CFP Board eNewsletter
February 2007
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CFP Board eNewsletter |
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| How To Get A Clear Financial Picture |
In his book The Seven Stages of Money Maturity: Understanding the Spirit and Value of Money in Your Life, George Kinder relates an anecdote about Mullah Nazrudin, an ancient Persian sage and storyteller. Nazrudin walks into a bank to cash a check and the teller asks him to produce some identification. So he pulls out a small mirror from his pocket, glances at his reflection and says, “Yep, it’s me.” This tale, though amusing, may seem, well, a bit immature for a book that’s supposed to be about money maturity. Yet it captures perfectly Kinder’s belief that before we can take the practical steps necessary to master our financial situations, we have to take a good hard look at ourselves and our relationships with money. It took years before Kinder brought his own relationship with money into focus. He started out as an economics major at Harvard, but the pull of William Blake and William Shakespeare was more powerful than that of Warren Buffet and Alan Greenspan. So he switched to English and after leaving college moved to the country, determined to live a life of spiritual practice and writing. He still needed to make a living, though, so he used his background in economics to begin his own tax preparation business, which gradually grew into a successful financial planning practice. But Kinder still felt there was a conflict between how he wanted to live his life and how he needed to make a living. He realized that he equated making money with suffering, a feeling he traced back to his childhood when he watched his father, an attorney, laboring over legal papers at the dining room table. This was Kinder’s Mullah Nazrudin moment. “Holding on to patterns of thought created in the experience of seeing my father making money at the dining room table kept me from developing a sense of Vigor around work and a financial plan for freedom,” he writes. He developed the seven stages of money maturity as a framework to resolve what he calls “the apparent conflict between life and money.” The first two stages are Innocence and Pain, the “beliefs, thoughts, stories, attitudes, and assumptions [about money] … we hold on to for dear life no matter how fiercely the world works to remind us of their untruth,” as Kinder describes them. The next three stages are Knowledge, Understanding and Vigor, which Kinder says occur “at the point where we translate our desire for [financial] freedom into concrete goals and commit ourselves to achieving them.” The final two stages are Vision and Aloha, which Kinder equates with “discovering a sense of ease around money.” Kinder grounds his vision of money maturity in the specifics of the financial planning process. “The notion that we can be free internally and not free financially is absurd,” he writes. “Financial planning provides the props that support the house we are building … When we finish, the props can be withdrawn and we may behold what we have built — our own souls, free and full.” Kinder provides some props of his own for putting a solid foundation under your dream house: 1) identify your goals; 2) assess the resources you have to accomplish those goals; and 3) choose a path to reach them. Identify your goals. If you don’t know where you’re going, you can’t choose the right path to get there. But actually establishing financial priorities can be very complex, especially when so many things — paying the bills, putting aside money for emergencies, saving for college or retirement, just to name a few — compete for attention. So having a clear idea of your financial goals is crucial for both you and your financial advisor, if you have one. “Financial professionals have discovered that if they don’t understand what their clients are truly seeking,” Kinder writes, “all their good advice goes for nought.” In December, It’s Your Turn featured an article on identifying and achieving financial goals. “Going for the Goals” offers lots of tips and resources to help get you started, as does the CFP Board publication Savings Fitness: A Guide to Your Financial Future. Assess your resources. Kinder believes inner and outer resources are equally important in achieving financial goals. Outer resources include your salary and any other income you might have, as well as assets like your home, pension, insurance policies, and valuable objects. Kinder defines inner resources as “those qualities … that contribute to or detract from your ability to achieve financial goals.” Both are needed on the journey to money maturity. Kinder suggests two important milestones on this journey: a net worth statement and a budget. A net worth statement is simply the total value of your assets (saving accounts, stocks, bonds, real estate, etc.) minus the total value of your liabilities (mortgages, credit card and other personal debts, student loans, etc.). If your assets are, say, $100,000 and your liabilities are $50,000, your net worth is $50,000. CFP Board’s Web site has a simple online net worth calculator that can help you assemble your net worth statement. “This exercise makes you more conscious of what is happening in your financial life,” Kinder writes, “which assets are earning a rate of return in the form of interest and which liabilities are costing you the most money.” Similarly, a budget records how much money is coming in and how much is going out. But a budget should list more than just the total amount of your expenses; it should detail exactly what you are spending that money on. Kinder suggests keeping a small notebook to quickly jot down expenditures — from rent, mortgage and utilities payments to money spent on childcare, groceries and dining out — as they occur. “This exercise underscores your ability or inability to save,” Kinder writes. “Working through a budget