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The B.E. guide to easy, no-nonsense financial planning.

Yes, it's the "B" word ... and nobody - not even the President or the Congress - likes to deal with it But the reality is that good financial planning always starts with a sound budget. Although it took months of debate for Congress to finally pass President Clinton's economic plan, your financial plan should only take several hours to complete.

Making every dollar count is especially critical for individuals caught in the "triple squeeze generation" - baby boomers. For many of us, the new challenge is trying to keep our retirement nest egg from being squeezed out by the college costs of our children and the long-term care of our aging parents.

That's why a well-thought-out financial plan must be a permanent item on every success-minded professional's agenda. A clearly defined plan delineates your financial goals and determines how you achieve them. Just think of it as a guide to a better life - sort of your very own personal finance treasure map.

Financial planning isn't as mysterious as people make it out to be. A plan outlines where you want to be. That means determining your net worth, deciding on your financial goals and developing a savings and investment program. The power of compound interest means that small sums invested now will add up to larger amounts later. The sooner you get started, the easier reaching those goals will be.

Some people have only a vague sense of what they want to see happen. They'll say, "I want to build my net worth," or "I want to buy a house," or "I want to save for my child's education."

But these aren't goals. They don't have a time frame and a dollar amount. Instead, you should ask yourself: How many years before my child starts college? Will she go to a community college, a state school or private institution? How much will it cost? You must quantify your goals. That's the only way to make sure you accomplish them.

Your financial objectives may be short-, intermediate or long-term, says Cheryl Broussard, a principal of Broussard/Douglas Investment Management Corp. in Oakland, and author of The Black Woman's Guide to Financial Independence (Hyde Park Publishing, Oakland, $19.95).

Short-term goals tend to be more immediate and consumption-oriented - a new car, new furniture, a new roof or aluminum siding for your home. intermediate goals are usually more expensive items or events that require more planning and saving, such as the purchase of a home, start-up capital for a business, or college tuition and expenses for your children. Long-term goals include saving for a comfortable retirement, seeing to it that your aging parents have adequate health-care coverage, and even providing for your loved ones after your death. But these things won't happen without consistent regular contributions to your savings and investment portfolio.

UNDERSTAND YOUR NET WORTH

Once you better understand your needs, start the planning process by calculating your net worth. A net-worth statement is a "snapshot" of your current financial statement status. Your total assets minus your liabilities is your net worth.

To calculate your net worth, list all your assets and add up their value. Include possessions that can be sold or otherwise converted into cash: your savings and checking account balances, stocks, bonds, certificates of deposit (CDs), shares in mutual funds, the cash value of your life insurance policy, home equity, pension plans, employee stock ownership or profit-sharing plans, IRAs, Keoghs, 401(k) plans and investment-grade collectibles such as art or rare coins. It isn't necessary to list clothing, unless, for instance, you own a fur coat.

Next, add up your liabilities. These should include: the mortgage on your home or other property, balances on any car, college, home improvement or other personal loans; the amount owed on all your credit cards, and the overdraft line on your checking account.

Obviously, the higher your net worth, the better. If you are a young person just getting established out of college, your net worth may be relatively low. However, if you are older or more established, a low net worth or negative one should raise a red flag. Normally, that indicates excessive debt and lack of an adequate cash reserve. Before any income is channeled into investments, pay off any large balances on high-interest debt.

Another meaningful figure for investment purposes is capital at work, which represents the money you actually use to finance your goals.

Once you have a clear picture of your finances, make sure safeguards are in place to preserve your possessions. Do you have adequate life insurance? Disability insurance? Do you and your spouse have wills? If not, you may want to add these items to your list of goals.

CUT OUT THE FAT IN YOUR EVERYDAY SPENDING

Once you've calculated your net worth, the next step is to develop a plan to curtail spending and boost personal savings. To do this, you must begin monitoring your monthly cash flow. "Clients often walk in for the first time claiming that they don't have any money to invest," says Broussard. "The question is, where is it going? The only way to find out is to track every single expenditure you make - every magazine, every candy bar, every can of soda.

Broussard advises her clients to carry a notebook and write everything down. You'd be surprised how those quarters you plunk in the soda machine add up. Purchases made by check or credit card will be easier to track, since they leave a paper trail. By keeping tabs for a few months, you'll get an accurate idea of what you need to live on and pinpoint areas where you can save. Armed with an idea of what you're spending, you can work out a monthly budget

DEVELOP A LIVABLE HOUSEHOLD BUDGET

Your ledger should have two columns - one for sources of income, such as monthly take-home pay, investment income, income from property rental and any other money you receive. The other column is for monthly expenses.

