The 7 Keys to Financial Health

The 7 Keys to Financial Health Personal Financial Consultants

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Serving clients throughout the West and Hawaii since 1985

Personal Financial Consultants, Inc.

The 7 Keys to Financial Health  ·  Personal Financial Consultants, Inc.

Many of us were not taught how to handle money properly

The 7 Keys to Financial Health Since 2007, the American Psychological Association has conducted an annual Stress in America™ survey. Year after year, the number one cause of stress in the lives of Americans is money. In good times and bad, three out of four Americans are more stressed about money and the economy than about work, physical health, children or family. Money stress has a significant impact on our physical health and emotional well-being. When we are financially stressed, we are more likely to be depressed, anxious, overeat, smoke and drink excessively. Money stress interrupts our sleep, can cause us to be irritable, can have a negative impact on our work lives, and cause problems in our relationships with our partner, friends and family members. Many of us live in shame around our financial lives:

• We know we should not spend more than we make but month after month we come up short. • We know we should save for the future but we don’t have an emergency fund or adequate retirement savings. • We know we should have a budget but have not taken the time to track our expenses.

• We regret having made some bad investments or impulsive purchases.

Some of us have more than we need but are too anxious to enjoy it. We know we should do better, but in the course of our day-to-day lives, we just haven’t been able to make it happen. These feelings of shame can keep us stuck:

• We may be reluctant to ask for help because we are embarrassed of our financial reality. • We keep our financial lives a secret from those closest to us. • We may feel discouraged and hopeless. • We may feel that change would take too much time and effort or that it is downright impossible.

Before we can take charge of our financial lives, we first need to disentangle from our feelings of shame. It is important to know that many of us wound up in bad financial shape because we were not taught how to handle money properly. After all, before we were given a license to drive, we had to take driver’s education courses, practice driving under adult supervision, take a written exam and pass an onroad driving test. However, many of us did not get a good financial education. Home economics classes are no longer taught in schools. Sadly, most of these Page 2

The 7 Keys to Financial Health  ·  Personal Financial Consultants, Inc.

programs have fallen victim to educational budget cuts. This was the one place children were taught about budgets and balancing a checkbook.

Another barrier to financial health is that money is a taboo topic. Surveys show that parents would rather talk to their children about the birds and the bees than have a discussion about money. Given our lack of education around money, we are ill-equipped to deal with it when we are thrust into the adult world. Our problems are compounded when we gain quick access to our first credit card. Many young Americans find themselves quickly and deeply in debt. The addiction to debt extends far beyond our college campuses. Prior to the 2008 economic crisis, the average American had over $8,000 in credit card debt and a savings rate of -0.5%. This savings rate was the lowest in the United States since the Great Depression.

Money is a taboo topic

If you are under financial stress and your financial health is lacking, you are not alone. The good news is that you can gain control over your financial life. It is time to give yourself a break, dust yourself off and take steps now to improve your financial health.

Key #1: Get a Financial Health Checkup Is your spending under control? Do you have a budget? Do you have money set aside in the event of an emergency? Are you saving for your most important goals, such as a child’s education, a financially secure retirement, your ideal home or your dream vacation? Do you and your partner or spouse fight about money? Are you happy about your relationship with money?

The first key to financial health is to take an honest financial inventory. This can be challenging for many because financial stress can motivate us to deny our financial reality and avoid thinking about our relationship with money. Financial stress is associated with depression, marital dissatisfaction, occupational impairment and health problems. While offering a quick fix in anxiety reduction, such avoidance just adds to our financial mess and serves to keep us stuck.

In contrast, financial health is an important aspect of physical health, emotional health, relationship satisfaction and life satisfaction. Let’s start with a test of your financial health using the Financial Health Scale (FHS). This test was developed by Dr. Brad Klontz, Psy.D., CFP ®, in his work at Kansas State University’s Personal Financial Planning Department.

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The 7 Keys to Financial Health  ·  Personal Financial Consultants, Inc.

Financial Health Scale (FHS)* Circle the number that best describes the extent that you agree or disagree with each of the following. 1

Strongly disagree

2

Disagree

3

4

Neither agree nor disagree

5

Agree

Strongly agree

Score

1. My spending is under control.

1

2

3

4

5

3. I am saving for my goals (e.g., school, car, house, etc.).

1

2

3

4

5

2. I understand my financial goals. 4. I have a spending budget.

5. I consistently follow my spending budget. 6. I have clear financial goals for the future. 7. Financial issues do not depress me. 8. I am proud of how I handle money. 9. I avoid thinking about money.

