Bay
Financial Newsletter
THE
GOLDEN RULES OF FINANCIAL PLANNING
No matter how basic or how sophisticated you are as an investor, there
are certain rules of thumb or guidelines which seem to be timeless.
Wise investors take heed:
1. Diversify. Never put all your financial eggs in one basket.
(But if you do, watch them very carefully.)
2. Seek a return OF principal before seeking a return ON principal.
In other words put safety of principal and certainty of income before
gain on capital. This is another way of saying, "If it looks too good
to be true, it probably is." Don't be greedy or you may lose it all.
3. Cover your assets before taking greater risk. Protect the
ground you've gained. Never go to the next level of financial risk
before protecting the gains you've already made. This is what personal
and business risk management is all about. So be sure you've managed
the risk in (a) property (such as fire, storm, loss, and theft), (b)
income (such as death, accident, or sickness), and (c) liability.
4. No risk, no reward. The greatest risk of all is doing nothing!
Money is made and taxes are saved by taking prudent risk.
5. Put yourself on your own payroll - at the top! Budget for
savings and investment just as you budget for paying your bills.
6. Capitalize on the miracle of the "forgotten" automatic investment.
If at all possible, put money aside on a regular automatic basis BEFORE
you see it and consider it spendable. For example, use salary savings
accounts, 401(k) plans, and similar devices that help you compound
money year after year. And create automatic mechanisms to make money
with the money you've made. For instance, most investment vehicles
provide automatic dividend reinvestment plans.
7. Constantly increase the rate of your investing. It is both
easier and safer to gradually increase the percentage of the amount
you are saving and investing than to increase investment return by
taking greater risk. A small increase in the input of a regular investment
is often equal to or greater than a dramatic increase in the rate
of return on a new investment.
8. Increase your expenditures at a lower rate than you increase
your income. Controlling inefficient spending and debt acquisition
is the lowest risk way to increase the dollars you have available
for investment. Eliminating monetary waste and uncontrolled cash flow
are essential to financial success.
9. Always maintain a measure of liquidity. Liquidity is the
ability to turn assets back into cash quickly with little or no loss.
It is essential to meet an emergency or take better advantage of a
financial opportunity. Insufficient liquidity often translates into
a forced (and then a fire) sale or a lost opportunity.
10. Remember that assets and income maintain their utility only
to the extent they maintain their purchasing power. This means
that you must consider the ability of any investment to keep pace
with or exceed the rate of inflation.
11. Think of your financial security only in terms of "the bottom
line". It's not what you earn that counts; it's what you get to
keep. Don't judge the health of your wealth at the top of the line.
Be sure to consider what's left after (a) taxes and (b) slippage.
Consider that state and federal taxes and other "slippage" reduce
bottom line spendable income considerably.
12. Always use the lowest risk solution that meets your investment
need. Risk should increase progressively as each level of need
is satisfied. For example, one of the first and most primary financial
needs is for an emergency fund. After this "ground level" need has
been met, you can afford to take greater risk in seeing a greater
return.
13. When planning for retirement or for a child's education, assume
a lower than hoped for rate of return on investments, a higher than
anticipated level of inflation and cost of living (or education),
and put less reliance on what social security or a company pension
will provide. In other words instead of projecting with just one
set of assumptions and thus putting unrealistic reliance on figures
that are mathematically accurate but that are grounded on dubious
long-range assumptions, do your planning on a "worst case", "best
case", and "probable case" basis.
AS
ALWAYS, FEEL FREE TO CALL TO DISCUSS THESE OR OTHER ISSUES OF IMPORTANCE
TO YOU!
