaten up by inflation and taxes. For instance, if inflation is a modest 1.5%, then the yield on your savings account has been reduced to a mere 2%--and that's before the tax hit.

Make your money work harder by investing in equities, bonds and/or mutual funds. By doing so, you can take full advantage of the power of compounding--taking a small amount of dollars and watching them multiply exponentially. A quick acid test to figure out how quickly an investment will double is through the application of the Rule of 72. How does it work? Simply, divide the number 72 by the compound annual rate (expressed as a whole number) of your investment. For example, a $10,000 investment with a compound annual rate of 8% would be worth $20,000 in nine years.

Even if you employ the services of an advisor, you should have a working knowledge of the financial markets. "You need to learn everything that you can about the investment environment as well as be sure about your own financial goals," says Gabriele Smith, associate vice president of investments with Morgan Stanley Dean Witter in White Plains, New York. "When investors come to me, I tell them that they should know how much money they have to invest, the amount of time they need to reach their investment goal and how much risk they can tolerate."

The key, says Smith, is time and patience. Don't think that you are going to make a mint on the latest Internet IPO (initial public offering). It will take a methodical investment process to reach your goal--and keep losses to a minimum. To be a proactive and informed investor, do the following:

* Learn the basics. Use every tool to demystify stocks, bonds and other investments. Take courses on investing at your local college and read the financial pages daily. One option: using BE as a resource by reading the monthly Moneywise section, visiting the Investing page of or getting a copy of the BE Wealth-Building Kit (which includes a glossary of commonly used investment terms).

* Identify a specific investment strategy. Such factors as goals, age, time and risk will determine where you park your money. For instance, the closer you get to retirement, the more likely you are to be conservative and income-focused. If you lose money, you'll have less [principal for living expenses and less time to recover. The longer you have until retirement, the more aggressive you want to be because you have time to wait out market cycles.

So what should you do? Structure your portfolio--your mix of assets--based on your goals and time horizon. For example, high-priority objectives should be placed in less risky investments such as Treasury notes, Treasury bills or blue-chip stock and bond mutual funds. Remember that lower risk translates into lower returns and, therefore, it will take more time to reach your objective. With less immediate goals, you can assume more risk--that is, if you've given yourself enough time to realize your objectives and recover from dips in the market.

* Consult experts when necessary. With the advent of online brokerages, many experts advocate "do-it-yourself investing." However, make sure you have the time to make the right moves. And, by all means, don't start off day-trading. That would be like getting behind the wheel of a Formula One race car with a learner's permit.

Investment advisors and brokers can be helpful at times. When dealing with a broker, however, write down your financial goals and have your broker sign a copy of that document. Keep an eye on your monthly brokerage statement and inquire about all fees.

* Determine how you want to allocate your assets. A 1991 study by researchers Gary Brinson, Brian Singer and Gilbert Beebower found that the determining factor in investing came down to asset allocation. In fact, the investment mix accounted for 91.5% of the difference in the returns of the investors they surveyed.

As you plot your mix of investments, figure out how much of your portfolio should be allocated to stocks by subtracting your age from 100%. For example, if you're 35, you should place 65% of your assets in stocks or stockbased mutual funds.

A great primer on how to develop an asset allocation model can be found in the book Getting Started in Stocks by Alvin D. Hall (John Wiley & Sons, $18.95). The four steps outlined in the book are: (1) determining the class of assets--stocks, bonds and cash equivalents; (2) determining the amount of money needed to invest in each class; (3) investing in specific securities based on your goals; and (4) the amount of money to be invested in each security (see chart).

Mutual funds represent one of the best ways to achieve portfolio diversity as well as professional management. Because of this, mutual fund assets have grown to $5 trillion and may grow to $10 trillion over the next few years. But what makes these vehicles so inviting to the lay investor like you is that they offer a range of funds to suit your investment philosophy, sector preference and risk tolerance level.

* Look for a way to invest on the cheap. To avoid paying broker fees, you can buy high-quality equities through direct stock purchase plans (DSPs) or dividend reinvestment plans (DRIPs), in which you buy stocks directly from a public company. You can buy into some DSPs and DRIPs on the Internet ("Direct Investing," August 1999). DSPs usually require a minimum investment of $250, but some companies waive the lump-sum fee if you use their automatic debit process. Through these plans, you can buy stock for as little as $50 a month. You can access DSPs through Netstock Direct at In terms of buying affordable mutual funds, look for no-loads--funds that you can buy directly from the company and avoid upfront sales charges that typically range from 4% to 8%.

Beginning a full-fledged investment program will take discipline and dedication. Learn the basics and place your hard-earned dollars in a range of investments gradually. By doing so, you will stay focused on the road ahead and avoid obstacles that may cause costly accidents.


You can get your copy of the BLACK ENTERPRISE Declaration of Financial Empowerment and the BLACK ENTERPRISE Wealth-Building Kit by calling the toll-free number 877-WEALTHY, or logging on to
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Title Annotation:personal finance
Publication:Black Enterprise
Geographic Code:1USA
Date:Feb 1, 2000
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