Financial Planning in Action

Financial Planning in Action

Each person is unique, equally unique is the financial needs of individual families. The following four scenarios are common financial situation followed by solutions. Within these solutions are recommendations for insurance, risk tolerance, and appropriate investments.

Life Situation #1: Husband/wife, two kids, 1 income, mortgage, good salary, some savings, no college fund

The scenario is based on a family setting where the risk tolerance will not be significant. However, the need to build savings for kids to have a college fund and eventually for retirement would be the goal. For this type of an investor, it would make sense to take a more conservative investment strategy with lower risk. The family in the scenario has a single income, making every dollar count, and investments are no exception. To maximize investments, some potential vehicles are mutual funds, common stock, government bonds, and certificate of deposits. While the common stock holds the highest risk, followed by the mutual fund, the other two are conservative choices that offer minor gains. The mutual fund option has the chance for higher gains and the added benefit of a fund manager. Given the details of this scenario, it is not recommended pursuing the stock market as a new individual investor. Also, the family needs insurance that will cover them if something were to happen to the one with the salary. Since the family is dependent on that single income, the insurance should be adequate to provide for the spouse and children. To estimate the current need for insurance, the basic rule is 70% of the income for seven years. Given the individual has a good salary, this basic calculation will offer a starting point. The next consideration should be what the family budget can support. If the budget only allows for a set amount, that amount will have to be the starting point. Over time, this amount can be increased until the desired amount is achieved....