Re-Learning The Basics Of Financial Planning
Forecasts & Trends

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I often receive requests from readers of my E-Letter asking how to get an investment plan started.  These requests often come from young people early in their careers, but I also receive similar inquiries from older readers who either lost a lot of money in the recent bear market, or have always spent everything they made, and now see the need to save and invest.

I’ll be the first one to admit that basic financial planning is not the most interesting of topics.  However, during the go-go 1990s many investors forgot (or ignored) the sound basics of financial planning, and paid a terrible price.  Unfortunately, many of those who made a lot of money, and then lost it, are just waiting for another 90s-style bull market to come around and get them back to where they were.  This is not likely to happen.

Instead, new and veteran investors alike should reacquaint themselves with the basics of financial planning.  In doing so, they will not only put themselves in a better position for meeting their future goals, but they also might actually avoid the next speculative bubble that comes around and the losses that always follow.

In this E-Letter, I am beginning a series covering the basic concepts of financial planning.  This week, I will cover the fundamental concepts that will help you start out on the right foot.  These initial fundamentals are the preparatory stage for building wealth.  If you are already beyond this basic stage of financial planning, I encourage you to forward this to a friend or relative who may be able to use this information.

As you read through these concepts, be aware that every person’s situation is different, and not all concepts will apply to all investors.  In addition, sometimes outside events such as an inheritance or a major promotion (or demotion) may require that you seek the help of a financial planning professional rather than work from this list of ideas on your own.

Finally, the explanation following each fundamental concept is not meant to be exhaustive.  In fact, entire books have been written about many of the items to which I have devoted only a paragraph or two.  My intent is not to provide a detailed “how-to” guide, but rather to give you a general overview of the major steps necessary to reach financial success.  Obviously, financial security can take many years to complete, so it is important to keep focused on your financial goals along the way.

Yet while this may not be the most interesting issue of my Forecasts & Trends E-Letter, it may well be one of the most important, so read it carefully and save it for future use.

Establish Financial Goals

It may sound odd, but the truth is many people have no idea what their financial goals are, or how they are going to reach them.  Sure, most folks would say they would like to have a secure retirement and have funds to send their kids to college, but they have not spent any time identifying all of their financial goals or how to accumulate the money to meet them. 

Unless you identify these goals early and fund for them, you are likely to end up short when the time comes.  I have listed below some of the more common financial goals that we see from our clients:

*  A secure retirement in the lifestyle you want;
* College expenses for children and/or grandchildren;
* Funds for the care of an aged parent or disabled child;
* Money for a future home purchase as needed; and
* Becoming debt free (a goal we should all reach for).

It is also important that you re-evaluate and modify your goals as time goes by, and adapt them to changes in your life.  For example, upon the birth of a child, you will need to factor in another potential college education, a possible move to a larger home and various other expenses.  Likewise, financial and business success may require that you develop goals for an estate that carry out your wishes even after you are gone.

Once you have clear goals in mind, it is important to know what level of savings and returns will be required to get you there.  In the “Resources” section below, I have listed a number of good financial calculators available on the Internet.  You can use these calculators to determine what you must save and what returns will be required to meet your goals.

When setting your goals and calculating the amount of savings to get you there, it is very important that you maintain reasonable expectations about the future.  In the early 1980s, many investors thought that bank CDs would always pay double-digit returns.  Likewise, in the late 1990s investors thought the stock market would always provide returns of over 20% per year.  Time has shown how wrong both assumptions were.  Therefore, when using the calculators, use reasonable assumptions about future investment earnings.

Save Money

Even the most reasonable of financial goals cannot be attained without money to invest to get you there.  All of the other concepts listed below depend on your ability to save money.  Unfortunately, in today’s consumer-oriented world, there is little emphasis on saving for the future. 

Some people were raised to be thrifty, so saving money comes naturally.  Others, however, seem to let money fall through their fingers.  No matter how much they make, there always seem to be more expenses than income.  The old saying used to be that these people let money “burn a hole in their pockets.” 

If you think it’s impossible for you to save any money, it may just be a case of your not paying attention to where your money is going.  One common characteristic of thrifty people is that they generally know how every dollar is spent, thus allowing them to better control expenditures.  So, one good way to develop the habit of saving is to first determine exactly how your money is being spent.  And let me clarify that I mean ALL of your money, including cash, checks, and credit cards.

For those of us who do not have a natural ability to categorize expenses, it’s a good idea to use one of the many computer software programs available today to keep track of your expenditures.  If you are not computer literate, you can keep track of where your money goes by categorizing each check, credit card and cash purchase on a piece of paper each month for three to six months.  At the end of that time, you will likely be very surprised to see exactly where your money goes.  Cutting back on wasteful spending can mean more for saving.

A lot of conventional wisdom exists regarding how to save money.  The methods for saving range from paying yourself first to just saving whatever is left at the end of the month.  The problem with the latter method is that it is too tempting to spend extra money during the month, so nothing is left for savings.

