FINANCE FUTURE SHOCKPROOF

Call it PFP, CFP, TFP-whatever you like. But what sounds like a bunch of swimming pool chemicals is in fact personal financial planning. It’s been floating around smart money circles for years, rapidly gaining a reputation as the only way to beat the Eighties crunch of high taxation and inflation.

An uptown relative of the good old family budget (and formerly only for uptown incomes), personal financial planning is now a service offered by banks, brokerage firms, insurance agencies and certified and non-certified financial specialists. It involves taking a detailed financial inventory of your current situation, including net worth and cash-flow information, your long-term needs-even your temperament-and then recommending a budget that includes an often-complex plan of diversified savings and investments to meet as many financial goals as possible.

All planners use detailed worksheets that you fill out, a computer program and (it is hoped) some common sense. It’s possible to get a good computer-printed plan with a human recommendation for free. Some large brokerage firms, such as Paine-Webber and Prudential-Bache, charge nothing for these services in hopes that you will then invest with them (and pay their brokers’ commissions). You are, however, under no obligation when you ask to have a plan done for you, although you should expect to get a few telephone calls from your friendly broker.

There are about 69 Certified Financial Planners (CFP) in Dallas who have been trained by the College of Financial Planning in Denver. They have met certain educational requirements and are presumed to subscribe to an ethical code. They will charge you for their plan either a flat fee or one based on a percentage of your portfolio. You would then implement their recommendations yourself through your own broker, lawyer, or accountant. C’FPs claim to be unbiased in their recommendations because they have no sales commissions to gain, although some CFPs are able to place your investments for you, as well (and earn a commission).

Insurance agents are often financial planners or have access to computers that will do it. Their results frequently stress heavy insurance and annuity purchases.

Computer software packages such as “Home Accountant,” “Personal Accounting,” and “Dollars and Sense” are good tools for taking the financial inventory, but you’ve got to be certain your information is good and that you’re willing to continue to update your input over time. Programs such as “Tax Manager,” “Tax Strategist,” “Personal Investor,” and “The Dow Jones Market Analyzer” are good for evaluating various investment options or financial changes. You need to be sophisticated enough to know what your range of options is, too, in order to take full advantage of your personal computer for planning.

Although some CFP’s might give a more detailed plan, most of us would do quite well enough with a free assessment done by a brokerage firm. (Some firms, like Merrill Lynch, do charge. Be sure to ask first.)

All planners ask for extensive information. It’s the first step in a long process.

To determine cash flow, you will need to know where all your money goes. How much do you spend on food, shelter, clothing, entertainment, insurance, taxes, savings? Where does that elusive $200 go every month?

For net worth analysis, you will also need to know all your outstanding debts and loans (mortgage, car, credit cards, student) as well as everything you own (house, retirement plans, insurance policies, cars, boats, jewelry, stocks, bonds, all bank accounts).

For most of us, developing this inventory will take several months of monitoring our expenses and a dull weekend poring over our earthly possessions as well as dusty policies, bank statements and old employee benefit manuals. This discipline is a valuable first step, since it gets you thinking seriously about your money. It also foreshadows the way in which true believers in PFP handle their money: deliberately and productively, with an eye toward both the present and the future.

Goal setting and priority setting are all up to you. Do you want to buy a house soon? Send a kid to college? Retire at 55? Pay less taxes? Of course, we’d all like to answer “yes” to all of the above.

A good plan, however, can help you use your money in a way that maximizes all your objectives, while a good planner can help you make the necessary trade-offs (say, between retiring at 55 and sending your kids to school). At this point, the computer starts chugging merrily along, preparing your plan.

With or without software, there are guidelines for setting your financial priorities at different points in your life and a number of strategies for reaching these goals.



LIFE-CYCLE THEORIES of financial planning are a useful first step in thinking about your needs at a given time. Most experts suggest plans like these:

In your 20s: Invest in yourself. Save regularly as a habit-building process, to cushion your real-world entry and to accumulate capital for investment. Borrow for your education or to start your own business. Take risks-you have time to earn back your losses.

