Pasadena Financial Planner | 2 - Financial Planning Tools

2 - Financial Planning Tools

10 Personal Financial Planning Steps in the Right Direction

This is one of the “10 Steps in the Right Direction” that make up The Pasadena Financial Planner’s personal financial planning and personal investment management process. For a summary of these ten steps, see Your Family Financial Planning. To find an in depth article for each step, just click the Sitemap link at the top of this page. Also, you can reach us by using the contact form below, and you can subscribe to our Objective Family Financial Planning Blogs by clicking the orange RSS icon to the left. Please enjoy reading this article. Thank you!

Your personal savings rate is the single most important personal financial planning lever that you control directly through your lifetime efforts to earn income and to manage personal expenditures and your family budget.

Economists call the potential of each person to earn money, pay expenses, and still set aside financial savings their “human capital.” For most people, their personal human capital is all they have financially, until they convert some of their human capital into more durable investment assets.

Over their lives, individuals must rely increasingly upon assets to replace earned income. Without the good fortune of receiving substantial inheritance and gifts or winning the lottery, you can invest - only if you save. When saving to fund an investment program, you must live within both your current and future economic means.

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Saving money adequately across your lifetime is the most difficult challenge that you and your family face.

Prior to retirement, you must produce earned income to cover current expenses. Furthermore, you must produce excess income and control your expenditures to allow for adequate personal savings rates. Your personal savings rate will largely determine whether you will build up enough assets for the unknown and uncertain future that lies decades in front of you. In retirement, your cash flow management challenge shifts from saving for retirement to retirement expenditure management. Your retirement investment assets and investment income must be adequate for your retirement expenses, yet you cannot know how long your retirement savings will last.

In relative terms, your lifetime investment management strategy is a piece of cake compared to the challenge of earning, controlling expenses, and savings. Personal savings and cash flow planning are relatively difficult, while optimal lifetime investing is relatively straightforward.

A positive difference between current earned income and household expenditures - or plain old financial savings - usually results from awareness and intentional control of personal consumption.

Expense control allows for personal savings, personal investing, and eventually deferred consumption of investment returns and the investment principal, if necessary. Those who are better at managing their savings plan tend to be much more conscious of their expenditures. They tend to be more aware of the level of their current personal expenses relative to their current earned income. In short, they are better at personal financial planning and family cash flow management.

Personal savings rates increase with conscious planning and better expenditure decision-making. Better expenditure control results from a conscious decision made at the time of each purchase. Across your lifetime, the quality of your personal financial decision making at the point of purchase will determine much of your overall financial success.

Each purchase potentially involves a “need versus desire” decision. Some people do this better than others. Some plan ahead and understand their limitations. Many simply do not.

The Pasadena Financial Planner believes that lifetime financial success is dominated by both the quality of personal consumption decision making and knowledge of one’s current financial limitations. In the long term, many frugal people of modest means will end up more secure financially, when compared to higher earners with less conscious understanding and control of their expenditures.

Most people simply do not have a high enough personal savings rate to meet their retirement savings and other future financial needs.

Your cumulative lifetime labor earnings are variable and uncertain. Your human capital is perishable. Personal income volatility has increased significantly at all income levels in recent decades and people must exercise increased discipline to restrain spending in a fluctuating income environment. The passage of time steadily diminishes your total personal earning potential. Furthermore, illness and injury can randomly slash the value of your potential human capital, while disrupting your life, while permanently altering your best-laid financial finance and savings plans.

The Bureau of Economic Analysis of the U.S. Department of Commerce has tracked the national personal savings rate since 1952, as part of its “National Income and Product Accounts” and “Flow of Funds” reporting. From the 1950s through the 1980s the national national savings rates fluctuated around the 9% to 10% range. In the early 1980s, these rates began to decline. In 2006 and 2007, they have turned slightly negative.

A negative national personal savings rate means that for every dollar someone saves, another American goes more than a dollar into additional debt. This American savings trend (or lack thereof) is very disturbing, since a sustained long term savings rate of 10% to 20% is usually required to save for retirement adequately.

Therefore, the first thing you must get right is your financial savings program. To ensure that your personal savings rate is high enough to build up an adequate asset base, you must understand, track, and project your cash flows. You cannot know the adequacy of your savings rate and your progress toward your investment goals without measuring your current progress and projecting your future cash flows.

Any comprehensive cash flow projection must also include planned future cash requirements for living expenses and special requirements, such as a down payment on a house, college expenses, retirement, charitable giving, and estate bequests. Projected personal financial requirements provide the baseline expenditure plan over which you can overlay various income and investment return scenarios to test the adequacy of your current savings and investment plans.

When you work with The Pasadena Financial Planner, we will use VeriPlan to analyze and project your lifetime financial affairs in comprehensive detail.

VeriPlan is a very sophisticated and customizable computer planning model that I have developed. VeriPlan enables you to view graphical projections of your family’s income, expenses, assets, and debts across your lifetime. Data inputs reflect your particular situation and include all of your significant assets, including cash, bonds, equities, property, real estate, private equities, and business interests.

This comprehensive lifetime financial planning and cash flow modeling process is very important. We measure your current financial circumstances and model your goals and intentions for the future within this framework. To develop your customized lifecycle model, we will work together to gather information, adjust assumptions, and evaluate the effects of different financial decisions across your lifecycle. For more information about VeriPlan, see: About VeriPlan — Personal Finance Software for Your Lifetime.

VeriPlan can vary future expected investment returns by asset class, and it automatically analyzes the details of your taxes, investment expenses, and retirement investment plans. Any and all assumptions can be changed for instant “what-if” testing. The cash flow model’s risk analysis capabilities evaluate how well your future assets would cover normal and extraordinary expenses, if market or personal circumstances were to disrupt your plans. Because excessive and unnecessary investment costs undermine the lifetime investment returns of most people, VeriPlan automatically projects the returns you will waste with such excessive investment fees, if you do not choose more cost-efficient investments.

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See Step 3 — Investment Risk Tolerance >>>

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Start a conversation today — Just scroll down to the contact form below and send a message to the Pasadena Financial Planner

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Larry Russell, Managing Director

MBA — Stanford University, MA — Brandeis University, and BS — M.I.T.

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Lawrence Russell and Company Pasadena, California 91103

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — CONFIDENTIALITY — DILIGENCE — EFFICIENCY — SATISFACTION

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Use this contact form to start a conversation with me today

Serving clients throughout the greater Pasadena, California area including these cities: Alhambra, Altadena, Arcadia, Azusa, Baldwin Hills, Baldwin Park, Burbank, Glendale, La Canada, La Crescenta, La Tuna Canyon, La Verne, Los Feliz, Monrovia, Montrose, North Hollywood, Pasadena, San Gabriel, San Marino, South Pasadena, Sunland, Temple City, and Toluca Lake.

Tags: personal savings rate, saving money, retirement savings, financial planning tools, financial savings

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