I favor the pay yourself first method, where you automatically transfer money to savings at the beginning of each month (or upon receipt of each paycheck) just as if you were paying a bill.  Many people already use this method for contributions to their church or favorite charity, so your own savings could be just an extension of that same discipline.  The bottom line is to learn to live below your means or you may never succeed.

Accumulate A Cash Reserve

A cash reserve is the first thing you should accumulate.  This reserve will help to pay unforeseen or emergency expenses, or will help meet expenses during an extended illness or loss of a job.  Most financial planners suggest a cash reserve of anywhere from three to six months’ worth of estimated expenses, but others suggest as many as 12 months’ worth.   Your cash reserve should be set at whatever amount makes you most comfortable, but I would recommend a minimum of six months’ worth of expenses.

The cash reserve should be kept in an interest bearing bank account or money market account.  Do not invest your cash reserve in stocks or mutual funds since losses could occur at a time when you need this reserve the most.   Although bank accounts and money market funds currently pay low interest, they are liquid and safe, so you know you can always get your hands on this money on a moment’s notice.

It may sound odd for someone in the investment business to be suggesting that you maintain cash accounts.  However, this type of account is best suited for the purpose of the cash reserve, and any financial planner worth his salt should be doing what’s best for you, not what’s best for his commission account.  Any broker or financial planner who says you do not need a cash reserve, or who tries to get you to invest your reserve in stocks, bonds or mutual funds, is doing you a disservice, in my opinion.

If it becomes necessary to call upon your cash reserve due to loss of a job, an emergency or an unexpected expense, it is imperative that you build it back as quickly as possible after the need is met.  I don’t necessarily recommend that you liquidate investments to rebuild the reserve, but I do recommend that you redirect any regular investment contributions (other than to qualified retirement plans) into the cash reserve until it is back to its former level.

Eliminate Debt

While debt can be a beneficial tool when used wisely, it is often abused and can become a roadblock to the success of your financial goals.  Therefore, you should resist debt whenever possible and only use it for major purchases such as a home or car.  Instant gratification for material goods is usually not worth the instant indebtedness that comes along with it.

If you plan on major expenditures such as a down-payment on a home, new furniture, appliances, etc., save money in your cash account over and above your cash reserve and defer the purchase until you have enough money saved to pay cash.  Be cautious of zero-interest rate ploys on major expenditures.  Some of these offer zero-interest only for a short time, and then hit you with double-digit interest rates if not paid off by that period.

Above all, you want to pay off all of your credit card debt as quickly as possible.  The interest rates charged on most credit card balances are in the double digits.  Many consumers don’t realize, until it’s too late, that by paying only the minimum amount required each month, they are allowing the interest charges to swell the balance owed.

Obtain Insurance

Your need for life insurance depends upon your individual financial situation.  However, many people do not buy life insurance because they feel they don’t need it.  The question is not whether you need insurance now, but will you need it in the future based on your family situation or your financial and personal goals?  The purpose of life insurance is to create an immediate estate where there was none, or at least one large enough to support a family after an untimely death.

Unfortunately, too many people are under-insured and those left behind are faced with an unexpected change in their lifestyle.  At the same time, there are some who are over-insured and could cut back on coverage and divert that premium payment to savings or investments.

In addition to life insurance, you will want to provide for medical insurance (if not provided by your employer) and possibly even disability insurance.   You will also want to carry property and casualty insurance on your possessions, even if you are renting.

The type and amount of life insurance coverage depends upon your specific current needs and goals for the future.  I have always been a fan of “term insurance,” as opposed to “whole life” or “universal life.”   However, I also recognize that there are certain situations in which these other types of permanent coverage are advisable.  The main thing is that you evaluate the positives and negatives of each kind of coverage in light of your own financial situation and goals.

If you find that term insurance is most suitable for you, there are numerous companies that have large databases of term insurance products, and they will search for the best rate for you.  Term rates do vary widely.  There are also term policies that offer “level” annual premium rates over 20 years or longer.

I recommend you find a reputable insurance professional in your local area and sit down with him or her to discuss your insurance needs for now and in the future.  Just keep in mind that some (not all) insurance agents may try to sell you what is best for them and not necessarily what is best for you.


While the information I have given you in this first installment is very basic, there are a number of experienced investors who have not taken some of these initial steps.  As I talk to prospective clients, I am frequently amazed at how little thought has gone into their financial goals.   In some cases, even “experienced” investors have neglected to build a cash reserve, eliminate debt or take care of their insurance needs.

I view these basic fundamentals as a firm foundation upon which wealth can be built.  In future installments of this series of fundamental financial planning concepts, I will build upon this foundation and show you how to build wealth through tried-and-true investment strategies.

If this article has generated any questions, I welcome you to give us a call at 800-348-3601 and speak to one of my experienced Investor Representatives.   Or, if more convenient, you can send us an e-mail at, or you can go to our website for more information about our services.

Very best regards,

Gary D. Halbert


"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."

Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.

Posted 11-23-2004 2:03 AM by Gary D. Halbert