Financial Planning Principles

Guiding principles are vital in that in any endeavor they maximize the probability of survival, even in threatening circumstances, and when consistently practiced over time, typically add success to the experience. These principles are applied positively, with actions to execute, and negatively, with mistakes to avoid. Three of my close friends started kayaking in the last couple years, and all three have already experienced dangerous capsizes; I’m not familiar with the principles of kayaking, but I hope to be before trading my crampons in for a small boat! What powerful principles can maximize the probability of your financial success, and supply wonderful things to impart to your children?

Financial planning involves having a plan, so begin by putting your goals to paper. Secondly, understand how your numerical assumptions flesh-out over time, given conservative estimates on variable factors, like Social Security, rates of return, and inflation. You are unlikely to modify your approach if you’re unaware you are off-track. Thirdly, realize financial planning is really “a way of living financially”, so don’t place too much emphasis on the goal; do apply the principles and enjoy the process. Sadly, some of the members of our Denali climbing team considered our effort a failure because we didn’t summit. The truth is we just enjoyed the grand adventure of our lives! And to the three, add these:

• Know who your Provider is and avoid placing too high a value on money, for money can “sprout wings and fly like an eagle toward heaven”.
• Have a detailed budget, including incomes and expenses. You must know the cost of running your household, and your potential for saving, investing, and giving. ?
• Identify your Net Positive Cash Flow, or the extent to which net income exceeds gross expenses, and determine to appropriate this valuable resource wisely.
• Be vigilant with debt. Maintain a low debt/equity ratio. Avoid unproductive debt, especially consumer debt, and never fully retire while in debt.
• Use insurance for protection against catastrophic risks only. Avoid being “insurance poor”. Never think of insurance as an investment. Use temporary insurance to cover temporary risks (and permanent insurance to cover permanent risks). Always price shop.
• Build your financial foundation first: a) ample emergency savings, b) ample term insurance to protect your loved ones and give them a fresh start in your absence, and c) a specific plan to become debt free, including a scheduled mortgage burning party!
• Make wise investment decisions. Keep expenses low. Never miss an employer-matched contribution to a company retirement plan. Buy great businesses when they sell at reasonable prices. Avoid catastrophic losses by investing in different industries, keeping individual positions to less than 5%, never buying aggressively into a bull market peak, never capitulating near a bear market bottom, and having an exit plan on every non-forever holding.
• Start dollar cost averaging immediately, and never stop unless you have to, even in retirement. Remember, reinvesting dividends also constitutes dollar cost averaging!
• Put your affairs in order with proper estate planning. Why should only the rich enjoy the benefits of multi-generational wealth building?

In short, when the weather allows you to kayak, KAYAK! Regarding money, this means earning it, spending it, saving and investing it, holding it loosely, and giving it away freely. Teach these things to your children while they are young. Think about it, Shaun.??

“A wise man leaves an inheritance to his children’s children.” ~Proverbs 13:22

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

All investing involves risk including the possible loss of principle. No strategy assures success or protects against loss.

Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.

Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.

Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Please keep in mind that insurance companies alone determine insurability and some people may be deemed uninsurable because of health reasons, occupation, and lifestyle choices.?Guarantees are based on the claims paying ability of the issuing company.