increases your awareness of the categories you might be able to reduce as a way of increasing net saving … If you reduce your spending, you instantly become richer and have more choices. If you increase your spending, you automatically become poorer and have fewer choices.” The U.S. Securities and Exchange Commission, the government agency that regulates the financial services industry, has helpful pointers on how to draw up net worth statements and budgets in the Make A Financial Plan section of its Web site. Choose a path. Once you’ve identified your goals and assessed your resources, it’s time to plan a route to your destination. Kinder suggests a variety of ways to increase savings and plan for the future: don’t spend pay rises or windfalls (“Instead of living it up with any extra money that comes in, add it to your savings,” he writes), make sure you claim all the tax deductions you are legitimately entitled to, take advantage of tax-deferred retirement schemes like IRAs, SEP-IRAs and Keogh plans, and pay down your credit card debt. You may feel that you can map out this journey yourself. If you’d like a guide along the way, however, the CFP Board Web site can help you learn more about choosing a financial planner. The Financial Planning Process section of the site provides an overview of working with an advisor. The How to Choose a Planner page gives tips on selecting the right person for you. If you want to learn more about the whole process, you can also request a free Financial Planning Resource Kit. In the meantime, Kinder’s three steps should help ensure that the picture is crystal clear the next time you glance at your financial reflection. |
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| Easy-To-Use Tech Tools for Financial Planning |
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A lot of people cite technology as the cause of many of their day-to-day frustrations. Computers break down, Web sites crash, printers eat documents. When it comes to financial planning, though, technology can be part of the solution rather than part of the problem — especially if you’re new to financial planning or feel you can’t afford the services of a professional advisor. Tim Clegg, a CERTIFIED FINANCIAL PLANNER™ professional with 20 years of experience, is harnessing the power of technology to help him help others. Clegg is a senior advisor with Financial Solutions, an initiative of the non-profit Solutions Community Development Corporation, which provides financial literacy programs to low- and moderate-income families in the Holyoke-Chicopee area of Western Massachusetts. He became increasingly irked by the fact that his clients couldn’t afford to pay for the time it takes to prepare a thorough financial plan. “These people face financial issues just as complex and challenging as anybody else,” Clegg says, “but they can’t afford to sit down face-to-face with a planner to organize their situations.” The answer, he thought, was to create software to automate parts of the planning process so the planner could spend more time with the client. Clegg and his colleagues developed software that generates financial scenarios based on answers to a questionnaire. “The system is designed to create meaningful scenarios,” Clegg explains, “so the planner’s time is spent helping the client make good decisions rather than fiddling with data. The idea is to get a complete picture of the factors in the client’s life, flag the assets, and then dig for opportunities to build resources. Sorting out your financial life can mean big money, whether it has to do with making better spending decisions, saving more effectively or putting a down payment on a home. The payoff will be dramatic down the line.”
In a joint effort, the Distance Learning Center and the Business and Management division of the University of California, Irvine's Continuing Education department are deploying technology to distribute basic financial planning information. “Fundamentals of Financial Planning” is being developed as a free online course designed to provide a comprehensive overview of personal financial planning. “The course mixes what people need to know about managing money,” says Don DeBok, a CERTIFIED FINANCIAL PLANNER™ professional who is designing the curriculum, “with what they might need help in order to do, such as creating net worth and cash flow statements or planning retirement needs. The course gives a snapshot of a person’s financial situation, helping them answer questions like: Where am I in my financial life? What do I need to do next?” Course materials will be accessible through a dedicated Web site hosted by the UC Irvine Distance Learning Center. An Internet connection and a desire to learn more about financial planning are all you need to find other helpful online financial tools. The National Economic Development and Law Center (NEDLC), for example, has devised a Self-Sufficiency Calculator to help low–income families build economic assets and increase their financial literacy. The NEDLC, a national research and consulting organization based in Oakland, California, estimates that around 25% of Bay Area households have incomes too low to pay for basic needs. The Self-Sufficiency Calculator is designed to help these families identify and act on strategies to improve their financial situations. The Calculator identifies gaps between a person’s income and basic needs, and then highlights which of more than a dozen benefits and tax credits he or she may be eligible for. The program also generates information about ways to increase income through further education and initiatives like CalWORKs, a California program that provides temporary financial assistance and employment services to low–income families. ManagingMyMoney.com is another site that offers tips on “how to manage money so money doesn’t manage you.” Created through a collaboration between the Community Action Partnership™ and the National Endowment for Financial Education® (NEFE®), the site is packed with information on everything from money management to job seeking to applications for Individual Development Accounts (IDAs), programs through which every dollar you save is matched by at least one dollar from a private sponsor. For more on IDAs, go to the IDA page on the Web site of the CFED, a Washington, D.C.