In your 30s: Invest in home-making. Save regularly for a down payment on a house or car, for furnishings, for having children, and to have the capital for investing. Borrow for your house, car, on-going business. Take risks, if you can afford to, on new businesses and small companies’ stocks.

In your 40s:Invest in equity-builders and for long-term growth. Save regularly and invest for the long term. Consider trust funds for your kids, or retirement plans for yourself. Take advantage of growth-oriented stocks and mutual funds. Borrow for leveraged investments, such as real estate partnerships, etc. in order to generate a good return and shelter income from taxation. Continue to make some high-risk investments.

In your 50s:Save and invest first and foremost for your retirement. Shelter income and capital from taxes. Borrow less. Take fewer risks.

In your 60s and beyond: No need to save if your retirement is secure. Spend your money from dividends, Social Security, pensions as it comes. Get your estate in order. (Conserve capital for your heirs, if you wish, or liquidate slowly.) Don’t borrow. Don’t take risks. You will not be able to replace lost funds.



MEETING THESE GOALS is something else again-requiring both budgeting discipline and a wise investment strategy.

According to Suzanne Weiner, an account executive at Prudential-Bache, a tightly run savings plan is essential. “You need assets to start the ball rolling. For young singles, I recommend a pretty austere plan for them to save up to 30 percent of their income in their first earning years. It’s tempting to “drive” it away or play it away, but they’ll need a house or condo down payment and at least $5,000-preferably $10,000-in savings to begin to develop a diversified investment portfolio. To save, you’ve got to pay yourself first. Don’t wait and see if anything is left over at the end of the month.”

Like many financial professionals, Weiner develops an investment policy on a “risk/return” pyramid. In all investments, return (if there is one) will increase with risk. A bank will pay you a guaranteed 5 percent on your money, but a new business might make-or lose-a bundle.

Everyone (with or without a portfolio) should have a small, almost totally safe financial base as both an emergency fund and a long-term nest egg. A money market fund can be kept to cover unforeseen expenses, major repairs, major medical bills or a few months’ salary in the event of layoff. Your most-secure portion of IRA or trust funds can be in bank CDs or zero-coupon bonds. For those of you with little money to invest, this will be the only levee of the pyramid that you are likely to utilize.

Once you have $5,000 or $10,000 (or $1,000,000) to invest, Weiner recommends not keeping more than 5 percent of your total portfolio (including cars, real estate, and all other investments) at that safe but not terribly productive level. She would put the bulk (70 percent or more) of your investments at the “conservative” growth and then “aggressive” growth level with opportunities such as mutual funds, Blue Chip stocks and your own home at the conservative end and investment in real estate (residential and commercial), limited partnerships and high-technology stocks on the aggressive side.

Growth-oriented mutual funds can be good long-term IRA investments or good in a college-tuition trust fund. If you have limited funds, you’ll probably want to set these up and buy your house or condo and have some conservative stock and bond investments first. When you’re able psychologically and financially to move into more aggressive investments (and need the tax-shel-teri depreciation and long-term capital gains they often bring), aggressive growth is the next level. It’s here and at the high-risk level that “big money” (or big wipe-outs) can be made.

For those of you who are young, with increasing income years ahead (with strong stomaches, and good sleeping habits), Weiner would invest 15 to 20 percent of your portfolio at a high-risk level. She recommends various new ventures: small companies, stock options, penny stocks, commodities, etc. When you can’t afford to lose much (during fixed-income, retirement, or other tight financial situations, it’s best to stay out of this upper range.

Diversification-having a number of different investment eggs in several baskets-is the key to insulating even an aggressive portfolio from more than minimal losses. It also offers the chance for high-investment returns.

“How much you can afford to lose, how easily you can replace lost income and your own psychology determines how much risky investing you should do,” says Weiner.

Psychology, it seems, affects investing more than any computer printout or analyst. “There are only two motivators,” she says.

“I try to educate my clients to keep them in balance.”

The motivators? “Fear and greed.”