This is a question that was posed to us. It is being published in ‘It’s Up to You’, the monthly publication of The Kobrin Agency Inc.”

August 26, 2003

Ron, my father has always preached the virtue of “planning your work, and working your plan”. Tell us how this relates to investment management. How important is it to have a plan, in terms of an idea of how much wealth you want to accumulate, and what you would like to do with that money?

“Fail to plan, plan to fail” is one of my favorite sayings. I do not recall who originated that phrase. Of course in all aspects in life that theory should be adhered to. The importance of a plan is the setting of and the future achievement of goals. A “road map” is so necessary in the designing of a financial plan. The map need not be formal, nor does it need to be set in stone. How often have you been following a map and a detour comes along ? Of course, detours while traveling occur all the time. Detours happen during financial planning as well. Hence, your financial plan or “road map” needs to have the flexibility for potential adjustment.

It is fairly simple to set up a financial plan. A financial plan would include a budget, combined with future needs such as college funding, retirement , vacations, rates of investment return, inflation and everyday needs of living. The need for detail in planning is different for most people. Let’s use a few examples.

Example 1 – Single male, 25 years old, hopes to eventually get married and have a family.

In this example it would be most important for this person to set specific general goals. One goal would be to contact an insurance professional and determine the need for life insurance and perhaps disability insurance. A 25 year old may figure that insurance is not necessary at this time since there is no one that relies on him for a financial livelihood. Yet, this person needs to recognize that his ability to get life insurance now may be altered years in the future due to a possible change in his health situation. The goal of this person is to eventually have a family, hence the need for securing life insurance would be something to most certainly consider. This person needs to realize that the need for future savings should start now as well.

The ability to save for the future is crucial at this stage of his life for several reasons. One reason would be to instill the habit of savings. Another reason would be to take advantage of the power of compounding of interest. Here is an interesting example. A person saves $200 per month and over the course of time earns a hypothetical annual rate of return of 8.00%. Using this example, the person starts saving at age 25, by the time they are age 70 they would have accumulated $1,054,908. Had the same person started the savings at age 35, by the time they become age 70 they would have accumulated $458,776. The difference of a mere 10 years would be $596,132. The natural power of compounding is incredible. Did you know that legend has it that Albert Einstein said that compounding was the worlds greatest invention?

I mentioned in the first line of this example that the goals would be general goals. At this point in this persons’ life, detailed goals would not be required. He doesn’t yet know his future spouses needs, wealth, earning power , etc. Perhaps this person still lives at home, or is thinking of still starting a career. Yet, this person should start thinking about goals and laying them out in a written informal plan, and as the years go by, and as his needs become more obvious, he can formulate those informal goals into formal structured goals.

Example 2 – Married couple age 40, twin children 2 years old, goal is to retire at age 65.

Of course in this example the need for a formal plan, as compared to an informal plan is so much more important than in example 1. above. The couple needs to consider the possibility of future college funding for the children, perhaps paying for a wedding and other milestone events during the years. At the same time the couple needs to consider having enough money for retirement and perhaps a vacation home. Of course the couple needs to include insurance needs for the both of them, an estate plan, a will and taxable and tax deferred savings vehicles. Often in this situation we will develop a formal budget. In that budget we consider many items such as current salaries, possible future inheritances, college costs, monthly budgets, inflation rates and assumed rates of returns on investments.

On several occasions we have come across clients who had goals of retirement at a specific age, and we brought to their attention that their goals and reality were not in sync with each other. For example, a couple might require annualized investment returns of 15% to achieve their retirement goals. Whereas we would stress to the couple that those are not realistic long term rates of return and that the risk involved in attempting to get such long term returns can be very harmful to capital preservation. In a situation as this, we might suggest that the client postpone retirement for 3 more years, so that their other goals could be achieved.

Again, the importance of planning is vital. I encourage that people write down their goals and revisit them every so often. Goals should be set at a realistic level. The goals should be reviewed on at least an annual basis by a competent professional. This review process will allow for adjustments, changes, explanations and perhaps the addition of some fresh new ideas.

Here are some summary hints in working with a “financial roadmap” .

1. Saving should come naturally. There is nothing as important as saving in a financial plan. If you have trouble saving, you should consider “forced savings”. An example of forced savings would be to set aside a specific percentage of your salary each pay period. You should treat your savings in the same fashion that you treat other mandatory expenses such as, rent, mortgage, car payment, food, etc. There is an excellent book that I often recommend. It is called “The Richest Man In Babylon” , by George S. Clason. It is an incredible story that teaches a life lesson in savings. I recommend that everyone go to the library and read this book (or listen to it on tape or cd).

2. Your “financial roadmap” does not need to be complicated. It can be as simple or as complicated as you desire. If you make a simple plan, and you see it is not working, then consider a more detailed plan. A detailed plan would help you determine why your current plan is not working.

3. Make sure you consider your risk tolerances for investing as well as realistic portfolio returns when planning your future. Make sure you have contingency plans in case your investment returns are less than you had planned for.

4. Make sure you set realistic goals and review those goals at least annually.

5. Write down your plan and your goals. This gives you the ability to see your goals in front of you and by writing them down, you will never change the goals other than by rewriting them.

6. Consult with a financial professional. Try to do this once a year.

7. If you are having trouble saving, write down all of your expenses as they are incurred. Perhaps you will see that rather than going out to dinner three times a week, that perhaps make a nice dinner at home twice a week will give a weekly savings of $100.

Lastly, a “financial roadmap” should not intimidate you. The following would be part of your financial plan:

“I am 43 years old. My wife is 38 years old. I have 3 children, ages 5,8 and 10. My goal is to send the 3 kids to college. My assets are currently worth $XXX. My Net Worth is $XXX. My annual income is $XXX. My annual expenses are $XXX. I expect to earn between 6 to 10 % over the long term on my investments. I project inflation to be X%. I have equity in my house of $XXX and my mortgage is planned to be paid off in 2016. I send 10% of my income upon receipt to an investment account. I participate in my 401K. I have $XXX insurance on myself, and $XXX insurance on my wife. I have taken into consideration that my devotion to my job and perhaps my income level would drop if my spouse passed and that is how I have determined the amount of insurance that my spouse should have and visa versa. My goal is to one day have a vacation home, yet not a requirement…..etc. etc….”

The plan could then be expanded with spreadsheets, allocation schedules, budgets and so forth.

Please feel free to contact us for a free portfolio review. My name is Ronald R. Redfield. Our company’s name is Redfield, Blonsky & Co. Please look at our website at, which has a wealth of accounting, finance, and investment information. Our phone number is 908-276-7226. If you would like to be placed on our email list, please send us an email.