12 Steps



Step 1: Determine What’s Really Important to You

Most people feel that money is not an end in itself, but rather a means to an end. It is the ability to provide for our loved ones and ourselves that matters, not just piling up money for the sake of having it. However, we seldom take the time and effort to really explore and examine what is important.

In my life as a financial advisor, I have interviewed hundreds of individuals and couples about money. My first step is always to determine what is really important to them. I have never received the exact same answers from any two people. You are unique. You have a very unique set of values that are only yours. The better you can understand and define those values the greater chance you will have for success in your financial life. You will truly enjoy working toward your goals and realizing them because your financial strategy is built on your personal values. You will become proactive in designing and implementing your plan, rather than just reacting to events, as most people do.

So, how do you actually discover those values? The first thing you will need is a partner who is a very good listener. This person must be truly concerned with helping you discover your values, not making any judgments about them or helping you reword them. And, the person must be patient. A financial advisor who practices Values Based Financial Planning© is one good option. If not, a spouse or a very good friend could serve in this capacity. Just make sure they understand the ground rules.

Most financial planning starts with a discussion of goals. That is not what we are looking for here. You must start with your values. Our values are the qualities and principles intrinsically valuable and desirable to us. They are life’s emotional payoff. They are the intangibles that make our pursuit of goals genuinely meaningful to us.

Once you have your partner to work with, you will start with that person asking you the question: “What’s important about money to you?” When you answer, your partner will record your answer and follow up with another question: “What’s important about _________ to you?” What goes in the blank will be whatever you used to answer the first question. So, if you said security was important, for example, the follow up question would be: “What’s important about security to you?” You should continue with questions in this format, until you cannot answer any more. At that point, you should have a final answer that really speaks to a high level value. Make sure you do not stop too soon. Really work at getting as high up in the values ladder as you can. You will find it very rewarding, I assure you.

I challenge you to take this step very seriously. If you find that you are not totally motivated by the process, I recommend you try it with a different partner. If your financial advisor is not familiar with Values Based Financial Planning©, find one who is and ask for a consultation. Most likely you will be able to get this at no charge. However, it would be well worth paying a fee of a couple of hundred dollars, if that is what it takes.

Step 2: Decide What Kind of Help is Best for You

In step #1 we dealt with how to determine what is really important to you. Now we begin to roll up our sleeves and start the work of developing a financial plan. The question now is; how do you know what kind (if any) of help you will need from professionals. Remember, as we discussed last month, it is not really about your money, per se. It is more about managing your money in a way that allows you to fulfill your values, achieve your goals, and create the kind of life you really want.

There are three basic options for dealing with your financial decisions and plans. You can do it yourself; collaborate with someone; or be a financial delegator. Our goal here is to help you understand what each of these choices means, so you can decide which will work best for you.

Most people who take the “do-it-yourself” approach make the decision to do so by default. They have not made a conscious effort to develop a comprehensive plan and implement it themselves. They make most of their financial decisions without considering the impact each one has on their entire financial situation. There are exceptions, of course, and it is quite possible to be effective with this method. You have to be willing to weigh all of the factors.

First, you have to be willing and able to write your own financial plan. Very few important accomplishments are reached without a detailed written strategy. This is certainly true in our financial lives as well as other areas of life. You also must be prepared to do your own research, make your own computations, and set up your own accounts. Most people who are successful “do-it-yourselfers” are those who truly enjoy the work and simply don not want to work with someone else.

The biggest challenge in doing this, besides the amount of time it takes, is education. If you are serious about your financial future and want to pursue this course of action, you should consider enrolling in the same programs for training that financial professionals use. The courses required for a Certified Financial Planner designation might be a good place to start. There are many other less structured resources such as books, classes, and web based programs. Part of the challenge with doing this is determining what to believe and finding programs with enough technical content.

You should have a good understanding of all types of insurance (life, health, disability, homeowners’, auto, etc.); be able to prepare cash flow analysis and budgets; create a debt management and elimination plan; manage assets effectively; understand investment returns and yields including after-tax effects; be knowledgeable in bond and stock valuation methods; know investment theory and strategies; do effective tax planning; and estate planning. Once you have developed your plan, you must be able to implement it effectively and monitor it.

The option to collaborate with a professional might appeal to you. In this arrangement, you will do most of the work yourself, but you will have someone to lean on for resources and occasional advice. They might help you prepare a basic financial plan and determine how to manage your investments. They will set up your accounts for you and provide some basic investment research for you.