10. I often buy things in an attempt to make me feel better.

11. The way I manage money is consistent with my values, goals and dreams. 12. I obsess about financial matters.

13. I have money set aside for emergencies. 14. Financial issues do not confuse me.

15. I often spend more money than I can afford.

16. I have lots of fears and insecurities around money.

17. I am taking the steps necessary to meet my financial goals. 18. I have trouble controlling my impulse to buy things. 19. I let others take advantage of me financially.

20. I am comfortable talking about money issues.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4

5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5

Printed by permission. *Klontz, B.T., Bivens, A., Klontz, P.T., Wada, J. & Kahler, R. (2008). The treatment of disordered money behavior: Results of an open clinical trial. Psychological Services, 5(3), 295-308.

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The 7 Keys to Financial Health  ·  Personal Financial Consultants, Inc.

Scoring Instructions 1. Circle items 9, 10, 12, 15, 16, 18 and 19.

2. The items you have circled need to be “reverse scored.” For example, if you circled a 5 for question #9, you would give it a value of 1 as illustrated in the following formula: a. 1 = 5   b. 2 = 4   c. 3 = 3   d. 4 = 2   e. 5 = 1

3. After you have reverse scored items 9, 10, 12, 15, 16, 18 and 19, transfer the score to the scoring column. 4. For the remaining items, just transfer the number you circled to the “Score” column. 5. Add up the numbers in the “Score” column. This is your financial health score. 6. Use the table below to see what it means.

What Your Score Means

20–59

60–79

80–100

Your Financial Health May Be in Jeopardy You are experiencing stress in your relationship with money. You may lack clear financial goals, have difficulty saving, and may be spending in ways that are inconsistent with your values and goals. It is likely that you are experiencing conflict in your relationships with money and you may have difficult emotions related to finances, including guilt, shame, depression or confusion. You may lack important financial knowledge and would benefit from assistance in discovering and working through emotional blocks around money that are keeping you stuck.

Your Financial Health Is Fair

While you have some positive aspects in your relationship with money, you are not realizing your full financial potential. While not causing you overwhelming distress, your financial behaviors may not be entirely consistent with your values and goals. Further financial education, financial planning assistance, and possible help in exploring your relationship with money may help you reach your financial goals, strengthen your relationships and improve your financial health.

You Are in Good Financial Health

It is likely that you have a relatively healthy relationship with money. You have clear financial goals, are taking steps to achieve your goals, and are effectively executing a savings and spending plan. It is likely that you are open and honest with those close to you regarding financial issues and have found ways to successfully negotiate financial issues in your relationships. If you don’t already employ the services of a financial planner, it may be time to consider securing expert assistance in helping you maximize your financial potential.

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The 7 Keys to Financial Health  ·  Personal Financial Consultants, Inc.

While the FHS doesn’t measure all aspects of financial health, it is a useful tool to give you a rough estimate. A comprehensive financial plan created by an independent financial planner is recommended for a detailed analysis of one’s financial health. A well-constructed financial plan makes use of a comprehensive datagathering process and powerful statistical tests to determine the probability of successfully funding retirement and other goals based on current assets and a variety of other variables, including historic and projected investment returns, rates of inflation and the possibility of big market declines. A strong financial plan either confirms a good financial course or provides specific recommendations for getting on track. Personal Financial Consultants offers this service to our current and prospective clients.

Regardless of your current level of financial health, the great news is that you have the power to take charge of it. If your current financial health is poor, you can improve it. If you have great financial health, you can make it even better. The remaining keys are designed to help you do just that.

Key #2: Take Responsibility for Your Retirement Planning Imagine yourself at 90 years of age. You wake up to the sound of your alarm at 5:30 a.m. and to a few aches and pains. You get up, shower, get dressed, have a quick breakfast, pat your dog on the head and head out to your nine-to-five job. How does that sound? Sure, there is nothing like some grey hair to give your employer increased confidence that you are the source of great wisdom. However, you might not want to be in a position where you are required to work in order to pay your rent and buy food in your golden years. At the risk of bursting your bubble, if you want to stop working someday to focus on traveling, fishing, gardening, knitting, writing your memoir or spending time with your family, you will need to make it happen on your own. That’s right. It is all up to you. Pensions (also known as defined benefit plans), which pay retirees a guaranteed, inflation-adjusted income for the rest of the retiree’s life and the

