Building a Financial Plan
Current Situation

a) Balance Sheet: Assets – Liabilities = Networth: Most brokerages have comprehensive retirement planning tools that will help you quickly calculate your current situation and be able to project your future needs. These calculators can also be found on Quicken.com or any discount broker’s website.

Making Adjustments

b) Setting goals: After completing and accessing your current situation, you can begin setting goals toward reducing your debt and saving for retirement. Quicken.com actually has a debt reduction planner that will help you build a plan to get out of debt faster. By reducing and eliminating debt, you can build your net worth more rapidly. The less debt you have, the more you can invest for the future.

c) Implementing a plan: Using a retirement planer from a source like Quicken, you can complete this evaluation in about ten minutes. It’s easy, quick and comprehensive. By completing these three simple steps, you’ll be on your way to acquiring long-term wealth.

2. Self-discipline: The best advice in the world will not help you if you are not willing to help yourself. Acquiring and keeping long-term wealth requires focus and steadfast discipline. What you need to realize is the steps you take will have a direct impact on your financial future not only now, but many years down the road.

If buying a new Toyota Sequoia is more important to you than paying off a credit card debt, then you have to live with the consequences of that decision. If keeping up with the Jones’ and portraying an image of luxury is more important to you than acquiring financial freedom, you’ll have to accept responsibility for that decision.

Acquiring and maintaining long-term wealth is a process. There is no immediate gratification. But the rewards over time are well beyond the thrills of instant gratification. The satisfaction of knowing you have control over your own life will far outweigh the agony of knowing you don’t.

Once you establish your financial plan, let it be your gyroscope. With a good financial plan and a little self-discipline, you will be well on your way to making your financial dreams a reality.

3. Spend less than you make: This sounds simple enough, but actually it’s the toughest of the “7 Secrets”. The “Keeping Up With the Jones’” philosophy is more prevalent in our society than ever before. What these people fail to realize is this mentality will prevent them from achieving financial independence. Unfortunately, people have been indoctrinated by TV and newspapers with the belief that people who have money live lavish lifestyles. This may be true for the mega rich, but it certainly isn’t rue for the millionaires you don’t know.

Would it shock you if I told you I know people who make $50,000 who have larger net worth’s than people who make $500,000. It’s true. Often, people who make larger incomes like doctors, also have higher debt payments. The more money they make, the more debt they incur. This translates into a negative net worth. On the other hand, the person making $50,000 realizes their income potential is somewhat limited. They live below their means, pay down their mortgages and build toward a positive net worth.

Instant gratification can rob you of an early retirement and a comfortable lifestyle down the road. So the next time you’re tempted to keep up with the Jones’, go visit a retiree trailer park, because that’s where you might end up.

4. Pay yourself first: Every month you sit down and pay bills, or have your bills electronically paid from your checking account. You pay your mortgage, utility bills, car payment, insurance, and credit cards. Are all these payments more important than paying yourself?

Each and every month, get into the habit of paying yourself first. Open a savings account or a mutual fund with the understanding that the deposits in this account are like making a car payment. Under no circumstances is this money to be touched until retirement. If you do, remember you are robbing yourself. Treat the payments to yourself like a bill. Pay it, forget about it, act like it’s not even yours. In 10-20 years, you’ll thank me for this advice.

5. Reduce and eliminate debt: Would you like to have a small taste of financial independence before retirement? Then eliminate all debt. At age 34, I was organizing our filing cabinet and ran across the amortization table for my home. Never seeing the schedule before, I quickly realized what it was and called for my wife who was a banker. In disbelief, I asked her “Am I reading this right?” I quickly became very angry at the fact that I would have to pay $256,313 in interest on a 30-year loan, and I only borrowed $139,900. That means after 30 years, I would end up paying $396,213 for a $139,900 home.

As I began to dissect the calculations event further, I took into account that the average person only lives in a home 13 years before purchasing another. Calculating my equity 13 years our made me even angrier. At the end of 13 years, I would have made $171,600 in payments of which $148,444 was interest. That meant after paying in $171,600, I only had $23,156 in equity and still owed $116,744 on a $139,900 loan. I quickly went to work toward “burning my mortgage”. By age 40, the house was mine, and still today I look at debt as an abomination.