The down side to this process is that most of the better financial advisors tend to shy away from these types of clients. That means you will probably have to deal with a salesperson that is compensated by commissions. There are certainly plenty of honest investment salespersons who do all they can to provide the best solutions for their clients. However, because they are compensated only on what they sell, their advice is often less objective than a fee-based financial professional. It will be important that you check out the advice to make sure it is best for you.

Not everyone can be a financial delegator. It requires that you develop a relationship with a trusted advisor to handle all of the research and strategies for you. This person must fully understand what is most important to you and work with you to see that you achieve those things in your life. Most of these advisors will charge a fee for services and/or a percentage of assets under management to provide a comprehensive financial plan and implement a strategy for you. This relationship will leave you free from the details of your finances to focus on the things in your life you consider more important.

This is a very important decision in the process of developing your financial future. It would probably be well worth your time to interview a few advisors of each type to help you decide what kind of relationship will work best for you. Before you make a final decision you should ask yourself: “How will my decision impact my ability to create the quality of life I desire?”

Step 3: Determine Your Current Financial Reality

“Knowledge must come through action; you can have no test which is not fanciful, save by trial.” Sophocles (496 BC - 406 BC), Trachiniae

In order to successfully navigate a course to a destination, it is critical to know what your starting point is. In the first two steps you discovered what is truly important to you and have given consideration to what, if any, kind of help you need. Now, we will turn to the hard work of understanding your current financial reality.

The work part of this is taking the time to gather all of your financial information. And, I do me ALL of it. You will need to get copies of your last tax returns, paycheck stubs, investment statements (stocks, mutual funds, IRA’s, 401(k)’s), insurance policies and statements, wills and/or trust documents and anything else you have that involves money. Check the resources section of our web site (www.rogerskirby.com) if you would like a fairly comprehensive checklist.

Once you have all of this information together, take four blank sheets of paper. Write one of the following titles on each of the separate sheets: “Emergency Reserve”, “Growth”, “Debt”, and “Risk Management”. You will use these sheets to accumulate information from your financial documents.

The Emergency Reserve sheet will contain a listing of all of your savings accounts that are set aside for emergencies. These will be savings and money market accounts or CD’s. These are the funds that are set aside only for serious emergencies, such as the loss of a job or a disability. This is the money you would use to meet insurance deductibles, fix a leaky roof, meet expenses between jobs, or bail a friend out of jail.

The Growth sheet will be where you write down all of the accounts, which are to fund future goals. It does not matter how these are invested. If their purpose is to fund something in the future, they should be on this sheet. Write down the name of the investment, where it is held, the type of account (IRA, 401(k), brokerage account, etc.), the current balance and the current yield (if there is one). This sheet will not include the value of your personal residence, although it will include the value of any investment real estate you own.

The Debt sheet will include any financial obligations you have. This includes credit cards, installment loans, car loans (yes, payment obligations on leases are included too), and mortgages (including your personal residence). List the name of the person or company you owe, the current balance, the minimum payments, and the interest rate on the sheet. Also, make a note of how many more payments you will have at the current payment level.

The Risk Management sheet will be used to list all of your insurance policies. Be sure to include; life insurance, disability income, health, homeowners’, automobile, long term care, umbrella liability, and any other policies you have. Write out the company, amount of coverage, annual premiums, and any basic coverage details that apply.

Now that you have all of this information written on the separate sheets, you will transfer the totals to a summary sheet. Prepare a separate sheet and write a line halfway across it horizontally and another one half way across vertically. This will give you a single sheet with four quadrants. Write the title of each of the four separate sheets, one in each quadrant. Under each of the four titles in each of the quadrants, write the captions; “Now”, “Want to Be”, and “Action”. Now, transfer the totals from each of first three sheets to the appropriate quadrant on the summary sheet under the “Now” section.

In future articles we will discuss how to perform the calculations needed to determine what should be in the “Want to Be” columns. This will involve applying financial principles and guidelines and establishing the appropriate variables for your unique situation. You will then begin to bridge the gap between the “Now” and the “Want to Be” with specific financial strategies, or “Actions”. Keep these sheets along with all of the other financial documents you have gathered, so they are available as you build your specific financial plan.

With the steps we have taken so far, we have begun to clear the land for the foundation to be laid in your financial plan. Next we will begin building the foundation. Then, we will begin to develop specific written goals to work toward.

Step 4: Building the Foundation – Debt Elimination

“Most men spend money they don’t have on things they don’t need to impress people they don’t like.” Patrick Morley, The Man in the Mirror.