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The 7 Keys to Financial Health  ·  Personal Financial Consultants, Inc.

life of his or her spouse are on the quick road to extinction. The recent bankruptcy filings of corporations and municipalities have shown us that the pensions that are still in existence may not be as secure as we once thought they were. Because of a desire to cut costs, employers are off-loading the risk of funding retirement to employees. And don’t let the “security” in Social Security fool you. Even if Social Security is still around for your golden years, it won’t give you enough income to make you financially secure. This rapid cultural shift requiring retirees to fund their own retirement has far outpaced the necessary time, education and planning needed to equip them to be successful. Many hard-working Americans have not gotten the message that they are on their own and are not doing what they need to do to plan for a secure retirement. Sadly, in terms of planning for their retirement, the majority of Americans are living as if they are:

• In total denial about their aging, their projected spending needs, and the steps they need to take to secure their retirement • Hoping someone will swoop in at the last minute and fund their golden years • Planning on dropping dead at the office

To make sure you have what you need in retirement, it is important for you to maximize your contributions to your employer-sponsored retirement plans, such as a Simple IRA or 401(k). If you are self-employed, you can set up your own retirement plan. In addition, consider contributing to an individual retirement account (IRA). Roth IRAs are a great option. With a Roth IRA, you pay taxes on the money you put in now, and your investments grow tax-free. If you are just getting started, you can set one up yourself at www. Vanguard.com or www.Fidelity.com. A popular investment option is a target retirement fund. You just choose the fund that is closest to your target retirement date and the asset allocation rebalances automatically (and gets more conservative) as your retirement date grows closer. This is a great option for the investor who is just starting out. If you are one of the lucky few who have a pension plan, you may also be eligible to also contribute to an IRA, which is something you should make a priority. When you accumulate a significant amount of assets (e.g., $500,000), consider employing the services of a fee-only financial planning firm to manage your investments.

Key #3: Start Saving Now Don’t wait until your student loans are paid off. Don’t wait until you have paid off your house. Don’t wait until you have put your children through college. Start saving for your financial freedom right now. A good rule of thumb is to commit to saving 10–20% of your income for retirement. Let compound interest work for you. There is no reason why the average American couldn’t retire a millionaire. It doesn’t take much if you start early. For example, if a 22-year-old man set aside the maximum yearly allowable contribution of $5,000 a year in an IRA that earned 8% annual interest,

Time is the biggest factor in growing money

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The 7 Keys to Financial Health  ·  Personal Financial Consultants, Inc.

he would have $2.1 million by the time he reached age 67. Time is the biggest factor in growing money as it allows the principle of compound interest to take effect. If this same individual waited until age 40 to begin saving, he would have only $427,000 by the time he was 67 years old.

The later you start, the more you need to save each year to reach that goal. If you haven’t started saving yet, you may need to set aside a larger sum of money or plan on delaying retirement or moving to part-time employment when you are ready. Whatever you do, don’t let a late start stop you. It is never too late to begin saving. Start now.

Key #4: Cover Your Assets Did you know that you are already insured for all of the financial risks in your life? If you aren’t paying someone else for that insurance, whether it is health insurance, life insurance, renters or homeowners insurance, or disability insurance, technically speaking, you are still insured. When you bear all the financial risk in every aspect of your life without diversifying any of that risk to a third party you are said to be “self-insured.” Self-insurance is a legitimate risk management technique when it is done consciously. Unfortunately, many people are self-insured for higher probability risks without thinking about those risks and without making a conscious choice to self-insure. It is also rarely a good idea to self-insure every risk for yourself, your business or your family or to bear all the financial burden of a higher probability, potentially devastating risk even if you have deep pockets. That is where third-party insurance comes in. Auto, health and homeowners insurance are not enough for most people. Chances are you need disability insurance. Your odds of becoming disabled and being unable to work for a period of time far exceed your risk of premature death. Supplemental Security Income (SSI) will not cover your needs.

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The 7 Keys to Financial Health  ·  Personal Financial Consultants, Inc.

