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Guest Blog: You’ve Planned the Financial Work, Now It’s Time to Work the Plan

October 19, 2010

Steven Girard, President, Northstar Financial Companies, Inc.

Guest Blogger Steven Girard has laid out outstanding first steps toward taking control of your finances, your dreams and life goals.  Now, in this final installment, he shows you how to begin the actual work.  Don’t worry…you’re up for it and your dreams are worth it!

In the last few weeks, you have taken the steps to transform your financial life from one based on hope to one based on knowing.  You have defined and declared what you want your life to be and have examined through your Personal Plan of Action where you are now, where you need to get to, and what you have to work with to make it happen.  In these final steps you will move away from analysis and begin to take action.

I want you to think about risk and your tolerance for it.  What can you stomach?  Somewhere between “I need it all to be guaranteed” and “I’m willing to lose it all” is where you’ll find yourself.   A realistic acceptance of your tolerance for risk determines what long-term rate of return you can assume when figuring out what you need to save to reach your goals.  If you are very conservative, figure in a long term return of 4%.  If you feel you could lose it all and not worry, then an 8% long-term rate of return may be feasible.  If you find yourself in the middle, where many of us are, then use 6%.  It is essential to recognize the importance of “long term.”  The last couple years have shown that in a 12 month period the markets can move greater than 50%, but when looked at over a longer period these swings are less dramatic.

The rate-of-return assumption is critical as you begin to create your savings and investment plans.  The savings plan will become the schedule of how much you will save each year and broadly where those savings will go.  The investment plan will become the allocations of actual investments used within each of those savings vehicles.

To create your savings plan take the amount of dollars needed to reach each of the goals that you wrote about in your Personal Plan of Action.

  • List each goal and the amount of money you believe is needed to achieve this goal and the time to reach it.
  • Analyze and qualify your risk tolerance.  We have a questionnaire that helps with this self analysis.
  • List the amount of money that can be set aside for each goal today.
  • Multiply the sum you have today by the average rate of return your risk tolerance suggests by the number of years associated with reaching each goal.  Need a savings calculator?  Visit nstarfinco.com, click on “Research,” then click on” Calculators,”go to Savings and Investments and select the “savings calculator.”
  • The difference between what is needed and what can be created through investments is the amount that you will need to save over the time you allotted to reach your goal.

The question then becomes what will you save that money in?  Write down all the accounts you have access to starting with retirement plans at work like a 401k, then your personal retirement accounts like an IRA or a Roth IRA, then taxable investment accounts and finally things like your savings or Money Market accounts.  Always keep in mind that any account that provides you a tax benefit –  be it deductibility, tax deferred growth or tax free growth –  will have some liquidity restrictions.  That becomes very important as you must match up your various time frames with the best matching account.  For example if you are 40 and have a goal 5 years from now, you would not use your 401k to save for that.  Unless you borrow from the account you would not only pay income tax but a 10% Federal penalty for taking the money before the age of 59 ½.  In a situation like this using a taxable account, like a brokerage or savings account, would be best.

Once you match your goals with your savings vehicles, these accounts will become the vessels you use to systematically accumulate money.  Within each of these accounts you will have access to various investments in which to put your money.  Depending on the account you will have either a limited number of choices or a fairly deep stable of options.  The investment plan will begin to clarify which of those choices you will use.

Using a Financial Planner through this entire process can be very helpful.  If you are the kind of person who likes to do much of the groundwork yourself, when it comes time to choose which investments to use, this would be another time to tap into the knowledge of a trusted Financial Planner.  With thousands of mutual funds, exchange traded funds, stocks and bonds to choose from, effectively researching and managing these accounts can be daunting.  There is more data available on the Web than ever before, but you must be able understand what that data is telling you.

If you decide to proceed on your own, use the various tools to research the options available from things like Yahoo Finance and Morningstar to the fact sheets and prospectuses provided by the Management companies themselves.  You want to be aware of what the product owns, how long the manager has been managing the product, what their performance has been relative to their peers, how much risk they took to achieve those returns, what the year-to-year volatility is, amongst other aspects.

But for all your research I want you to remember that the commitment to consistently saving is equally as important as what you save in.  You want to own the best quality you can, but history has proven out that long term investing works.  You must strive to seek and own quality but be dedicated to adding to our savings and leaving the investments alone, in good times and bad, to do their work.

Once you’ve taken these steps, you now have investment plan.  It should be reviewed every year to determine if any changes need to be made.  Have your goals changed?  Time frames changed?  Tax laws changed?  Have some of your accounts underperformed?  If so you need to determine why before selling it.  Were they down because what they own was down across all investments but within the area they invest in they were better than their peers?

Avoid knee jerk reacting.  At all costs avoid selling a loser to reinvest in something that has shown big gains in the last year.  You would be selling low and buying high, chasing returns and hurting yourself in the end.  Stick with the plan.  If you have a properly diverse portfolio with quality managers then give it the time to do its job.  If you find that during a difficult period you have trouble emotionally handling the paper losses then you need to revisit your tolerance for risk, lower your return expectations and rework the plan from the bottom up.

All of these steps, defining and declaring your desires, creating a Personal Plan of Action, a Net worth Statement and Budget, and implementing a savings and investment plan are all a part of your financial plan. What it produces for you will be directly tied to what you put into it.  A financial plan is not a one and done scenario.  It is an ever evolving journey and one I encourage you to embrace and enjoy.  The results of doing so are very rewarding.  The results are your dreams, your goals and your life.

Due to SEC regulations the ability to leave comments on these Steven Girard’s blog post is prohibited, but he’d loves to hear your thoughts, questions and comments.   Please feel free to email him directly at steve@nstarfinco.com.

Steven B Girard is the President of Northstar Financial Companies, Inc., and the Principal of the  Registered Investment Advisor firm.  With over 18 years of financial planning experience, he believes that financial planning is the key to achieving a life lived well.  He is responsible for the development and institution of Northstar Financial Companies, Inc., its overall philosophy, and financial planning strategies.

Securities offered through Registered Representatives of Cambridge Investment Research, Member FINRA/SIPC. Advisory services offered through Northstar Financial Companies, Inc. a Registered Investment Advisor. NFC and Cambridge are not affiliated.

Northstar Financial Companies, Inc.
1100 E. Hector St. Ste 399,
Conshohocken PA 19428
(800)220-2161

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