The number one enemy to a life of financial peace is consumer debt. And the biggest cause of consumer debt accumulation is simply spending more than we can afford for things that really are not necessary. Most of the time, when we sit down in front of the stack of credit card bills, we cannot even remember what we bought.

If you want to reduce and eliminate your debt, you first have to “stop the bleeding”. That means getting really serious about a real budget. That does not mean simply writing out a budget and then feeling guilty that you over-spent at the end of the month.

In fact, drastic measures will probably be necessary. You have to anticipate your income for the month and spend every dollar on paper before the month starts. Then, you have to get radically serious and commit to the plan. You may even need to resort to the age-old envelope method. That’s right, the same plan your grandma probably used. It might sound corny in this high-tech era, but it did work for grandma and it will work for you. When you write out your plan each month, your goal is to identify every possible dollar you can use for paying off debt. Do not forget to include expenses, which are not paid every month. You will need to put away funds to cover these items.

Now that you have the plan on paper and know how much can be allocated toward debt, you will need to prepare a schedule of all your debts. This includes everything; credit cards, consumer loans, student loans and auto loans. The only one you can leave off for now is the home mortgage. List out each debt with its current balance and minimum payment amount. Now arrange them in order by current balance from lowest to highest.

Each month you will work off of this debt list. You will pay minimum payments on everything, except the first one on the list. You will allocate as much as you can toward that one until it is paid off. Once it is paid off, you will cross it off and go to work on the next one. Do not make a new list. Keep the old one with the crossed out accounts. It will help keep you motivated to continue moving forward. As you eliminate the smaller accounts, you will free up more dollars each month from the minimum payments to be applied to the next one. This is referred to as a “debt snowball”.

Some clients have told us that this is really difficult, because there is just not enough income to provide anything left over to pay off debt. Well, there are a couple of ways you can address this. First, what do you have that can be sold? Have a huge garage sale and apply everything you make toward the debt. Also, many people have a car payment that is completely out of line. My advice to you is to sell the car and pay off as much of the car loan as possible. Then, take out a loan for a couple of thousand dollars more than the remaining pay-off balance. Use this loan to buy a very inexpensive very used car. The payment on the new loan balance will be significantly less than the old car payment. Once the loan is paid off, you can upgrade to a three or four thousand-dollar car. Eventually, you will be paying cash for a very nice car, but for now you have to pay your dues.

Secondly, what type of part-time job can you find? There are plenty of jobs that pay fairly well. It might be something you think is a little “beneath you”. If you are serious you will be willing to take the humiliation for a while. The benefits of doing so will last a lifetime.

I realize that this might sound a little weird. However, just remember, doing what most people consider normal is what put you in the position you are in today. The day you finish with all of your debt will truly be a day to celebrate. Your life will never be the same!

Step 5: Building the Foundation – Preparing for Emergencies

“Stuff happens!” - Anonymous

We cannot predict what will happen to us in our financial lives or when. However, we can be sure of this: stuff does happen. We will always be disappointed and probably upset when bad things happen. The difference between the average person who becomes very stressed over these things and the person with true financial peace is how they have prepared for the event. Does it not make sense to plan for those things that we are quite sure are going to happen? Which situation would you rather find yourself in?

Situation 1: The air conditioning unit just quit on your home and it is July 10th. Obviously, you are not going to just wait until you can save up the four thousand dollars it is going to cost to replace it. So, you frantically check your available balances on your credit cards and find one you can use. You call the repair company and make the arrangements. The unit gets replaced and you are cool again, at least physically. Now you have to figure out how to pay off the balance. If you are like most people, you will only pay minimum payments. It will only take you fifteen to eighteen years to pay it off. Do you think you might experience another “emergency” or two before that time is up?

Situation 2: The air conditioning unit just quit on your home and it is July 10th. You get on line and transfer the four thousand dollars from savings to checking and write a check to pay the repair company. Over the next several months you budget to replace the funds in your savings account. Sure, you are disappointed that it happened but not really surprised. It was not really a financial setback, because you knew it was coming and had planned for it.

So, which situation would you prefer to be in? If you picked Situation 2, read further. If you picked Situation 1, you can stop now. You are so far gone there is nothing I can do to help you.

If we know that a certain amount of stuff is going to happen to us, why do we not plan for it and make provisions for it? The answer to that question is quite simple. This would require delayed gratification. We will not be able to buy the things we want or do the things we want to, because we are allocating dollars from our budgets every month toward saving to build this reserve. In order to overcome this attitude, we have to become deadly serious about doing something different. Remember; we do not get extraordinary results in any area of life by just doing the ordinary (what everybody else is doing). Normal in America today is to be broke and in debt. Do you want to be normal?