One of the biggest problems facing the average investor is a lack of diversification Consider the benefits of disability insurance. If loved ones depend on your income to maintain their quality of life, you also may need life insurance. Stay away from whole life, variable life and universal life policies, which combine life insurance with investments. Agents push these policies because they make much bigger commissions, but most objective financial planners advise against them. Stick with a term life insurance policy, which will cover you for a set number of years. The term should last until your dependents won’t need your income anymore. A general guideline is to have a death benefit that is at least eight times your annual income. You can shop for competitive term insurance rates at websites like www.AccuQuote.com or www.Insure.com. Non-working spouses may need their own coverage. Don’t ignore the costs it will take to cover his or her contributions to the household, which could include homemaking and child care. As you get closer to retirement age, you may also need to consider purchasing long-term-care insurance. Many insurance products require you to self-insure a portion of the risk in the form of deductibles and/or waiting periods. This type of self-insurance makes sense. For most people, however, it is a terrible idea to self-insure all risks as your insurer (also known as you) may go belly up when you are in most need of financial support.

Key #5: Diversify Your Investments You have heard the saying, “don’t put all your eggs in one basket.” The idea, of course, is that if all your eggs are in one basket and the weaving fails, you drop your basket, or you trip and fall, all of your eggs can be destroyed in one fell swoop. This idiom also applies to investing. One of the biggest problems facing the average investor is a lack of diversification. The average American is not adequately diversified. Research shows that more than half of the world’s wealth is now located outside of the United States. However, the average American’s stock portfolio is made up of predominantly domestic companies, which comprise 87% of the equity holdings. The same lack of diversification happens in other countries. The Japanese, for example, are 90% invested in Japanese stock. Putting all or most of your eggs in one country’s equity basket is a gross violation of the principle of diversification.

Investors also have a tendency to follow the latest in vogue assets and scorn asset classes that are depressed, which works against their best interests. Investors are also predisposed to make buy, sell and hold decisions for emotional reasons. These biases occur for many psychological reasons, increase an individual’s risk of financial loss and have a negative impact on diversification. Page 9

The 7 Keys to Financial Health  ·  Personal Financial Consultants, Inc.

While the actual percentage of money that should be allocated to a particular area depends on an individual’s risk tolerance, needs and goals, a well-diversified portfolio can include all of the following in various percentages: Domestic (U.S.) Equities (Growth or Value)

Foreign Bonds (Corporate and Governmental)

• • • •

• Developed Countries • Emerging Markets

Large Company Stocks Midsize Company Stocks Small Company Stocks Very Small Company Stocks

Foreign Stocks

• Developed Markets (e.g., Western Europe, Japan, Canada, Australia) • Emerging Markets (e.g., Eastern Europe, China, Brazil) • Frontier Markets (e.g., Smaller Markets in Asia, Latin America and Africa) Domestic (U.S.) Bonds (Long, Medium and Short Duration) • • • • • • •

Treasury Bonds Treasury Inflation-Protected Securities (TIPS) Mortgage-Backed Securities High-Yield (Junk) Corporate Bonds Medium-Quality Corporate Bonds High-Quality Corporate Bonds Municipal Bonds

Real Estate Investment Trusts (REITs) • Domestic Real Estate • Foreign Real Estate

Commodities (e.g., Natural Resources) Precious Metals (e.g., Physical Metals, Mining Companies) As you can see, there are a plethora of potential asset classes in which modern investors can put their money. Financial planners agree that a welldiversified portfolio is essential for reducing volatility, improving overall returns and maintaining good financial health. Given the complexity of investment options and the need to evaluate how they influence risk and return in a given portfolio, it is best to get the advice of a financial planner to help determine the appropriate asset allocation to meet your needs. Page 10

The 7 Keys to Financial Health  ·  Personal Financial Consultants, Inc.

Key #6: Plan Your Legacy One of the biggest threats to your decedents’ financial and emotional well-being is the lack of a legacy plan. A poorly designed set of instructions for how your assets should be distributed can result in significant family conflict, emotional distress and financial devastation. The lack of such a plan can result in pure chaos. Financial transitions upon the death or disability of a key family member are difficult even when they are well-thought-out. However, the loss of a loved one combined with an ill-conceived legacy plan can be downright traumatic. A critical aspect of legacy planning involves the creation of a will. A will is a legal document that outlines how you want your assets distributed. To be valid, a will must meet certain legal requirements, and as such, should be developed with the assistance of a reputable attorney. A good will clearly and accurately reflects your wishes, complies with state laws, is up-to-date and will not create conflicts in your family. If you have not set up a will yourself, you may be surprised to learn that you already have one. The state in which you live has predetermined what it thinks is a fair way to dispose of your assets when you die. This is what happens in the probate process. In addition to a will, trusts are often recommended to assist with legacy planning. Trusts establish a thirdparty entity to manage property or make decisions for a beneficiary. Trusts come in many forms and iterations, including “special needs,” “revocable,” “irrevocable,” “springing,” “living” and “testamentary.” While nearly everyone needs a will, a financial planner can help you determine if you could benefit from establishing a trust and refer you to a qualified estate planning attorney.

