Financial Planning 
from ChildGuide.com

Introduction
"MONEY" – Just the word inspires such a large range of responses. Some people cringe thinking they will never be able to understand its complexities. For others, the mere subject of money rocks the foundations of an otherwise stable relationship. Money can incite some to spend with childlike giddiness while provoking others to save with a vengeance, reminiscent of Scrooge. If your hands have begun to moisten just reading these last few lines or you are merely trying to get a handle on your finances, you are in the right place.

Money, while providing the necessities of life, can also help you reach any financial goal: a new bike for your child, a used car, a new house, or a college education. You must determine how risk adverse you are to accomplish your goal -- what type of road you will use? Here is an example:

Safe Sara, Midge and Rocky are all traveling from City A to City B. The road they choose is the tool they use to reach City B. Ms. Safe Sara takes the four-lane highway that is quite out of the way but extremely safe. She arrives in four hours. Midge takes a country road with some interesting scenery and some blind turns. She arrives in three hours. Rocky takes the speedway, racing toward her destination, exhilarated and sometimes on the edge of disaster. She arrives in one hour. Each individual reaches makes it to City B, taking the road that was most comfortable he.

This scenario is what financial planning is about: Determining how risk adverse you are in conjunction with how long you have to accomplish your goal.

First, in order to save money for a goal or simply to get yourself financial organized, you need to determine how much money is coming into your household and how much is walking out the front door or sneaking out through the cracks. That means you need a budget! By using some comprehensive budgeting software such as "Quicken Basic", you get a clear picture of your financial situation. It may not be pretty, but at least you know where you stand. And you are now in a position to clean up the mess and save toward future necessities (college, retirement, health care) or perhaps some not-so-future luxuries (new car, new stereo, new computer). Your budget will help you determine where you need to cut back or minimize spending. If you decide there is no money left to put toward a specific goal, think about these facts:

• If you buy a cup of coffee for $2.75 three times a week, after one year, you will have spent $429.00 for beverages.
• If you set aside $.50 in spare change every day, in one year, you will have $182.50 extra in the bank.
• If you buy your lunch every day for $6.50 instead of brown bagging it, you will have consumed whopping $1,690 at the end one year.
• If you took that money you did not have (the summation of the three things above equals $2301), invested it at 8%, added $50.00 a month for thirty years (retirement), you would have over $100,000 dollars! (And would have only set aside $18,000, out-of-pocket).

Think of all the ways you needlessly spend money, and you will realize you do have some money to put toward a goal. Your goal can be extremely specific or fairly general: A $28,000 car or enough for retirement.

As you read above, you must also have a road or investment tool to reach your goal. Before you can determine that investment tool, you must determine your risk tolerance and the time you have to reach your goal. This step in the process is similar to the example above: Safe Sara, Midge, and Rocky chose their roads based on time and security. These factors will play a large part in determining how you should invest your money. First, decide how long you have to reach your goal: 18 years for your newborn’s college education; 5 years for a down payment on a home, or 30 years until you retire. This time factor and your risk tolerance will help you determine what types of investment vehicles you should use and in what percentages.

If you will worry daily about whether you are earning enough money or you panic when you learn the value of your investment has gone down, you have a low risk tolerance. If you can stay fairly relaxed as the value of your investment fluctuates, you have a medium risk tolerance. If you can stomach huge gains with possible huge losses, you have a high risk tolerance. With a timeline, knowledge of your personality traits, and a little financial education, you can become a savvy investor.

Here are some general definitions that you should know before beginning your investment planning:

Savings Accounts: These accounts are very poor investment tools. They do not earn very much interest, however they are very safe and your money is very liquid. Risk tolerance: low; time factor: short term.

Money Market Accounts. These accounts usually earn slightly higher interest than a savings account, but still allow easy access to your money. Some financial institutions require an initial deposit of $1,000 or more and limit the number of withdrawals or transfers you can make during a given period of time.

Certificates of Deposit (CDs, but not the musical kind): This kind of investment is offered by banking institutions. It is similar to savings accounts in which you collect interest on the money you leave in the bank. However, with CDs, you agree to keep your money invested for a fixed period of time, say 3 months to 3 years. By promising to leave your investment, you received a higher interest rate than a savings account. However, if you need to take your money out before the fixed time period, you will have to pay a penalty. Also, the FDIC generally insures CDs up to $100,000. Risk tolerance: low; time factor: short term

Bonds: When the federal government, a company or a local government wants to raise money for a large project, they often sell bonds. When you buy these bonds you are actually loaning money to these large institutions and in doing so you become a creditor (just like Visa financing your holiday spending). You allow the institution to use your money for a fixed period of time from a few months to decades. Though bonds often have a lower rate of return, they are extremely safe. After the term of the bond expires, you receive your original investment plus a guaranteed interest rate. There are many types of bonds, but savings bonds and Treasury bills (T-bills) are probably the kind you have heard of. The U.S. government issues them. Though T-bills are insured, many bonds are not. Find out before you buy. Risk Tolerance: low; Time Factor: short or long term.

Stock: When you own a share of stock you actually own a percentage of an individual company. If Bill Gates is the largest shareholder in Microsoft, he owns the most shares of stock. When a company goes public, its stock is traded on a national stock exchange such as the New York Stock Exchange (NYSE) or the NASDAQ. A public stock is very liquid, meaning you can sell it at any time, but the value is never guaranteed. Potentially, you could lose all of your money; however, a risk of such loss is quite minimal. In recent history, there has not been a single 10-year rolling period in which stocks, as a whole, have lost money. Risk Tolerance: Medium to High; Time Factor: Long term.