If not, the first step is to set a goal. If you have already completed Step 4 of this series and have eliminated all of your debt but your mortgage, then you should build a full emergency reserve. That means you are going to put away four to six months of you household expenses in reserve. This reserve will allow you to have the peace of mind that whatever comes your way; you should be able to handle it. If you are fortunate enough to never have a major setback, like losing your job for an extended period of time, then the excess balance in your emergency reserve will contribute to your retirement plans.

If you still have consumer debt (yes, this does include car loans), you will establish your reserve in stages. First, establish a goal to have a few thousand dollars in savings. You can make minimum payment on your debt while you are doing this. I would even recommend reducing the 401(k) contribution or shutting it off temporarily, if necessary, to accomplish this. Once this savings if funded, go back to work full scale on the debt. You will attack the emergency reserve full scale when the debt is paid. In the meantime, you have a small emergency reserve to take care of those things that come up while you are paying off the debt. If you have to use it for something, go back to building the reserve back up again.

Always keep in mind that this is a reserve for emergencies and not a long-term investment. Therefore, you do not want to put it at risk in any investment markets. It just stays in savings making little or no interest until you need it. If you have it invested, you can almost guarantee that the accounts will be down when you need the money. That certainly would not lead to less financial stress.

Step 6: Setting the Foundation – Managing Risk

“Take calculated risks. That is quite different from being rash.” George S. Patten (1885 - 1945)

Picture this. You are on a hill rolling a snowball upwards. You started with a snowball about the size of your head. Your goal is to get to the top of the hill with a snowball large enough to make a very large base for a huge snowman. You stop about half way up to check your progress. Great, you are on track and feeling really good. So, you have it made, right? It appears that way, but there are a few things that could happen to keep you from your goal. Suppose you fall and break both of your legs, so you cannot push it any more. What if you fall down and the snow ball starts rolling down hill rapidly. How about if someone much bigger than you comes and steals your snowball, or smashes it to pieces.

The top of the hill is your financial independence. The snowball is your savings and investment plan. And you are ... well you. Unfortunately, some people work really hard to build a financial future just to have it taken away by an unexpected event. Financial risks are a fact of life. There are only three things you can do about a risk.

First, you can avoid risk. This strategy might work for certain limited risks, but for the most part, it is unrealistic. In order to avoid risk, you will have to remove all of the possible events, which could cause the loss. So, for example, you could avoid the risk of death by automobile accident by never riding in a car. However, you would still have the risk of death by some other cause.

Another possibility is to assume risk. This means that you determine that you are in a position to cover the risk from your own financial resources. Unless you are a very wealthy person, this method of covering risk will also have limited application. For example, you could possibly assume some of the risk of medical expenses by accepting a higher deductible to get a lower premium. You determine that the cost savings is worth the risk and you can quantify the total amount of risk and decide that you can accept it. It would be more difficult to assume the risk of having your house burn down.

Most financial risks cannot be avoided and are too large to assume. There has to be a transfer of risk. In order to transfer risk, you have to find another person or company with deeper pockets than you. Usually, this means entering into a contract with an insurance company. The insurance company has enough people facing the same risks that they can pool them and predict their losses fairly accurately. Therefore, they can make a profit on the premiums and provide for the transfer of risks for each individual.

There are many types of risks of financial loss that we all face. One serious risk, which many people overlook or underrate, is the loss of income from a disability. This loss is far more likely for most people than the loss of life. The question you must ask yourself is: what will happen if you are unable to work for an extended period of time? There is often short-term protection, which will cover for thirty to ninety days, available from the employer. Long-term disability coverage begins after the policy’s waiting period (usually 90 days).

Long-term disability income insurance is available through many employers at an additional cost. It can also be purchased privately. It is important that you understand the waiting period (period before benefits begin), maximum length of benefits, amount of monthly benefits, and whether or not there is a cost of living adjustment on benefits.

One of the most important risks to those you might leave behind is, of course, the loss of life. Life insurance is the only viable way to transfer this risk from the ones you care about who are depending on you. The question is; how much do you need and what kind? There are two broad categories of life insurance: term and permanent. Term is the best solution for most people who need pure insurance coverage for a limited amount of time. You should select the length of guaranteed coverage, which will last long enough to ensure that your financial responsibilities will be met before it expires. For example, if your youngest child is sixteen years old and you expect to be financially independent within ten years, a ten-year level term policy should be adequate. Make sure the insurance company you chose is highly rated, not just the cheapest premium. You should consider permanent insurance, if it is not likely that your obligations will end or that you will realize financial independence. Another use of permanent insurance is for estate planning purposes.

