Revisiting The Basics Of Financial Planning
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In our E-Letter Survey earlier this year (and thank you for an overwhelming response), one of the most common requests from readers was how to get a financial/investment plan started. So, during the holidays, I thought this would be a good time to revisit the issue of basic financial and investment planning. Feel free to share this issue with anyone -- children, grandchildren, friends, etc. -- that you think would benefit from some basic financial planning and investment guidelines.

At my company, we get inquiries from people of all ages about financial and investment planning. These requests often come from people in the midst of their careers who have always spent most everything they made, yet know they need to save and invest more. We also get many requests for financial planning advice from older readers who may have lost a lot of money in the 2000-2002 bear market, and now realize that their financial plan is well behind schedule at this point.

Let's be honest, we can all agree that basic financial planning is not the most interesting of topics, at least until it's not working. Then it ranges from, at the least, very interesting to urgent. So, the key is to focus on your financial plan early and investing accordingly, even when it is not interesting, and by all means before it becomes urgent.

During the go-go 1990s, when stocks were delivering annual returns of 15-20% or more, 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 hoping for another 90s-style bull market to come around and get them back to where they need to be. This is not likely to happen any time soon.

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 big losses following the next speculative bubble that comes around.

The basic financial planning concepts that follow will help you get started on the right foot. These are the fundamental steps for saving, investing and building wealth. You can never read and re-read them too often, no matter your age or experience, unless perhaps you are wealthy beyond your wildest expectations.

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, a divorce 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. If you have accumulated a significant net worth, I highly recommend you use a professional financial planner.

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Finally, the explanation following each fundamental concept below 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 few paragraphs. 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, much less how they are going to reach them. Sure, most folks would say they would like to have ample funds to send their kids to college and to secure their retirement lifestyle, but most have not spent any serious time identifying all of their financial goals or how to accumulate the money to meet them.

Unless you identify these goals early and save 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;
* Adequate funds for potential medical costs later in life;
* 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 can 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 investment 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 many investors thought the stock market would always provide returns of 15-20% 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 so as to be able to invest for your future goals. Unfortunately, in today's consumer-oriented world, there is little emphasis on saving or investing for the future.

Some people were raised to be thrifty, and saving money comes naturally for them. Others, however, seem to let money fall through their fingers. Most of us are somewhere in between. Yet no matter how much money most people make, and the resulting lifestyles they adopt, there always seem to be surprises along the way that result in more expenses than income. This is why you need a defined financial plan, which specifies in writing the need for saving regardless of your income level.

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 carefully 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 unnecessary or wasteful spending will leave 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 in your savings plan. 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 (I recommend 12 months).

The cash reserve should be kept in a safe, no risk place: interest bearing bank account, CDs, money market fund, etc. 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 usually 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 safe, near-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.

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Eliminate Debt

While debt can be a beneficial tool when used wisely, it is all to often abused and can become a roadblock to reaching 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 rarely worth the instant indebtedness that comes along with it.

If you plan on major expenditures such as a down-payment on a home, new car, 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. In fact, I recommend you pay off all credit card debt every month. 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.

Maintain Adequate Insurance

Your need for life insurance depends upon your individual financial situation. Unfortunately many people do not buy life insurance because they feel they don't need it. Typically, the question is not whether you need insurance now -- usually you don't need it 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.

Sadly, 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. It all depends on your financial situation, your family's needs, your debt levels, health risks, genetics, etc., etc.

What Kind of Life Insurance?

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." This is the type of life insurance I have on my own life. Term insurance only pays a specified amount of death benefit, as opposed to "whole life" or "universal life" which include a death benefit plus some type of savings account within the insurance plan.

Whole life and universal life plans are virtually always more expensive than term life, especially over time, but there are occasionally 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. This is the type of life insurance I have on my own life -- a term policy that has level annual premium payments over the 20-year life of the contract.

As noted in the paragraph above, there are several nationwide companies that will search for the best term life insurance policy for you. To find information on these independent companies, just do a quick Internet search. For example, go to Google and type in "Level Term Insurance" and you will quickly find links to several services that compare rates among numerous insurance companies and give you quotes. Or you can call their toll free numbers.

While not necessary, if you prefer to deal with a local insurance agent about your life insurance needs, you should sit down with him or her and ask specifically about term life. Understand that most local agents will try to convince you that term life is not a good alternative. 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.

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


While the information I have given you above 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 sophisticated investors have neglected to build an adequate cash reserve, create a disciplined savings plan, eliminate debt or adequately take care of their insurance needs.

While basic, these fundamentals are the building blocks on which any financial plan should be structured, and a firm foundation upon which wealth can be built. In the future, I will build upon this basic foundation and show you how to build wealth through time-tested 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.

Either way, we will be happy to answer your questions, and there is never any pressure to invest.

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Happy New Year!

I hope everyone reading this had a great Christmas, Hanukkah or whatever holiday you may have celebrated over the last weekend. We had a wonderful time at the Halbert House, with all the family in from out of town.

At this time of year, I am especially thankful for the blessings in my life: 1) a terrific wife and family; 2) wonderful friends all across the country; 3) that I live in the greatest nation on the planet; 4) that I have a successful company that feels more like a family than a business; and 5) that I have wonderful clients and readers like you.

I wish you a happy and profitable New Year!!

Warmest holiday regards,

Gary D. Halbert

Gary Halbert is the president and CEO of the ProFutures companies, a diversified investment advisory firm located in Austin, Texas. ProFutures offers professional financial planning services to a nationwide base of clients. Mr. Halbert's firm specializes in tactical investing, and its recommended investment programs include mutual funds, managed accounts with professional Investment Advisors and alternative investments. For more information about the programs offered, call 800-348-3601 or visit the website at


Books with basic information about financial planning:

The following books are good sources of basic investment information. The first two are written in a narrative format, much like a novel. While reading the story, you are actually introduced to the fundamentals of investing. The last book presents much more detailed information about investing in a textbook format. All of these books are available for sale online from, and are likely also available in your local bookstore or public library.

The Wealthy Barber by David Chilton (good for all ages)

The Richest Man in Babylon by George Clason

The Intelligent Investor by Benjamin Graham (Revised Edition)

Calculators for projecting future needs and estimated accumulations:

The following calculators are available on the Internet and will help you to project the amount of money you will need to meet your financial goals, as well as the amount you will need to save and the level of return required to get you there.

Just copy the website addresses into your browser window. Be aware that you will need to input assumptions about future investment earnings, wage increases and inflation, which will be guesses, at best. It's usually best to be conservative when projecting investment growth since future returns are not guaranteed. I would recommend a rate of return of 6-7%; if you happen to do better, that's icing on the cake.

Copyright © 2005 ProFutures Capital Management, Inc. All Rights Reserved.


"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 12-27-2005 6:09 PM by Gary D. Halbert
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