FORGET THOSE HOT STOCK TIPS, AT LEAST FOR NOW. NONE OF THEM WILL DO ANY GOOD WITHOUT A PROPER FINANCIAL FOUNDATION.

BY JOSEPH PAWLIKOWSKI

There are bills to pay, mouths to feed, and a future to plan. Money is moving in a thousand different directions, and it seems like it is spent before it shows up in the bank account. With the credit cards, the car payment and the mortgage, there is plenty of debt, so taking out an additional loan is not feasible. How, then, will all of these expenses be paid?

The problem is that most people do not adequately plan and document their financial transactions. If someone wanted to start a business, he or she would draw up a detailed business plan. If one wanted to build a deck, he or she would follow step-by-step instructions. Why, then, would someone wanting to amass wealth not follow a personal financial plan?

When planning for retirement, college, or even just a big family vacation, investing in interest and risk-bearing accounts is a common consideration. However, there are more basic steps to take before entering into such endeavors.

THE BASICS
The first step in righting the financial ship is to assess your net worth. This is a simple process that many people neglect for fear of the outcome. No one wants to come to the realization that they are worth negative dollars. To figure your net worth, divide a sheet of paper into two columns, labeled “Assets” and “Liabilities.” Place things
like your home, car, investments (stocks, 401(k), IRAs), savings, and any valuables under assets, and all debts such as credit card, mortgage, car loan, and student loans under liabilities. Add them up, subtract the liabilities from the assets, and that is your net worth.

When building wealth, the initial focus should be on liabilities. Debt is the killer of wealth, and should be eliminated before making any considerable investments. Credit cards are the main culprit, as they can charge upwards of 19 percent interest. Even if you have a credit card with an interest rate at as low as 12 percent, there aren’t
many, if any, reliable investments that will provide a 12 percent return. So instead of putting $300 into a mutual fund, the better move is to put that money towards paying off a credit card, as it will reduce the balance and interest payments.

A risky yet effective way to reduce credit card debt is to open an account that offers zero percent interest on balance transfers for a year. The catch is that the balance must be paid off in full during that year, or interest is back charged for the entire year. The idea is to continue transferring balances to new zero percent interest cards until the balance is fully paid. While this sounds like an ideal solution, it involves plenty of risk. Failure to read the fine print of the credit card agreement or late payments may result in the full incurrence of said interest.

BUDGETING
In order to efficiently pay off debt, as well as bills and other expenses, creating a budget is paramount. Absent one, money can fly freely and recklessly, increasing debt and cutting into savings. The better the allocation of your money, the more you’ll save and the faster you’ll get out of debt.

Creating a reasonable budget is as simple as assessing your net worth. On the top of a piece of paper, write down your approximate monthly income. This is your salary plus any secondary income sources. For the next month, write down every incident in which money left your hands, whether it is cash, credit, or check.

At the end of the month, go back and examine where your money goes and determine which activities can be cut from your spending. For instance, dining out is a frequently overlooked expense. This is the first area from where you can cut.

Shopping at a supermarket is much cheaper, but there are pitfalls in the aisles that can bust your budget. Budgeting comes heavily into play when food shopping. By going to the store without a list of necessary items, you are prone to impulse buys. But by spending 15 minutes writing down everything you need for the week ahead,
money can be saved. This way, extraneous items will not make their way into your shopping cart. Save your receipts. When you get home, you can create a list of what you bought and the prices. After about a month, you’ll have quite a populated list, and will be able to approximate your food costs before even setting foot into the store.

An important yet often neglected key to budgeting is to pay yourself first, and that doesn’t mean recreational spending money. Michael Masterson, author of Automatic Wealth, suggests that 15 percent of your pre-tax earnings should go directly into savings and investments. For people with extravagant debt, that 15 percent should go towards repayment.

When creating your budget, make sure to account for an emergency fund. Cars break down, kids tear clothes, and household appliances malfunction. By creating a small accruing emergency fund, these kinds of unexpected expenses can be paid without ruining your budget.

THE RISKS OF INVESTING
There are plenty of monetary risks that go along with investing, but perhaps the biggest risk lies in the person handling your money. This isn’t to say that brokers are all crooks and liars. But in a situation where there is plenty of room for monetary abuse, knowing the history of the person handling your account is a necessary precaution.

The first step is to check the Central Registration Depository for a broker’s disciplinary history. This information can be obtained through your state securities regulator. During the initial meeting with a financial advisor, it is important to ask as many questions as possible. These should be about both the type of investments that are
right for you and the history of the advisor and his or her firm. Finding out the advisor’s or the firm’s investment philosophy is important, as you can use this information to compare brokers and decide which is the best fit for you. Asking questions regarding how the broker gets paid and how you are to pay the broker can also be telling questions.

After you become acquainted with a financial advisor, the next step is to pick your investments. The more homework you do prior to entering a broker’s office, the better you’ll be able to select investments.

There are a few questions about yourself that you should answer before meeting with an advisor.

• What are my investment goals? Are you saving for retirement, college, or a nest egg for your children? The more you understand about why you are investing, the better a broker will be able to help you select investments.
• How much do I know about what happens when I make a trade? If you don’t understand the process by which stocks and bonds are bought and sold, it is advisable to spend a day researching the topic at your local library.
• What percentage of an investment am I prepared to lose before pulling out? Having a solid plan in case of a loss can be integral when deciding which investments to choose.

Once you have crafted solid answers to these questions, it is time to meet with an advisor. Make sure to bring a pad to write down the main points of your conversation. Having these on record will help clarify any future confusion. As with most other stages of investing, there are additional questions you should be prepared to ask before making an investment. Your advisor should be able to provide specific answers.

• How will my chosen investment make money? Some investments make money simply by a stock’s increase in value. Others also pay yearly dividends to shareholders. Some investments even require an event to occur, such as the raising of interest rates. A supplemental question would be: What needs to happen for this investment make me money?
• How liquid is this investment? If I need the money in a hurry, how quickly can I sell the investment? Are there any penalty fees for selling before a certain date?
• How long has the company in which I am investing been in business? Have they had any disciplinary action from the SEC? How has this investment performed in the past?
• What is the company’s competition like? Where does it stand in relation to its competitors? What are the fees associated with this investment?

So now your money is invested, and you have to check up on it. The following questions should be asked every time you check the progress of your investments:

• Is this investment helping me reach my goals?
• How much would I take home if I liquefied the investment right now?
• Is the investment currently under performing, over performing, or doing pretty much as expected?

If you receive unsatisfactory answers to these questions or there is a problem with your investment, you must act quickly, as there is a limited amount of time in which to file a complaint. After your advisor, the next person with whom to speak is the branch manager. Beyond the branch manager is the firm’s compliance department, and finally the United States Securities and Exchange Commission. Due to the short statute of limitations, it is advisable to speak with a lawyer promptly.

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