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The 7 Keys to Financial Health  ·  Personal Financial Consultants, Inc.

For advice on how to choose a financial planner, please see our guide: How to Choose a Financial Planner

Key #7: Seek Professional Help Please don’t tell us you are still doing your own taxes. Unless you subscribe to five of the top ten accounting and taxation journals and surf the IRS website on the weekends, perhaps you should leave it to the experts (the same goes for outsourcing your family’s dental services). In terms of financial planning, get some expert advice along the way. Look for a Certified Financial Planner™ professional to ensure a minimal level of education and expertise. Ask a potential financial planner how they get paid. If “commission” or “fee-based” is part of the conversation, don’t be surprised if there is some pressure to buy things. If you find a planner who is paid a percentage of your investible assets or pay a financial planner an hourly fee for his or her expertise, you are much more likely to get objective advice. For a fee, some financial planning firms, like Personal Financial Consultants, will conduct a comprehensive financial plan for you. These plans take into consideration your resources and your goals and offer concrete recommendations to help you meet your goals. If you are not looking for someone to manage your assets, it can be helpful to employ a financial planner to whom you can pay an hourly fee for his or her objective advice. The Garrett Planning Network (www.GarrettPlanningNetwork.com) is a group of fee-only financial planners who are willing to provide objective advice for an hourly fee. Not all financial stress can be cured by financial advice alone. If you are engaging in a pattern of chronic, self-destructive financial behaviors, consider seeking the help of a financial therapist. For those of us who know what we should be doing but just can’t do it, the expertise of a behavioral finance expert, who can help us untangle destructive financial beliefs and behaviors, can be invaluable. A list of individuals who specialize in financial therapy can be found at www.FinancialTherapyAssociation.org.

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The 7 Keys to Financial Health  ·  Personal Financial Consultants, Inc.

Conclusion There is nothing better than the feeling one gets from a sense of financial security. To review, the 7 Keys to Financial Health are:

1) Get a Financial Health Checkup: If you don’t take an honest look at where you are, you will never be able to get to where you want to be.

2) Take Responsibility for Your Retirement Planning: The rules have changed. Pensions are no longer an option for most, Social Security is not secure and no one is going to take care of your financial needs in your old age. You need to take responsibility for yourself. 3) Start Saving Now: Time is the biggest factor in securing financial freedom. Regardless of your age or how far behind you are, start saving today.

4) Cover Your Assets: Don’t let an adverse event wipe you out. Diversify your risk by buying appropriate insurance policies. 5) Diversify Your Investments: As the wise farmer says, “Don’t put all of your eggs in one basket.” Appropriate diversification is a primary factor in decreasing your portfolio’s volatility and insuring an adequate long-term rate of return. 6) Plan Your Legacy: Don’t sentence your loved ones to a state of financial and emotional turmoil. Take the time to think about what kind of financial legacy you want to leave. 7) Seek Professional Help: Consider employing the services of a CPA during tax season, seek the advice of an experienced financial planner when it comes to managing your investments, find a financial therapist if you are engaging in financial self-destruction and don’t engage in at-home amateur dentistry.

Odds are you are one of the 75% of Americans who year after year, in good times and bad, identify money as the number one source of stress in their lives. Let your financial stress motivate you to take action today. Financial health is a critical aspect of mental health, marital happiness, family security and life satisfaction.

If you want to create a financial plan or talk about our investment advising services, please don’t hesitate to contact us at Personal Financial Consultants. Wishing you excellent financial health!

Your team at Personal Financial Consultants

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

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Retirement Planning: Get Started Today

Planning for retirement is a lifelong process. By starting today, even if you’re just saving small amounts, you can increase your odds of enjoying a comfortable retirement in the future. Make an appointment with Personal Financial Consultants. We can talk to you about your long-term goals and help you develop a retirement savings strategy that works for you.

Contact us at 888-557-3272 or at [email protected] to schedule your appointment today!

1970 Broadway, Suite 1140, Oakland, CA 94612 888-557-3272 • www.PersonalFinancial.com

Personal Financial Consultants, Inc.