Financial Planning: Introduction

What is this all about?

It's about planning your financial future to achieve your goals. It is not about beating the market, getting a ten-bagger, being rich beyond your wildest dreams. It is certainly not about "buying and holding" or "timing the market". It is about understanding what you want, what it will take to get there, and how to do it in the most efficient way possible. If you want to jump right into the meat of the matter, then go to the page on asset allocation.

Louis gave me a tip on some papers at Thornburg Investments that I found very interesting. They talk about post retirement spending and investing. I particularly like the one on Endowment Spending Policy. It's not about creating an endowment, it's about how you should plan your yearly spending based on your net worth. The paper on a Cash Ladder also gave me some things to think about. If you're retired, or close, then you might enjoy these too.

Are you ready for financial planning?

As my good friend Jon pointed out, a lot of people don't follow the three basic steps to financial security:

  1. always save some of your money (if you always save 10% of your salary then you can retire wealthy)
  2. make the maximum contribution to your 401k
  3. don't carry a balance on any credit card, period

If you're not following these three rules, then you might want to start there. If you have been doing these for years and have some money in the bank, then it may be time to do more planning. Read on.

Let me be clear that I am not a certified financial planner. I make no warranty, guarantee, or other claims that this is correct or accurate. What I want to do is share with you the combined discussions that I have had with so many of my friends about financial planning. I can also tell you that I have been following this advice for years.

A few words about financial software

Financial Engines ( This is simply the absolute best investment advisor I have found. I love it. It will cost you $300 per year, but that is nothing compared to what you should get back from it. The advice is priceless. I particularly like that it recommends specific investments to buy/sell. There are a few downsides. First, it does not handle individual bonds that you hold; bond funds are fine. If you have a significant investment in single bonds then I recommend creating a separate account for them within FE. It's a little messy, but works. Second, be sure to set the basis value for each holding in your taxable account. If you don't then FE assumes the basis value is 0 and you still owe taxes on the entire value. That changes your outcome a lot. FE could make this much easier, but they haven't. If this discussion is too much for you, then maybe FE isn't for you. Third, FE does not give advice on exchange traded funds. ETFs are often the lowest cost and most liquid way to invest in a particular asset class. If you own an ETF, then FE assumes you want to keep what you have. You'll have to look at FE advice and decide if you need to sell some of your ETF to implement their plan.

Second is Sungard's Frontier Allocation Master program - it is fantastic. (It should be, it sells for $500 with a $400 a year support fee.) The free demo has given me some great projections. It allows you to enter your portfolio and your goals. It will do spending projections and give you a cash to spend plan from each account you own. It is very easy to use. Unfortunately it doesn't make specific investment purchase recommendations, nor does it integrate with fund evaluation or monitoring sites. I wish it would at least show me the current Morningstar ratings for each fund it knows about. I also want it to watch for style drift and alert me when a fund manager changes.

Third is a qualified recommendation of Quicken Premium edition. Regular readers will know that I have an entire rant about Quicken on this web site. Quicken let me down big time and to me it appeared to have some very big bugs. Still, it has a very neat retirement planner. It asks all the right questions and gives you a great way to play what-if games. Quicken will cost you $79, once, and the retirement planner is worth that. I warn you that in my opinion Quicken cannot be trusted with paying your bills, but you should buy it for the retirement planner.

Fourth is another tool that shows promise in 2009, but I can't recommend it yet: ESPlanner. It was recommended by Consumer Reports, so I bought it for $200. ESP will do projections of your net worth and cash flow for the rest of your life. ESP will give you a spending plan that tells you how much money to take out of each account each year. It will do a Monte Carlo simulation for you. It's like you get to see the details behind what FE does. ESP does not make recommendations to buy/sell specific funds, so you still need something like FE. When I ran it ESP told me that with my plan I could spend the same amount per year that FE projected - great the two tools agreed! On the downside, ESP is not for the novice. The user interface is confusing to me. The documentation is terrible. Input fields are defined in the documentation with the same phrase that is used in the UI. The output from the plan is displayed in a number of Microsoft Excel spreadsheets and graphs. When I first installed it I used a very simple scenario and immediately ran into two very significant bugs. The company was very nice and very responsive and eventually fixed them. However, if I had run a more complex situation I might not have noticed these and they really threw off the results. I hope this product gets better over time, but for now it is only for the sophisticated investor.

It's now February 2010. I ordered Veriplan years ago. An old friend of mine wrote it and he is a very smart guy. Unfortunately my interests went elsewhere and I never really test drove Veriplan (sorry Larry!).

I would enjoy hearing the thoughts of anyone reading this. I'd love to know if something I say is wrong or doesn't make sense. If you have a better way to get some point across, let me know. I'm willing to publish some of your ideas here too.

Step 1: Set a Goal

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