Divide your expenses into two categories: fixed and discretionary. Your fixed expenses include: mortgage or rent, property taxes, utilities, homeowner's expenses, car and life insurance, groceries, clothing and dry-cleaning costs, public transportation, gas and maintenance for your car, phone bill, household help, tax liability, credit card and bank payments, and miscellaneous necessary expenses. (Some bills fluctuate; others you pay annually. Make a yearly estimate and divide by 12.)

Discretionary expenses cover restaurant meals, movies, videos, baby-sitters, cab fares, rental cars, jewelry, vacations, sporting goods, tapes or compact discs, health club memberships, toys for the kids and charitable contributions.

Take subtotals of each expense category, then calculate a grand total. Subtract this amount from your total monthly income. If you have little or nothing left over, or if you're spending more than you're taking in and letting credit cards make up the difference, serious belt-tightening is in order. While fixed expenses are just that - fixed - fat can be trimmed from the discretionary category. Eat out twice a month instead of twice a week; rent two videos, not four. Beware of too much austerity, warns Broussard. "Recreation is important. Just make sure it doesn't eat up more than 5% to 10% of your net monthly income."

LOOK FOR EASY WAYS TO SAVE

It's equally important not to tighten your budget so severely that your new lifestyle is impossible to stick with. Look for painless ways to save - start a car pool or buy bulk items on sale. Leave your credit and ATM cards at home. When you deposit your paycheck, withdraw exactly what you need for the week and spend only that. Each month, compare projected expenses against actual expenses, it's equally important to check your progress on a quarterly and annual basis. And above all, stick with your budget

If this approach to saving requires more willpower than you can muster, try cutting from the other direction. Begin channeling a set amount from each paycheck into savings. That automatically reduces your spending by decreasing the amount you have to work with. Many employers offer automatic payroll deduction, where a set amount of money from each check is deposited directly into your savings account - you never see it so you can't spend it. Whichever savings method you choose, make it a regular part of your budget. Think of it as a bill you pay to yourself every month. In the long run, $10 a mont - very month - is better than $50 every once in a while.

Once you have paid off a school loan or a car note, funnel the extra cash into savings and investments, rather than increasing your standard of living. Do the same with a substantial raise or bonus. If you earn commissions from your job, save some of your income from the high-earning years to balance out those years when you aren't making as much.

Don't forget your emergency fund. The rule is at least three months' net income. Since it's unwise to park so much cash in a low-interest passbook account, try liquid vehicles, such as a money-market account, instead.

Finally, be sure that you are taking all of the allowable deductions on your

tax returns. There's no point in paying Uncle Sam any more than you are required to by law. (See "12 Tax Moves You Should Make Now," this issue.)

BUILD UP YOUR NEST EGG WITH

A FLEXIBLE INVESTMENT STRATEGY

A portion of your monthly savings should be ear-marked for investments. Your financial goals and tolerance for risk will determine the amount and your investment strategy. Once the time frame is established, you'll know what rate of return you'll need to get you there. Typically, stocks and Treasury bonds are used to finance long-term goals, while CDs are better suited for immediate needs.

The first investment you make should be in your own education, since mistakes can cost a bundle. Many local colleges offer investment seminars. And for around 50 cents you can buy one of the best investment tools around - your daily paper's business section. Investment and personal finance newsletters are costly, but you can read them for free at the library. Books worth noting: The Complete Guide to Investment Opportunities (Free Press, Now York, N.Y., $29.95) and The Wall Street Journal Guide to Understanding Money and Markets (Access Press, New York, N.Y., $13.95).

Remember that educating yourself is an ongoing process. You need to stay on top of economic and business trends that are likely to affect your investments. Consider starting an investment club with friends or co-workers. Write the National Association of Investors Corporations, 1515 East Eleven Mile Road, Royal Oak, MI 48067 for more information.

The transition from spender to saver to investor takes discipline, but the rewards are worth it. You'll be the captain of your financial ship with your bills paid, your goals met and your family protected. Peace of mind may be the most priceless treasure of all.
COPYRIGHT 1993 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:1993 Money Management Guide; Black Enterprise
Author:McIntosh, Claire
Publication:Black Enterprise
Date:Oct 1, 1993
Words:1818
Previous Article:Finally! a budget.
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