One of the most common mistakes we find in our financial planning practice is that people are not adequately protected from liability. You should fully understand the coverage you have and its limitations. There are types of losses, which may not be covered by your homeowners’ or automobile policies. An umbrella policy fills in these gaps and increases the amount of coverage as well. Most people with any significant net worth or income should have this type of coverage.

Most people take their health insurance for granted, because it is often provided by an employer. However, it is important that you understand the limitations and options of these policies. It also might make sense to shop individual policies and compare them to your employer group plan.

Finally, there is long-term care coverage for the risks we face of an extended illness, which requires that we spend time in an institution not covered by our insurance or Medicare. Anyone over fifty years old should begin to explore this coverage.

The scope of this article is far to general to cover all of the intricate details of these risks and their coverage. If you are not technically qualified to evaluate them, you should get help. Make sure you work with someone who has the attitude of a consultant, rather than a salesman. In the meantime, keep pushing the snowball uphill and make sure you enjoy the journey!

Step 7: Set Specific Goals

“The reason most people never reach their goals is that they don't define them, or ever seriously consider them as believable or achievable. Winners can tell you where they are going, what they plan to do along the way, and who will be sharing the adventure with them.” Denis Watley

There is no way I can overemphasize this step. Virtually every highly successful individual has specific written goals. If you want to succeed financially, you must take time to write your goals down. In order to be effective, your goals must pass the “SMAC Test”. That is, they must be Specific, Measurable, Achievable, and Compatible.

Specific The more specific your goals are, the better. A goal that states: “We want a vacation home in a cool place in five years” is not nearly as good as one that states: “We will purchase a vacation home in San Diego County for $500,000 on June 30, 2018 and when we do we will feel thrilled and a sense of real accomplishment!”

Of course, we often do not know enough details right now to be this specific. Make the goals as possible given what you know today. Then, make part of the goal to nail down more specifics as soon as possible. You can update the goals as things become more clear.

Measurable There has to be a way to quantify your financial goals. This measurement can be dollar amounts in today’s dollars or inflated dollars. It can also be a stream of income net of tax or before taxes. It does not matter how you quantify it, as long as it can be measured.

This measurement is very important, because it is the basis for all of the calculations you will need to do later when you figure out what steps it will take for you to accomplish your goals.

Achievable I always encourage clients to stretch themselves some when setting goals. Your goals should not be so easy that you will not have to work to accomplish them. However, this is not the same as setting some goal that cannot possibly be achieved. There must be a realistic possibility that your goal can be reached. Otherwise, it becomes hopeless and you will probably give up.

One way I have found to address the competing desires to have goals that are a slight stretch, yet are still realistic is to rank them in priority order. That way when I calculate that I cannot possibly achieve all of my goals, I can focus on the ones with the highest priority. It also helps me decide if I want to compromise one goal slightly (i.e. Retire at 63 instead of 60) in order to fulfill another goal (i.e. pay for my kids college education).

Compatible Each one of your goals should be compared to the list of values you created in Step # 1. (Remember the “what’s important about money to you” discussion?) So, if you create a goal to buy a Time Share in Hawaii (probably more of a spur of the moment desire than a well thought out goal) you would look at it and decide if that is
compatible with your values. If you valued security and independence and really wanted to have the freedom to make a significant difference in the world, your newfound goal probably would not fly.

Make sure you have a few uninterrupted hours, grab a pen and a note pad, and a cup of coffee (and your spouse, of course) and have fun creating goals. We will discuss what to do with them once you have them over the next couple of steps.

Step 8: Determine the Appropriate Course of Action

“To will is to select a goal, determine a course of action that will bring one to that goal, and then hold to that action till the goal is reached. The key is action.” Michael Hanson

Most of what we have covered over the past seven steps has involved thinking and planning. The real test of how serious you are about changing your financial life and living a life of value comes in the action. If you have it all thought out and even written down, but never actually begin to act, you have accomplished nothing.

I began running when I was 15 years old on my high school cross-country team (yes, that was a few years ago). I have run several 5K’s, 10K’s and a few half marathons. All of my life I wanted to run a full marathon, but had never done it. I had read all kinds of articles on preparing for a marathon. I had even written out a specific plan, but never actually did one.

