A Financial Plan Can Often Help Dreams Come True
A Financial Plan Can
Often Help Dreams Come True
February 26 2006
By HUMBERTO CRUZ
Here is a fun way to look at a financial plan - as a permission slip to follow your dreams.
To the millions of Americans who don't have one, a financial plan is often perceived as an intimidating document filled with jargon and rows of mind-numbing numbers.
But at its most basic level, a financial plan is simply a snapshot of your financial situation and a game plan of how to get where you want to go.
How can anyone make financial decisions intelligently without a plan? And yet, most Americans don't even know where they stand financially, let alone have a plan.
Based on a recent study commissioned by the Consumer Federation of America and the Financial Planning Association, only 48 percent of more than 1,000 American adults surveyed knew even approximately their own "net wealth."
Net wealth, also known as net worth, is the value of everything you own, including home equity, minus everything you owe, such as credit card and other loan balances.
"Knowing your net wealth will help ensure that spending and saving decisions are sensible," such as not taking on car payments that are too high for you, said Stephen Brobeck, executive director of the Consumer Federation.
(Curious where you stand? Check the "personal wealth estimator" on America Saves' website, www.americasaves.org.)
Net wealth, not annual income or the amount of your savings or investments, is the best measure of your financial health because it also will include debt, Brobeck said.
The typical American household has a net wealth of $100,000, he said. About 5 percent have more than $1 million, and 10 percent have "negative" net wealth, meaning they owe more than they own.
These households can begin to put their financial house in order by realizing where they stand and committing to a disciplined program of savings (which includes paying down debt).
But many don't even try because they grossly underestimate how much wealth they could accumulate, even with modest savings.
For example, only 26 percent of Americans in the recent survey thought they could save as much as $200,000 at any point in their lives.
"They simply do not understand the power of making small regular contributions," Brobeck said.
I calculated that, thanks to compound interest, $100 saved each month earning a rate of return of 6 percent a year would grow to more than $100,000 in 30 years.
In contrast to Americans' low expectations, a companion survey of 360 financial planners found that four-fifths of young American adults could accumulate at least $250,000 in net wealth in 30 years.
"Planners know that it is easier for individuals to build personal wealth than they realize" by saving and investing regularly, contributing to workplace retirement plans and building home equity, said James Barnash, chairman of the Financial Planning Association, a membership group of financial professionals.
If you don't believe it, just try it. On middle-income salaries and quitting full-time work in our 50s, my wife, Georgina, and I have accumulated enough net wealth to have a high confidence of meeting our financial goals for the rest of our lives, based on a financial plan that a certified financial planner prepared for us.
Our secret? Just disciplined and systematic savings, from the time we could afford no more than a rented one-bedroom apartment when our daughter was born.
To draw up a financial plan, you identify what you want to do with your life and estimate how much it's going to cost you.
You project future living costs and investment returns and revisit the numbers periodically, at least once a year.
The beauty of a financial plan, whether done by a professional or ourselves, is that it lets us see whether we are on track to meet our goals.
If we are, a financial plan allows us - that's why I use the term permission slip - to feel confident about spending larger sums for truly special things, whether a dream trip or a significant contribution to a chosen charity.
"Sometimes, a plan will let you see dreams you did not dare to dream," said the planner who prepared ours.
A written plan can reduce unnecessary anxiety while also alerting us if we are straying off course.
I won't identify the planner to avoid even the appearance of giving publicity to anyone I have dealings with.
You can look up planners in your area - and receive an answer at no cost to a general question - at the website of the Financial Planning Association, www.fpanet.org/public.
To check a planner's background and for tips on how to choose one, go to the website of the Certified Financial Planner Board of Standards, www.cfp-board.org.
Copyright 2006, Hartford Courant
Primary Press Contact
The Consumer Federation of America
Attn: America Saves Campaign
1620 Eye St NW, Suite 200
Washington, DC 20006
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