Mutual Funds: A mutual fund is actually a huge melting pot of assets owned by many people. It is stirred (invested) by a financial professional. The manager invests the pool of money in different assets including stocks, bonds, and cash. The percentage invested in each type of asset depends on the goal and focus of the fund. For example, growth funds are largely invested in stocks with small percentages in bonds and cash. Some funds focus on certain industries such as technology funds. The advantage of mutual funds is that when you buy a share of a fund, you invest your money in many investment tools, meaning that your money is diversified; however, remember that your fund is only as profitable as its manager is skilled. If you invest in a fund, ask not only about the fund’s history of performance but also about the manager’s experience and track record. Furthermore, you must find out about fees. When you buy a fund from an advisor, if it is a "no load" fund, you pay no commission. Therefore, if you invest $1,000; $1,000 shows up on your first statement. Other funds are load funds in which the advisor takes a percentage of your investment, either when you invest (front-end load) or when you pull your money out before a certain period of time (rear-end load). For the first time investor, no load funds are the best way to go. Risk tolerance: medium; Time Factor: short and long term.

Now that you have a general investing foundation, you can make some educated decisions about you investment vehicles.

General saving: A car, a house, a stereo, Christmas presents - putting aside a little every month will make these dreams come true. And even if you have no grand goals, no pot of gold at the end of your saving rainbow, at least consider these points:

1. Have an emergency fund. Not to be the cloud that rains on your parade, emergencies are bound to happen. If you are living paycheck to paycheck, such an emergency can wash your dreams away and destroy your credit rating.
2. Don’t be house poor. If you are dumping every spare dime you have into your mortgage or are considering buying a house for more than you planned to spend – Don’t! You will be much happier if you have a nice little house first. You will be able to fix the dishwasher if it breaks and go to a movie now and then. At the same time, you will be happily building equity in your little house to put toward your big house in the future.
3. Pay off your credit cards. That coat you bought on sale with your credit card for $300.00 will have cost you $500.00 by the time you pay it off. Just say to yourself: pay them off, pay them off, pay them off. Chant this phrase to yourself as you cut up all but one of your credit cards. See www.cc-bc.com for a great site on relieving credit card debt.
4. If you are too unsure of yourself to invest in the stock market, have fun learning about it. Give yourself $10,000 pretend dollars and buy $2,000 worth of stock in 5 companies. Choose companies you know such as McDonalds, Kraft, Microsoft, Starbucks, and AOL. Then plot their stock prices every day or just every week. Without any risk, you will learn how the market rises and falls. After a month, see how much you’ve made or lost. This should give you the security to jump into the market. Remember that the mutual funds are a good way to start!
5. Read The Nine Steps to Financial Freedom by Suze Orman.

Saving for College: If you have a newborn, you have about 17 years to save for her college education. Considering that the average tuition for one year of college in 17 years will be around $100,000. Planning ahead is critical. Though this may seem daunting, imagine how impossible it will seem if you wait to get started. Here are some tips:

1. Save money in your name: though there are tax advantages to saving in your child’s name, financial aid grants are based first on your children’s savings. Depending on the amount saved, your child may not qualify for financial aid.
2. Stocks or growth mutual funds are the best investment vehicle for at least the first ten years. These investments have the highest yield, and though they tend to be higher risk investments, remember there has not been a single 10-year rolling period in which the stock market has lost money in several decades.
3. The following books are very useful: From Cradle to College by Neale Godfrey and Making The Most Of Your Money by Jane Bryant Quinn.
4. Look at the college related websites listed under the resources section of this article.
5. While saving for your child’s college education, remember to save for your retirement also. In the long run, your child can borrow money for school, however you will have a hard time borrowing for your living expenses at 65.

Saving for Retirement: You have heard the new slogan: Don’t depend on Social Security. This should definitely become your mantra. Unless you can live on $15,000 a year, 30 years from now, you better start saving now. The good news is you probably have anywhere from 15 to 45 years to save. This is an advantage. Tips for retirement saving:

1. Do not let the investments listed above be your only tool for preparing for retirement. Utilize your company’s 401(k) plan, purchase an insurance policy, pay off your house, stay with a company long enough to become vested in their pension plan (up to 7 years).
2. Have a certain amount of money automatically deducted from your paycheck and placed in a mutual fund, or in the 401(k). What you do not see, you will not spend.
3. Determine when you will retire. If you will retire more than 15 years from now, throw almost everything you are saving into the stock market and DO NOT TOUCH IT!!! If you have at least 15 years, the stock market is always your best bet for the first ten. Then you can move a higher percentage of your portfolio into more liquid, less risky investments.

Finally, the key to saving for any goal is to be proud of yourself. Open your statements every month and pat yourself on the back. Even if you still have huge bills coming in, you can at least smile and know that you are digging yourself out of that hole and saving for a rainy day.

College Sites

1. www.collegeillinois.com - interesting option for saving for a future public education in Illinois at today’s tuition prices.
2. www.scholarship.com
3. www.educaid.com

Investing and money management sites

1. www.moneycentral.msn.com
2. www.quicken.com -highly recommended
3. www.stockmaster.com
4. www.pathfinder.com/money - the tool section at this site allows you to check the performance history of mutual funds and the best credit card interest rates.
5. www.university.smartmoney.com/departments/ investing101
6. www.cc-bc.com - a non-profit consumer education and financial counseling agency, that serves individuals and families in financial distress. An outstanding site to help you relieve built-up debt.

Funds

1. www.vanguard.com
2. www.troweprice.com
3. www.fidelity.com
4. www.schwab.com
5. www.invesco.com

This article has been provided by www.childguide.com, your local network for family friendly solutions. At Childguide, you will find hundreds of topics relating to parenting in your neighborhood including time-saving tools to balance work, life, home and fun! Visit the Chicagoland or National version of this web site today! New York, LA and San Francisco are coming soon…