Accountants will argue that you receive a tax deduction on mortgage payments. That is only partly true. If you pay $10,000/year in interest to the mortgage company, and you’re in the 28% tax bracket, you can only deduct $2,800 of the $10,000 that you paid. This means the bank keeps $7,200 and you deduct $2,800. What kind of bargain is that? I would rather pay Uncle Sam the $2,800 and keep the $7,200 for myself.

The bottom line here is, work to eliminate debt. This includes credit cards, lines of credit and car payments. You’ll be able to accumulate wealth a lot quicker if you’re not making someone else rich first.

6. Keep your family intact: Money is one of the leading causes of arguments and disruptions within families. When implementing a financial plan, it’s not uncommon for couples to have conflicting priorities when it comes to money. Divorce experts agree that money is the one thing couples argue about most, followed by children. But, there is a lot of reason to believe that the content of what couples argue about is not as damaging as how they argue.

If acquiring and keeping long-term wealth is really important to you, then involving your spouse in the planning process really makes sense. If one spouse wants to grow wealth and the other is interested in keeping up with the Jones’, you are going to have serious problems. Couples must agree and work toward a mutual goal. Without a mutual agreement, struggles will occur, and sound investment decisions suffer.

The financial impact of divorce on a person’s net worth can be devastating. Not to mention the effects on the family unit and children. Recovering from a divorce when children are involved may take years if it occurs at all. It’s important for couples to agree on a plan, and work together as a team when pursuing financial goals. Sure, to mutually agree, there has to be compromise. But compromise beats total financial ruin hands down.
If you are not married and have accumulated a substantial net worth, then by all means protect yourself with a prenuptial agreement before you tie the knot. It has often been said that love is blind. Well believe me, money is not.

7. Protect your ass-ets: We need to accept the fact that we are indeed a litigious society today. I’ve heard the quote that “it is better to have no money, than t have money and lose it.” Can you imagine working and saving an entire lifetime only to lose it in a lawsuit? The thought is chilling to say the least. Well I hate to tell you, losing your assets due to poor preparation is a reality. It happens everyday. Acquiring wealth is one thing, hanging on to it is another.

Establishing a plan to safeguard your assets from litigation has other benefits too. Proper planning can also protect your assets from estate taxes and creditors down the road. With a trial lawyer around every corner, individuals, property owners, and even car drivers are all at risk from out-of-control jury awards. Integrating the right mix of asset protection with a liability umbrella policy can deflect a tremendous amount of risk from coming your way.

Like a well-diversified investment plan, your approach toward asset protection should follow the same approach. Let’s look at some ways to protect yourself.

a) Umbrella liability policy: If you are ever sued, your homeowners or automobile policy will provide you with some liability coverage. The problem exists when these policies reach their maximum limits of protection. Any amount above and beyond the coverage limits are your responsibility.

A personal umbrella liability policy provides you with an extra layer of protection in the event of a large judgment. If you own rental property, condos or even a sidewalk leading to your front door, an umbrella policy is a must.

b) Family Limited Partnership (FLP): Family Limited Partnerships do basically two things: 1) They can discount the value of a large estate; 2) Provide asset protection from creditors. Make an appointment with an attorney who handles wills, trusts, and estates. The attorney will discuss with you the various options available in a FLP, and be able to decide whether it’s right for you.

c) Tenants by the Entirety: Assets held by you and your spouse as “tenants by the entirety” generally cannot be touched by creditors. Assets titled as “tenants with the right of survivorship” can be tapped. In some states, if one spouse is sued, confiscating half the bank account or half the house is not uncommon.

d) Limited Liability Company (LLC): If you own rental property or a business, strongly consider putting them in an LLC. If an accident occurs at your place of business, or the rental property, an LLC can protect you from a creditor coming after you personally.

When it comes to protecting your hard earned assets, do not attempt to do it yourself. I realize there are software programs and books on the subject, but you’re going up against lawyers who are experts at finding loopholes. Consult an estate tax attorney so that you know for sure that you are protected.