On February 12, 2001 I turned 45 years old. I decided it was time to go for it. First I registered for the Ocean State Marathon and paid the fee. Then, I booked my travel arrangements to Providence, Rhode Island. I wanted to etch my commitment in stone. Finally, I put together a specific training schedule and began doing the work. I was completely committed.

There was hardly a day over the next nine months in which I deviated from my schedule. There were several Saturdays during the summer, when I started my runs at 4:00 in the morning to get twenty miles or more in before it was too hot. When I realized that it was still going to be too hot, no matter how early I started; I drove to Prescott, parked my car, ran twenty miles and drove home. I was determined and committed!

We all know what happened on September 11, 2001. That was only six weeks before my marathon. I never even considered canceling my trip. If the airlines were not flying, I would have driven there. Fortunately, there were flights by the time the race approached. On Saturday, October 27, 2001, I crossed the finish line of my first marathon.

You probably have a similar story of something you really committed to and made happen. All you have to do is take that same dedication and focus to your financial life. As the Nike commercials say: “Just Do It!”

If you have been following these steps up until now, you have taken time to consider what is really important to you. You have decided what kind of help would be best for you. You have taken a look at your current financial reality; put together a debt elimination plan; and established your emergency reserves. You have evaluated your need for insurance programs to cover the risks you face. Finally, you have set specific goals. Now it is time to actually draft your specific plan and begin to implement it.
If you decided to work with an advisor the rest should be fairly simple. You will hire that person to write a specific action plan and help you implement it. The plan will cover specific steps for establishing the right level of cash reserves and how to invest them. You will understand and gain control of your personal cash flow and determine ways to minimize your income taxes. Your plan will determine the amount you will save to accomplish each of your goals and how those funds will be invested to maximize your likelihood of success. You will have a written debt elimination strategy, which includes your mortgages and your consumer debt. You will have an understanding of all of the financial risks you face and have a plan for addressing each one with the optimal products.

The plan will not look substantially different if your favored route is to do the work yourself. The difference is that you will need to obtain the skills to prepare all of these calculations and analysis. You can also use consultants for parts of it. Just be sure your consultants have your best interest at heart. A commissioned insurance agent, for example, may not be the right person to give an unbiased opinion of the types of life insurance you should have.

Now that you have the plan all written out, pick the three most important steps and get started on them. Make sure you have a deadline and a follow up plan. Once you knock off the first few, you can move on to a few more. The ultimate goal is to have all of your initial planning steps completed within one year. Then, it is a matter of monitoring your plan and making adjustment as you move forward. Now: just do it!

Step 9: Create an Investment Strategy

“To win by strategy is no less the role of a general than to win by arms.” Gaius Julius Caesar, 100–44 B.C.

You might recall, back in step 7, we discussed setting specific goals and writing them down. Well, it is time to get the old pen and paper out again. Step number 9 in achieving a life of financial peace is to create a specific written investment strategy. This step is probably followed even less frequently than the written goals step. Those individuals who use financial advisors or investment brokers are probably only slightly more likely to have a written investment strategy than those who do their own investing.

Strategy is defined as; “the art of devising or employing plans”. In order to be successful with a strategy, you will have to both devise a plan and then employ it. So, how do you, the individual investor, devise an investment plan? It is certainly much easier if you have a good financial advisor to help, but it is not impossible to do it yourself.

We have already covered the first step in developing your investment strategy. That is documenting your financial goals and objectives; and time frames for reaching them. You should develop these further by considering any of your personal preferences and constraints, and any tax issues that might affect your investment strategy.

Give thought to and document your ongoing income distribution needs from the portfolio, and other liquidity concerns stemming from withdrawals from the portfolio. This is necessary whether you are in the early accumulation stages of life or actually living off of your investments. This will have a very significant impact on your investment allocation.

What rate of return do you need to accomplish all of your goals with some degree of certainty? This is a very important factor. Once you know the return you need and have evaluated its’ reasonableness in light of your willingness and ability to assume investment risk, you will be able to arrive at your rate of return goals.

Your investment allocation strategy will be reflective of your rate of return goals. You will have to research the historical performance of several asset mixes so you can arrive at your personalized guidelines for the allocation of your assets. This process will determine which overall asset classes will be used, and how your assets should be divided between these asset classes.

It will probably not be in your best interest to immediately rearrange your investments to match this allocation. This is especially true if it is drastically different from your present strategy. You should create a plan to take into account the time frame for achieving your proposed asset allocation and when rebalancing is required. You should consider whether you will use techniques such as Dollar Cost Averaging to achieve your allocation ranges over time. Another consideration is whether or not portfolio optimization techniques will be used to enhance investment performance by helping to control risk and return. You should employ security selection guidelines to control how much of a certain type, and which types, of investments are permissible.