–based organization dedicated to expanding economic opportunity. If you need a quick financial health check–up, visit FinancialVitalSigns.org, a free Web site published by Globous Financial Relief, a non–profit organization headquartered in Salt Lake City, Utah. Simply sign up for a user ID on the Financial Vital Signs survey page, then log on and input your basic financial information, such as income, monthly expenses, and savings. The site will then calculate your Financial Vital Signs and give you a Fiscal Health Report, which is broken down into five easy-to-understand numbers. Your Financial Blood Pressure is a measure of your debt-to-income ratio; your Cash Flow is a measure of whether you spend more or less money than you earn; your Misery Index is a measure of how much you pay in late fees and other penalties; your Credit Score is a measure of your credit worthiness; and your Emergency Fund is a measure of how much cash you have set aside for things like car breakdown, hospitalization, or job loss. Maybe you’re a bit uncomfortable with financial Web sites and would prefer to connect with a real live person. Technology can help there, too. The Financial Planning Association operates an “Ask a CFP® Professional e-mail hotline” through which FPA members who hold CFP® certification answer personal finance questions. This service is perfect for individuals who are not ready to hire a financial planner but still need some general advice. The FPA Web site also features Financial Decisions for Life Events, an online education tool to help prepare for major milestones like college and retirement. And, should you reach a point where you want to hire a CERTIFIED FINANCIAL PLANNER™ professional, check out the FPA's PlannerSearch, an online referral service.
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| It Pays to Be Fit: Connections between Financial Fitness and Physical Health |
Last month’s “It’s Your Turn” introduced a survey asking whether you entered 2007 with a resolution to improve your financial or physical fitness. To date, the vast majority of those who completed the survey (87%) indicated they did make a resolution to improve their financial or physical fitness. More than 70% stated they made resolutions to work on both financial and physical fitness. While tackling more than one resolution could seem to increase the odds of falling short of one or both goals, those ambitious resolution-setters with financial and physical fitness goals may have it right: research is demonstrating that financial and physical fitness are interrelated. TwoMedicine Health and Financial Fitness, headquartered in Bozeman, Montana and with additional offices in Billings, Montana and Denver, Colorado, has been involved in helping improve people’s lives by examining the connections between physical health and the state of our personal finances. Learn more about TwoMedicine’s activities in this article from Earl W. Hanson, CFP®, MBA, a founder of TwoMedicine: |
| Are Obesity and Smoking the Only Factors to Blame for Our Health Care Crisis? |
We are seeing all the headlines these days about the causes of heart disease, cancer, and unnecessary accidents. And we’re talking about our poor lifestyle choices and behaviors, such as poor nutrition, lack of exercise, excessive alcohol consumption, smoking, and lack of adequate sleep. Certainly we need to work on changing these behaviors, and certainly we need to look at both physical and mental fitness when we look at health. As health care costs sky rocket, we’re all looking for the answers, the solutions. But do we ask the right questions? Research clearly shows us that stress is one of the major risk factors that lead to poor behaviors and ill health. But do we really think enough about the root causes of these behaviors? Maybe it’s time we take a harder look at the role Financial Fitness plays in stress, and the costs of health. TwoMedicine Health and Financial Fitness is a firm specializing in both preventive health strategies and financial fitness strategies. TwoMedicine believes that it’s important to bring to the forefront the interconnectedness of health and financial fitness. While it is standard practice for TwoMedicine and other health promotion firms to discuss the costs of health when helping individuals to optimize their health and well being, it is imperative that these groups look also at the health impacts of financial fitness, as financial stressors often significantly impact health. “Two in five people who have financial stresses tell us — absolutely positively — that their health has been negatively impacted because of financial problems,” states Dr. E. Thomas Garman, president of the Personal Finance Employee Education Foundation, Inc., and fellow and professor emeritus at Virginia Tech. Not only do financial stressors negatively impact health, they make the task of improving one’s health by changing lifestyle behaviors all the more daunting. Pete Shatwell, Director of Preventive Health Strategies at TwoMedicine, has observed in the populations with which he’s worked that, “Excessive stress, originating from many sources, is one of the greatest barriers to engaging in healthy behavior.” Shatwell says, “If you want to start eating right and are overly stressed, it probably won’t happen. If you want to start exercising and are overly stressed, it probably won’t happen. If you want to quit smoking and are overly stressed, it probably won’t happen. Financial struggles can cause significant stressors, thereby leading to a diminished state of well-being.”
