Creating a financial roadmap

Somewhere in between the emotion of fear that investors felt just a few years ago when the Dow Jones Industrial Average hovered around 6,500 and now as now as that same index sets records almost on a daily basis, there exists a time where investors can act in a rational manner, a place like now.

At this time, it is critical to make an intelligent evaluation of your financial picture, unencumbered by emotion, to determine the right course of action. Some steps you might want to take, not in any particular order, include.

Redefine your financial objectives. This should be done before and after you take an evaluation of your current financial position. A look before may include “perhaps we will have to work until age sixty-five rather than age sixty-two” or “perhaps we will not be able to pay off our home in twelve years, but rather it may take fifteen.” Redefining or reevaluating your financial objectives prior to determining your current position allows one to weigh the merits of that redefinition.

It also may help you to look at alternatives as your financial picture emerges. For example, your initial thought that you might need to work three more years may end up being modified to “perhaps we will need to work parttime from age sixty-two until sixty-five.” Regardless, if you redefine your financial goals up front it will help you to recognize the sacrifice necessary to accomplish those goals.

Calculate the value of all of your current assets. As one would do prior to making a journey, before you can determine the best route to take to reach your destination, you first have to determine your starting point. Many individuals can readily sum up their bank accounts, Certificates of Deposit, Individual Retirement Accounts, Brokerage Accounts, Stock Holdings, and Employer Sponsored Plans such as their 401(k), 403(b) or Deferred Compensation, but do not have a handle on their Defined Benefit Plan (monthly income that some employers provide to their retirees), a projection of Social Security Benefits, the cash value of life insurance policies or an approximation of the current value of their home, all of which can be sources of income.

Calculate your liabilities, including how much do you owe on revolving debt such as credit cards as well as non-revolving debt such as your mortgage or automobile loan. Furthermore, perhaps you are paying on a student loan from one of your children. Although theoretically this is not your debt, if you are paying it, it should be considered as yours for this purpose.

There it is, a simple balance sheet. Assets minus liabilities equals your net worth, your starting point. No, we are not considering the value of your car or household items as they will most likely depreciate down to little or no value. However, if you have accumulated any such items as investments with an intention of ultimately selling, then go ahead and estimate their value and add them to your personal balance sheet.

Determine your monthly living expenses. Be liberal and include vacations, entertainment, car repairs, home improvement and holiday gifts. Once having done so, establish a budget and then keep track of your expenses over the next three months to get a better handle on your actual expenses. Be sure to enter everything. If you’re like us, you are spending way too much on day-to-day expenses such as going out to eat rather than eating home.

This begs the question, which is more important going out to dinner several times a week or reaching your goals. Quality of life versus achieving your financial objectives is a personal decision and one that you will most likely wrestle with constantly. We do.

Estimate the amount of money you will need to save on a monthly basic to achieve your goals assuming an annual return of no more than five percent. Don’t go out on a limb. Be conservative in your growth projections and most likely, from these levels in the stock market, you will be happily surprised rather than disappointed in the ultimate outcome. That said, we suggest using an inflation rate of three percent or so to help you take into consideration the negative impact of inflation.

There are a number of websites that you can go to, put in the current value of your investments, enter an amount that you are saving monthly and a rate of return on that investment. The website will provide you with a balance at your prescribed time.

Finally, with all of this information at hand, take another look at your financial objectives. Perhaps they will need to be modified or perhaps you will need to modify some of the discretionary items you buy. That’s up to you, but at least you will now have your roadmap to get you where you want to go. The only question is how long it will take to get there.

Either way, enjoy the ride! After all, we only go around once in life.

Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call (518) 279-1044.