Once a plan is in place, it is important that you monitor its’ success regularly. You should determine which benchmarks are to be used in evaluating investment performance, and how they will be applied. For example, are you going to use one benchmark to evaluate the entire portfolio (Wilshire 5000, S&P 500, etc.)? Are you going to compare each of your holdings against an appropriate index for its’ asset class? Are you going to use absolute returns and not be concerned about comparisons to indexes? However you choose to address this, it is very important that your investment strategy be monitored and evaluated regularly.

You should refer to your written strategy whenever you consider a significant change in your investment holdings. This will help you keep the emotions (primarily fear and greed) out of the decisions. The best decisions are generally made when we stay true to the plans we created during times of calm sanity.

Step 10: Build in Accountability for Your Actions

“My problem lies in reconciling my gross habits with my net income.” Errol Flynn, 1909 – 1959.

Once we know exactly what we need to do, we still face two great challenges: 1.Doing it. 2.Keep doing it. It helps a great deal to understand what is important to us, because that provides the motivational fuel for our actions. It is also very helpful to have specific written goals. So, now that we have all the ingredients in place, we have to deal with the issue which is probably the number one reason people fail financially. They never really get started, or they quit too soon.

We are finding that accountability is helpful in many areas of life. It is used successfully in diet and exercise programs, career development, and other areas. So, how about implementing accountability in our financial lives? It can be done in one of three ways, or a combination of the three:

1.Self-Accountability. Very few people have the ability to do this successfully. However, it can be done. If you chose this method you will need a system, which measures your results regularly. You will need the strength to catch discrepancies in behavior and results and make adjustments accordingly. If you have never stayed on a budget, this is not the way for you.

2.Mutual Accountability. Find a close friend who is looking for the same type of relationship with their financial accountability. This can work with a husband and a wife, although it is usually better to have two couples working together. You should meet with your partner(s) at regular periodic intervals (at least monthly). During these meetings you will review how your actions have measured up to your plan and make commitments going forward. A very good alternative to this is to join a group specifically designed for this purpose. These groups usually provide financial education, as well as accountability. They have had very positive results. One example of this is the Financial Peace University, designed by nationally syndicated financial talk host Dave Ramsey (www.daveramsey.com). This is a eight-session program with videos and discussion. Many people have had tremendous results from them. You can locate a local group through their web site.

3.Professional Accountability. As we discussed in step number two, some people are much better off using a professional to guide them through this process. Most good comprehensive financial planners have some type of program to assist clients with all kinds of financial situations. The types of programs are almost as varied as the number of organizations. You will probably need to interview several firms to find the right match for your needs at the amount of fees you are willing to pay.

One fairly good rule of thumb is the more you need to change old habits, the greater will be your need for help. Regardless of which method or methods you chose, you need an action plan. This plan involves the types of things you will measure (monthly budget items, progress toward goals, number of “to-do” items accomplished, commitments to financial education, etc.). It will outline how frequently you are going to measure each one, and what success looks like. Don’t be part of the statistics on people who never acted on a plan because they just didn’t get started, or they faded out too soon.

Step 11: Revisit, Revise and Update Your Plan

“Only the wisest and stupidest of men never change.” Confucius

In an earlier article, when we discussed setting specific goals, I used an analogy of an airline pilot. This month we revisit that story. Our pilot realized that it would indeed be important to have a very specific flight plan to get from LA to New York City. He prepares a very detailed flight plan and files it with the flight operations center. Now, he is ready to go. He is going to follow that plan exactly as he filed it with no variations.

The problem now is that his plan assumed that there would be 40 Knot winds out of the south. In reality, the wind has shifted about one hour into the flight and now they are out of the north at 40 Knots. There is also some very turbulent air at his planned altitude. So, a few hours later the plane lands at the airport. The passengers are relieved to be on the ground, after the bumpiest ride they have ever experienced. Imagine their dismay when they realize they are in Charlotte, not New York City! The pilot’s response to their complaints: “Hey, I had a very good flight plan and I followed it exactly.”

Do you think the passengers would be very sympathetic to this pilot? Of course not! Yet, often we do the same thing as the pilot did when it comes to our financial planning. Many people do a pretty good job with the creation of their plan and actually implement the strategies it calls for. However, they only look at or reconsider their plan if there is a significant change in their financial circumstances. The truth is a financial plan is just like charting a course. The sooner we discover the need for modifications, the less disruptive the adjustments need to be.

