Prudence would dictate that investors prepare for all possibilities – including the worst.  While the worst is unlikely to happen, it is important to protect assets from the implications of serious change.

Only then will you feel free to take advantage of opportunities, seeking out investments that yield excellent rates of return.

GETTING RID OF THE WASTE

 The first step in making sense of your finances is to stop wasting money – reducing unnecessary expenses.

Assuring your financial future is not simply a matter of generating a lot of income.  You must not waste the money that you earn.

• Minimize your insurance bills

Insure only when the cost of a loss would be devastating.  If the probability of loss were high, insurance would be prohibitively high.  For example, few of us suffer fire losses, but it certainly makes sense to have insurance. 

To stop wasting money on insurance, set aside $3,000 or so to cover small losses.  This will cover minor damage to your home or auto, theft, small medical bills, and raise the deductible on your policies.  This tactic alone may give you the equivalent of the highest rate of return on any investment. 

• Reduce your taxes

Give primary attention to investing in tax-deductible and/or tax-deferred ways – which means building up your retirement accounts – IRAs, Keogh Plans, Seps, 401(k)s, etc.

Because the money you invest through these accounts is tax deductible, the federal government – in effect – contributes about one-third of the funds.  Your account builds up faster, because income taxes are not extracted each year.  You pay tax only when you finally withdraw the funds – usually after retirement.  This, too, is a superb investment deal.

Consider variable annuities for mutual fund investments that are not in retirement accounts.  Shop around for variable annuities with good performance records and modest fees.  As much as 70% of mutual fund investors could probably benefit from the tax-deferred feature of variable annuities. 

GETTING EXPERT ADVICE

 Do not rely on your attorney, accountant, stockbroker, real estate broker or any non-qualified “expert” for financial advice.  If you want to use a financial advisor make sure that he/she: 

• Has at least five years of full-time experience 
• Doesn’t sell the financial products of only one company 
• Understands and respects your goals 
• Gives you Form ADV – that is an SEC form financial advisors are required to give prospective clients.  It spells out how the financial advisor will be compensated for his advice 
• Has many clients in financial circumstances similar to yours 
• Holds a financial designation or college degree in the area of finance.  The designation should require continued education, years of experience, licensing and gives you the ability to check if the designee is a member in good standing  

PROTECT YOURSELF

The next step to bulletproofing your financial future is to protect yourself against calamity.  This is what liability insurance is for.

Be sure to have an umbrella liability policy that covers you for at least $1 million – $2 million in particularly litigious states such as California and New York – over and above the usual $300,000 liability on your homeowner and auto liability policies.  Typical cost for such peace of mind:  $100 to $500 a year, in most states.

If you own rental properties – an apartment house, a condominium or a second home that you lease out – be sure to get a commercial liability policy (also for at least $1 million) for the rental property.  Your personal liability umbrella will not cover you if someone is injured or killed on the property.

RULES BY WHICH TO INVEST

 Now, with your protection in place, you are ready to look for the best investment opportunities.  Simple rules to follow: 

• Keep a rainy-day fund 

At least three months’ worth of expenses in a money market account.

If investing in stocks and bonds keeps you awake at night, get out of the market.  It is too easy to panic at the wrong time if these investments just feel too risky for you. 

• Buy and hold your securities investments 

Do not try to time the market.  Do not panic during downturns if you have done your homework on your investment choices. 

• Don’t act on casual advice 

Do not look over the shoulder of the next guy for investment ideas.  He is no more likely to be right than you are.  Like fishermen telling tales, other investors are far more likely to tell you of their successes than of their failures. 

• Diversify your holdings to reduce risk 

Do not allow yourself to have too many eggs in one basket.  Each type of investment has advantages, and disadvantages.  A balance of investments will provide peace of mind and a better return. 

• Have realistic goals 

Do not expect extraordinary wealth to be achieved through investments.  Unwarranted expectations encourage people to jump in and out of investments. 

• Start saving early 

Unleash the power of compounding interest.  Encourage your children to save early, too. 

No matter how much research you or a financial advisor might perform, an investment might do very poorly for reasons that you could not anticipate or control.  This cause might be a political event, technological development, lawsuit, threat or act of war.  The only protection is diversification – not putting all or most of your eggs in one basket. 

Variable annuities are investments and are subject to market risk, investment risk, and possible loss of principal.  Variable annuities may have higher internal fees associated with the product.  Please read the prospectus carefully before investing in variable annuities. 

Mutual fund shares are not deposits or obligations of, or guaranteed by any depository institution.  The value of the shares will fluctuate so that when redeemed, shares or units may be worth more or less than the original cost.  Past performance does not guarantee future results.  Please read and understand the prospectus for a mutual fund before investing.

 Source:  Financial Planning Consultants, Inc.