Financial Planning in Times of Uncertainty

High unemployment, out of control government spending, homes worth less than the mortgages on them, volatile equity markets, European debt problems, a slowing Chinese economy. These are once again the times that try men's souls or maybe their wallets. Since nobody knows when the bluebird of happiness will c--p all over us, it is best to heed the motto of the boy scouts and be prepared. Depending on our age, being prepared means different things. Perhaps the best and simplest advice is to prepare for the worst. Basically this means saving for that rainy day that all of us will inevitably face and to not live beyond our means.

When we finish our education and embark into the real world, many of us will have incurred tens of thousands of dollars in student loans. In addition, we will need a place to live that must be furnished and a means of transportation for our commute to work. The tradeoffs that we make between what we can afford and what we desire can have a significant impact on our financial health. Incurring debts that we cannot adequately cover with our current income (Financial Obligation Ratio), would leave us without any meaningful means to save. Furthermore, by maintaining outstanding balances on our credit cards to finance our current consumption on items such as entertainment, gourmet meals, expensive vacations, etc., we exacerbate our financial difficulties. As we progress in our careers, we see a natural progression in our income until we reach a plateau, a period in which our income may not even keep pace with inflation, the deterioration in the purchasing power of the dollar. Depending upon our education and professional accomplishments, this income stagnation may occur at any stage in our careers. Hopefully, for most of us this will occur as we approach retirement and not in our earlier years. Another potential obstacle to achieving our own individual definition of financial security is serious illness that may leave us with large medical bills, inability to work, or even in our demise. Given the current state of the American economy, all but the most Pollyannaish among us have good reason to be concerned about our finances.

At the risk of being repetitive, the most important consideration in financial planning, irrespective of your stage in life and income level, is to live within your means, i.e., a budget. This means minimizing your fixed costs, those for which you are obligated to pay for regardless of how much you use them. Examples of fixed costs are car payments, rent or mortgage payments, insurance premiums, etc. Younger people, anticipating professional and income progression, can better afford such costs than those approaching retirement that might not have enough retirement income to cover their fixed financial obligations. Financial obligations whose cost vary with usage are called variable costs. Examples of such costs are food, utilities, gasoline, etc. The last costs are discretionary costs which are expenditures that are not necessary but are used to reward ourselves. While designer dresses, European sports cars, gourmet meals may be necessities of the elite, for the rest of us mere mortals these are discretionary if not frivolous expenditures.

The most basic protection that we can have is insurance. In addition to mandatory insurance for our automobiles, health insurance protects us from the burden of bills that can arise from a serious illness, disability insurance provides a source of income to cover our financial obligations in event that we are unable to work, long term care insurance covers expenses should we be unable to care for ourselves, and life insurance provides money to support those that depend on us in the event of our demise. Prior to getting married most younger people have no responsibilities for the well being of others. As they get married and have children that changes as their financial obligations and responsibilities increase. Life insurance is a means of providing protection for their families. As they get older consideration should be given to long term care insurance. It should be noted that as one grows older it becomes more expensive to obtain age based insurance such as life and long term care insurance. Those with a preexisting medical condition may be denied access to affordable insurance coverage if they can get coverage at all.

All of us need a safety net, a source of readily available funds that can be used to cover unforeseen expenses. This can range from the need to pay unexpected repair bills to cover our living expenses during times of unemployment. Due to factors such as globalization and the scarcity of well paying jobs, many of us will at least once in our careers find ourselves without a job.

While Social Security currently represents a reliable source of income to today's retirees, whether it will be able to do so for future generations is a subject of intense public debate. Irrespective of its viability, Social Security benefits are insufficient to provide the income necessary to support the retirement goals of many of us. With fewer companies providing defined benefit retirement programs, it is incumbent on each of us to provide for ourselves. This means saving for our retirement through vehicles such as IRA's and 401K's. The sooner we start our contributions, the more likely it is that we will achieve our retirement goals.


SOURCE: http://www.expertclick.com/NewsReleaseWire/Financial_Planning_in_Times_of_Uncertainty,201138005.aspx