At least once each year, you should pull out your plan and revisit the whole thing. That means reviewing your thought process, as far as what is important to you, your goals and time frames. You do not have to recreate the whole thing, but you should go through it point by point to make sure nothing has changed. In addition to revisiting your values and goals, you should revisit your assumptions and track your actual results against them. This is where you determine if each of the components of your investment plan is functioning the way you anticipated them. You should not only look at the performance of an investment, but all of the reasons you selected it in the first place. For example, if you selected a particular vehicle because there has been stable management and consistent performance and you find that there was a large shake up in the management team, this would be a candidate for replacement. You should make a list of all of the concerns you uncover throughout this step. You should also pull out your action plan, at this time, and determine if there are any actions steps you have not completed. Once you have all of the concerns and action items, you are armed and ready to move on to the next step.

The plan needs to be revised if there are any items at all on your list. You should consider what impact each of these items would have on your entire plan. Do you need to change a goal, because an investment has under performed for so long that you will not be able to recover? Have you realized that there was an important personal value missing from your original plan, so that you have to change your goals? Did your insurance (or other expense) go up so much higher than planned that you can no longer save the amount you planned? Whatever the issues are that require a change or adjustment, you should make them right away and determine the impact they have on your plan. If the outcome has changed considerably, you may want to go back to your original plan and do it all over again.

Most often we do not have to revise the entire plan. We can usually make very modest adjustment along the way. Once we have made the adjustments, we should update the plan and recalculate our expected outcomes. It always provides positive reinforcement to find out we are on course or actually a little ahead of our plan. It is always better to know bad news sooner rather than later. The adjustments you have to make will be considerably less uncomfortable that way.

Go ahead and dust off those old plans and begin the process of revisit, revise and update so you do not end up landing somewhere different than you had originally planned.

Step 12: Live A Life of Value

“When your values are clear, your decisions are easy.” Roy Disney

As we conclude our series on the twelve steps to a life of financial peace, it is time to refocus on what we started with. Imagine what your life will be like when you have a specific financial strategy based on what is truly important to you. You are fully aware of what really matters to you. You are working a plan so that your investment and insurance programs are working together in harmony to achieve your goals. You have the sense of fulfillment that comes from having a life that truly has purpose.

Dr. Steven Covey’s book: “Seven Habits of Highly Effective People” had a profound impact on my life. Most of the concepts that we apply in our Values Based Financial Planning Practice are based on Dr. Covey’s work. The first three habits are particularly relevant to the world of personal finance. Therefore, I think it is well worth summarizing them here for you:

Habit 1 - be proactive®: This is the ability to control one's environment, rather than have it control you, as is so often the case. Regardless of what the market does or any other external factors, you are working a plan and anticipating challenges. We control the things we can control (spending, savings, etc.) and do not fret the things we cannot control (the economy, markets, etc.).

Habit 2 - begin with the end in mind®: Covey calls this the habit of personal leadership - leading oneself that is; towards what you consider your aims. You are not becoming sidetracked by distractions. There is a clear sense of direction; not a scattering of techniques. We continually remind ourselves of what is important in life and what goals we are working toward.

Habit 3 - put first things first®: Covey calls this the habit of personal management. This is about organizing and implementing activities in line with the aims established in habit two. The things that matter most are of the highest priority. You do not allow the tyranny of the urgent to dictate your actions.

I am not aware of any possible way to truly live a life of value (that is, a life based on fulfilling our own personal values), without practicing these habits consistently. Think about the individuals you know who have been truly successful in some area of their lives. Have they not displayed this type of discipline in that area of their lives

My suggestion is that you display your Financial Roadmap somewhere that you will see it every day. In addition, get some pictures that represent your fulfilling your values and accomplishing your goals. For example, suppose one of your values is to have time freedom so you can be personally involved in mission work. You could get a picture of someone working in the mission field in one of the countries you would like to go. Paste these pictures up around your Financial Roadmap. This is often referred to as a Dream Wall.
These actions will help spur you to follow through on the commitments you make to your financial plan. The visual reminders will help you to see past the challenges and temptations that compete with the behavior that is necessary for you to stay with your plan. Take pictures that represent steps you have taken toward partial, and ultimately complete, fulfillment of these values and goals and add them to the Dream Wall as well.

I sincerely hope that you have enjoyed and learned from this series. More importantly, I hope that it will lead to a profound impact on your future. Just imagine what it will be like to look back on your life and know that your life really mattered! That is ultimately what it means to live a life of value.