The interconnectedness between health and financial fitness is indeed coming to the forefront of the fields of Preventive Health and Financial Planning. Mayo Clinic Health Management Resources and TwoMedicine Health and Financial Fitness, with the help of Dr. E. Thomas Garman, professor emeritus of Virginia Tech and President of the Personal Finance Employee Education Foundation, Inc., have developed a health risk assessment that includes financial stressor assessment. The assessment is helping TwoMedicine identify the most prevalent sources of financial distress and people’s perceptions of their financial well-being as well as the perceived affects of financial distress on their health, their readiness to change, and the demand for workplace financial fitness education and intervention. This research is exploring financial fitness topics such as employee benefits, retirement planning, budgeting and debt management, credit status, estate planning, tax planning, purchasing a home, paying for college education, or managing a will, deed, or trust. TwoMedicine and Dr. Garman, are among others currently working with the InCharge Education Foundation to conduct research to identify and measure financial distress as it relates to health. TwoMedicine will be presenting some of its research findings at the Annual Conference of the American Council on Consumer Interests in St. Louis this April. For example, when asked, “Which of the following financial topics cause you stress?” the top five responses were Retirement Planning (54.1%), Managing Debts (34.6%), Budgeting (30.8%), College Funding (24.9%), and Insurance Planning (20.5%). Furthermore, an average of (25%) of the respondents Agreed or Strongly Agreed that they feel that thoughts or stress about the financial topics they identified above have affected their health. In addition, when asked to describe their plan for addressing the ONE financial topic that caused them the most stress, an average of only (16%) responded that they DON’T plan to learn or do more about it. That means a whopping 84% of people with financial distress are either thinking about how to resolve it or are already looking or taking action to resolve it. At its annual meeting in Los Angeles in August 2006, CFP Board hosted a session for CERTIFIED FINANCIAL PLANNER™ professionals to discuss the positive impacts that they can have on the overall health of the individuals they serve. The interventions of financial planners in the lives of their clients promise to bring the benefits of improved physical and financial health full circle; the improved health of individuals, and in fact of whole organizations, helps reduce the costs of ill health, such as disability and workers comp costs, absenteeism, low productivity, and medical plan claim costs, which, in turn, can lead to enhanced individual and organizational well-being. — Earl W. Hanson, CFP®, MBA |
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| Financial Alerts |
NAIC has issued a consumer alert to college students urging those renting an off-campus apartment or house to consider purchasing renters insurance. Although many college students are a dependent under their parents’ insurance, their personal property — things such as computers, stereos and furniture — is often not covered if they live off campus. Read more about renters insurance to decide if it’s right for you or your child living off campus. NASD is urging seniors to be cautious when considering life settlements — a fairly recent option that allows some people to sell their existing life insurance policy for cash. While a life settlement can be a valuable source of liquidity, life settlements are not appropriate for everyone. The latest NASD investor alert covers what all senior citizens should know about life settlements, including questions to ask to help determine if a life settlement is a good choice. Read more about these and other financial alerts.
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| Your Rights as a Financial Planning Client |
Understanding your rights as a financial planning client will help you determine if you are receiving the quality service you deserve. Read or view and print the brochure or request a free Financial Planning Resource Kit, which contains the Your Rights as a Financial Planning Client brochure and other materials to help you learn more about financial planning.
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| About This eNewsletter |
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CFP Board's "It's Your Turn" eNewsletter is sent monthly to those who have subscribed through CFP Board's Web site, www.CFP.net/learn. CFP Board exists to make people aware of the benefits of financial planning and to encourage people to seek out individuals who can help them apply the financial planning process to improve their financial lives. This eNewsletter is designed to provide information about financial planning, financial planning tools and resources, consumer alerts and more. Suggestions and feedback are welcome at mail@CFPBoard.org.
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