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Resources
College
Savings at
WiredScholar
College
savings
calculator from
Bloomberg
How much do I need to save to reach a
million dollars at armchairmillionaire
Retirement calculators from
Fidelity
Calculators from
javacalc.com
Net
Worth
Budget your monthly expenses at CNN Money
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Wealth
Plan
The roadmap to wealth (" 5-Z Wealth
Plan") is the daily application in a ritualistic and habit forming
manner of both saving and investing disciplines over time.
PRESENT
Assess
your current situation first, by taking a financial inventory.
1. NET
WORTH
This is a statement of your assets minus liabilities.
This is a true measure of your wealth.
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Net
Worth Statement
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ASSETS
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Value
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Securities
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Stocks
and Stock Funds
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Bond
and Bond Funds
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Cash
accounts, money market funds, bank CD's
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Cash
value of Annuities
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Cash
value of insurance policies
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College
Savings Plan
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Real
Estate
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Primary
residence (market value)
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Vacation/Second
home
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Investment
Real Estate
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Private
Business
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Stock,
Partnership interests, etc.
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Miscellaneous
payments due to you
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Personal
Property
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Art
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Collectibles
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Jewelry
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Automobiles
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TOTAL
ASSETS
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DEBT
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Mortgage(s)
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Home-Equity
loans
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Credit-card
balances
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Auto
or other installment loans
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Student
loans
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Personal/Bank
loans
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Other
loans
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TOTAL
DEBT
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NET
WORTH = TOTAL ASSETS - TOTAL DEBT
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2.
INCOME AND EXPENSES
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INCOME
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$
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Salary&Earned
Income
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Child
Support&Alimony
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Pension
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Social
Security
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Rental
Income
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Dividends,
Interest, Capital Gains
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Other
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Total
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HOUSING
& LOANS
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$
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Mortgage/Rent
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Credit
Card
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Auto
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Personal
Loan
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Other
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Total
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TAXES
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$
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Federal
Income Taxes
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State
Income Taxes
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Local
and Property Taxes
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FICA
Withholding
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Medicare
Withholding
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Total
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INSURANCE
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$
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Life
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Health
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Disability
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Auto
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Homeowner
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Other
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Total
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SAVING
AND INVESTMENT
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$
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401(k)
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IRA
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Taxable
account
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College
savings
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Other
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Total
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LIVING
EXPENSES
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$
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Food
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Clothing
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Electricity,
Gas for home
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Water
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Telephone
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Cable/Internet
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Gas
for car
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Personal
Care
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Doctors,
Dentists, Rx Drugs
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Entertainment,
Hobbies
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Newspaper,
Books, Magazines
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Day
Care
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Club
Dues
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Tuition
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Other
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Total
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3.
STATE OF YOUR ESTATE
One of the most important things you can do for your
family is to create a
comprehensive well-drafted estate plan with 6 essential documents:
- Will
( specifies your wishes on how to distribute assets to loved ones and charities
upon death).
- Revocable
Living Trust (arrangement you make for management and distribution of
your property).
- Durable
Power of
Attorney (give powers to another person to act on your behalf).
- Living
Will (lays down your wishes regarding use of life-sustaining measures
in case of a terminal illness).
- Health
Care Power of Attorney (authorize another person to make medicals
decisons in case you become incapacitated).
- Beneficiary
designation forms for all IRA's, 401(k)'s and other retirement
accounts, insurance policies and annuities.
Keep these and other documents such as
an emergency medical form for your children
and an emergency information sheet in a safe place.
4.
EMERGENCY CASH RESERVE
Keep aside in a bank or in money market, funds for
approx. 6 months of living
expenses. This is your rainy-day fund.
5. ADEQUATE PROTECTION
Provide for adequate auto, home, personal
liability insurance for you,
your family and business, life insurance and
disability protection.
ANNUAL
SAVINGS
Increase
income by working hard for a raise, spouse starts working part-time etc.
Increase savings by reducing both spending and what you owe (debts, tax).
Check the different Saving
ideas.
YEARS
TO GOAL
The
more time you have before you reach your goal, the better you are since
compounding can have effect (see next section). Start investing early for
retirement, college savings etc.
The importance of starting early is easily seen in the table below.
"Early" contributes
$2000 into an IRA earning 10% from age 28 until age 38. He contributes a
total of $22,000. "Late" contributes $2000 into an IRA earning
10% from age 39 until age 65. He contributes a total of $54,000.
When
they retire at age 65, Early's portfolio has grown to $485,887 while
Late's portfolio has grown to only $242,200. Early's portfolio is more
than Late by $243,687 although Early saved less than half as much as Late.
RATE
OF RETURN
The rate of return is determined by your
Portfolio
Asset Allocation, which is which is
how to slice up your portfolio in different asset classes
(stock funds, bond funds etc.) to diversify and maximize return for a
given level of risk. An example is given below.
See Portfolio Design
for more
details.
Portfolio Asset allocation is determined by:
a) Risk level:
Your risk level is
determined by how close you are to your goal (lower the risk when you get
older and closer to retirement, your son is 16 and planning to attend
college at 18 calls for lower risk) but also by your career (you work in
the IT field and have a huge exposure to technology even if you have not
invested in tech company shares).
The aim
is to have the highest rate of return for a given risk level.
High returns with longer time periods makes money grow by compounding
(see table below).
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#
of years
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5%
APR
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9%
APR
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20%
APR
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5
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$1,276
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$1,539.00
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2488
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10
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$1,629
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$2,367.00
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6192
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15
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$2,079
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$3,642.00
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38000
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b)
Best funds:
Best
funds have to be selected for each asset class.
See Portfolio
design for
more details.
c)
Rebalance:
The portfolio needs to be rebalanced every year to maintain the asset
allocation commensurate with your risk level (generally more conservative
as you approach your goal). See Fund
Strategies for
more details.
FUTURE
The future is your investment goal.
The goals may vary depending on what stage of life you are in (single,
married, mid-career, approaching retirement, retired).
Examples are saving for college or retirement.
Calculators
such as the Fidelity
Retirement Income Planner can help you plan for that goal.
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5-Z-Wealth Plan