4 Parts to a Healthy Financial Plan

02/09/2012 11:15 am EST

Focus: MONEY MANAGEMENT

Evelyn Jacks

Founder and President, The Knowledge Bureau

Evelyn Jacks of The Knowledge Bureau explains each of these four elements of a solid retirement strategy, and how even people with little discretionary income can start quickly.

Evelyn Jacks joins us with some advice for staying invested during difficult times. Evelyn, thanks for joining us.

My pleasure.

Well, we are in difficult times. How do we stay invested…but not just stay invested, stay invested in a positive manner?

Yes, that’s a very good question, because it is more difficult. I think it begins with a strategic plan.

From a strategic plan point of view, it means that we’re looking not just at the income that we’re throwing off from our investments—and that’s a big challenge today is how you get any kind of a return on your investment. Also, we’re taking a look at the kinds of relationships that we have with our advisors to help us get there.

You’re going to have a tax accountant, and you’re going to have a lawyer, and you’re also going to perhaps have an insurance specialist. The first thing is to get all those people on a plan. The strategic plan means that you’re all working towards the same goal, and the goal is to increase your net worth over the next several years.

When you have that plan, then you can avoid doing what a lot of investors do really well, unfortunately, which is to have knee-jerk reactions to the dips that are in the marketplace. So a strategic plan allows you to stay on track even though you’re a little bit nervous.

We like to take a look at that strategic plan from the point of view of four elements. The first element is accumulation: how do you continue to accumulate through a variety of different life cycles—your own, your spouse, your children?

The second is how do you grow your money. Accumulation, growth, preservation…and we’re very much in a preservation mode right now. If we have to give up a little bit of growth in order to preserve, that’s not a bad thing in the short term.

The last element of what we call real wealth management at the Knowledge Bureau is transition. We’re always looking at how do we transition our wealth to the next generation, even if we’re in our 30s.

Now that might mean today, we’re funding education savings as opposed to focusing longer term. We wanted to hold on to our longer-term investments from a retirement point of view, but maybe the action plan today is taking a look at education funding.

A strategic plan will allow you to take a look at all of those elements of what we call a wealth plan, as opposed to just a tax plan or an investment plan. That’s what is going to keep you on track during difficult times.

Now are these plans primarily for people who have a great deal of money, or is this something that the average person that’s struggling every day to survive can get involved in?

That’s another very good question, because I have to say that it is for everyone.

All of us need to have some emergency savings, so if everything goes bad for you and you end up losing your job and you don’t have income per se, you’re going to have to pick up the pieces. You need to have an emergency fund, and that means some savings.

You do need to take a look at how you can eke out some savings from all the things that are going on in your life right now, and you need to have about six months of savings. Certainly there’s lots of investment vehicles to park that money on a short-term basis for you to have that on the side.

Once you’ve got that, then you can start looking for what I call redundant income, income that you actually don’t need. If you’ve got that redundant income—and it doesn’t matter to me if it’s $100 a month or maybe it’s $50 a month—now we can nudge towards a true investment plan. But it all begins with analyzing your needs and wants very closely.

Now, obviously the investment plan is going to be totally different for everyone who begins to look at it. Some people have a tolerance for more risk than others do, and some have more to invest. So how do we begin to create that plan?

You know, the sooner you begin the better, because the young really have compounding time on their side, don’t they?

I like to say that the time to do your retirement planning is with the very first dollar you invest in a retirement plan. People don’t think of it in that way, but it’s powerful.

If you can do just a very, very simple calculator inside or outside a registered plan, for example, you’ll see that together with the tax compounding and the tax savings that you’ll receive, you will be many, many times wealthier than someone who begins in their 40s or 50s. In fact you’re not going to have to worry about it; you’re going to have peace of mind right from day one. So start early.

But even if you find yourself in sort of more the upper ages, start today. The average retirement is about 20 years, and in that period of time I’ve never yet seen anyone run out of money, believe it or not. In fact, what I’ve seen is in that period of time, sort of halfway through, capital really starts taking off again and people end up with a tax problem.

So don’t worry so much. Over the long term, it’s going to work out for you. But have a plan—that’s sort of the basic message.