1. Drug treatment counselors often tell drug addicts that the first step to overcoming drug addiction is to admit that there is a problem. The same applies to personal financial management. You must admit that you need help with your personal financial management. Admit that there have been poor financial practices in your lifetime. These financial practices have now been ingrained over the years. Without help, these poor financial habits will derail long and short term goals.
The first step should be to write a list of poor financial habits. Items may include lack of a monthly budget, failure to keep records of spending in one place, tendency to make impulse purchases, over-dependence on credit cards, history of late bill payments and absence of a financial plan. Review each item on the list with several individuals who earned your counsel. One such person must be a personal financial advisor.
Develop an action plan to address each item on the list. If excessive use of credit cards is a problem then solutions may include credit card consolidation. If late bill payments are a problem, then a bill payment service like those offered free by banks to its customers can help. It will wean the late bill payer off the old fashion system of envelopes, stamps, and checks. Bill payment software provides reminders, confirmation of payments and flexible scheduling options and real-time updates of account balancing that all help to keep chronic late bill payers on track.
2. When in doubt or need help turn to the experts. There are many personal financial advisors who are able to lend their expertise. Some may charge a fee. In other cases, they may be paid by your job or another financial institution so there may be no costs to you. Much research has to be done before choosing the right financial advisor. Take a look at the planners’ qualifications. Do they have a background in accounting? Are they certified by national and state associations? Do they undergo at least quarterly seminars on tax and financial industry better practices? Do they read the latest periodical on financial planning? Does their training include an ethics course which teaches proper ethical behavior? Also, look at the compensation scheme of your financial planner. Do they get paid based on the performance of your portfolio or are fees set regardless of performance? Are they salaried and paid by the bank or retirement fund management company? Several financial advisors should be interviewed before deciding on the one that is right for you. Perhaps, peers who have a similar financial situation should be consulted. They may already be working with a proven financial advisor. Check references of the financial advisors. They should have a list of past and current clients who can speak to strengths and weaknesses. This is a big decision so tread carefully.
3. Design a financial plan with a team. The team can include a close friend, family members such as a spouse or parent and a financial advisor. Work with your team to define short and long term financial goals. The benefits of the team approach are getting input from multiple sources and drawing of different skills set. Short term goals may include creating a monthly budget for the first time, using credit cards less and waiting at least 2 days before deciding on making non-essential purchases over $300. Long term goals may include setting a retirement savings amount and a retirement date. It may involve developing a more strategic approach to investments. It could chart a more aggressive or conservative approach to investments. The plan must be flexible. It must allow for life’s strange turns and be able to make adjustments as needed. Team members who develop the personal financial management plan may not be in agreement on some issues. This is good because the process allows opposing voices. Ultimately, the client has the final say because it is his life, money, and plan. In this scenario, it is necessary to compile a complete financial picture of the client. Information needs to be gathered on from income sources including the job(s), rental properties, social security estimates, and other investments. The same must be done for expenses. These will include insurance, housing, medical and entertainment expenses. Financial planners usually recommend an emergency fund in case of employment separation, illnesses, and accidents.
4. The client must pay frequent attention to the plan. The financial plan must be a living document. As life throws ‘curve balls’, the plan should be revised. Team members who contributed to the plan can be consulted individually or team discussions can generate new ideas and strong responses to new challenges. Even if there is no critical financial change, the plan should be revisited at least twice per year. Course corrections can be made and investments can be manipulated in response to national and international developments. For example, the plan may have been created during a time of economic boom. A year later there may be a recession. The client may decide to buy cheap stocks or move to more stable investments such as bonds. Even personal changes like one’s age or marital status may elicit adjustments to the financial plan.
5. The client can be better served with a one-stop shop of services. A traditional financial planner may set up shop as a small business. In this role, he is a true middle man. He directs the client to services such as banking, insurance and investments. However, larger institutions own financial products or are affiliated in some way to those products. For example, a bank may offer financial advisors who steer you to banking, mortgage, investments and planning resources. This provides a high level of convenience. The client can reconcile cash flow, invest in stocks, get retirement planning advice and purchase insurance. Caution must be taken in this scenario because in this case, your financial planner is an employee of the company that owns products that are marketed to you. Now is a good time to point out the value of developing a diversified portfolio. If all your eggs are tied up in one institution, then its demise may have a catastrophic impact on your portfolio. The Great Recession of 2009 brought this threat to light when major financial institutions failed. Perpetual vigilance must be ingrained in all personal financial plan. See more visit: The Seniors’ Answer.