The United States is one of the richest countries in the world, so why do so many Americans have money problems? Several factors seem to be involved, says Les Dlabay, associate professor of business at Lake Forest College in Illinois and co-author of a college textbook on personal finance.
For one thing, there's the barrage of choices available in the marketplace because of our free- enterprise system. Advertising and other selling efforts combine with wide product availability to provide myriad temptations for consumers to spend their money."We're told we need certain items, certain brands. Our purchases go way beyond the comfort level of consumption. We have our basic level of subsistence, but we've replaced the word want with the word need. What are considered wants in other societies are considered needs here," Dlabay says.
We think we have to have a big TV, the newest car and all the rest.
A related problem is the idea of instant gratification. Not only do we have to have all these things, but we have to have them now. "People are not saving for intermediate wants, let alone long-term goals." Credit is easy and saving is hard.
A third factor, says Dlabay, is simply poor planning. "There's a negative feeling about the idea of budgeting. It's so negative, in fact, that some financial planners call it a `spending plan' instead of a budget. But it doesn't matter what you call it, it's how you approach it that counts. A budget helps you achieve goals.
"Maybe we need to market this idea more. Maybe we need to say, `In 12 months, you too can be free of debt. You can be taking an ocean cruise. All you need to do is budget.'
"An important thing to remember is that there is no right way to budget, but having one is vital. It may be nothing more than writing down where all the money goes - tedious but revealing. Do what works, but get control."
The simple fact is, he says, "you can only save for the future by not spending all that comes in now. That's so obvious. But so many people not only spend all they have now, but through credit cards, spend part of their future."
Successful financial planning is a combination of effective goal setting and good habits related to spending, saving and investing, says Dlabay. He offers a five-step planning process:
1. Analyze your current situation. This step means looking at your financial values and goals. You need to identify how you feel about money and why you feel that way. Are your financial priorities based on social pressures, household needs or desire for luxury items? How will economic conditions affect your goals and priorities?
This step also includes determining your current financial situation with regard to income, savings, living expenses and debts.
2. Develop financial goals. In order to be effective, goals need to be realistic, based on your income and life situation. They should be stated in specific, measurable terms. For example, the goal of "accumulating $5,000 in an investment fund within three years" is clearer than the goal of "putting money into an investment fund." Goals should have a time element that helps you measure your progress toward your financial goals. And goals should imply the type of action to be taken.
Your goals will be different from everyone else's goals.
3. Create a financial plan of action. This requires choosing among the various ways in which those goals can be achieved. For example, you can increase savings by reducing spending or by increasing income through extra time on the job.
Creating a financial action plan means investigating possible alternatives. Look for information on cost, benefits and ease of implementation. Several methods can be used to achieve the same end, but because of your individual values, needs and other factors, all methods may not be equally desirable.
4. Implement the plan. This step of the financial planning process may require assistance from others - insurance agents, investment brokers, accountants, professional financial planners, etc., depending upon your stage of life, your goals and what you have to work with.
5. Evaluate and revise your plan. Changes in your income, values or life situation will require revision of your financial goals and activities. When uncontrollable events affect your financial needs, the financial planning process provides a vehicle for dealing with them by delaying or altering priorities. Also, as you achieve immediate or short-term goals, goals next in priority will come into focus.
The important thing to remember, says Dlabay, is that financial planning is not designed to prevent your enjoyment of life but rather to help you obtain the things you want. It is an on-going, ever-changing process, but one that can greatly improve your quality of life.
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ADDITIONAL INFORMATION
ECONOMIC CONDITIONS AND FINANCIAL DECISIONS
Economic factor: Consumer prices
What it measures: The value of the dollar; changes in inflation
How it influences financial planning: If consumer prices increase faster than your income, you are unable to purchase the same amount of goods and services; higher consumer prices will result in higher interest rates.
Consumer spending
The demand for goods and services by individuals and households
Increased consumer spending is likely to result in increased job opportunities and higher wages; high levels of consumer spending and borrowing can push up consumer prices and interest rates.
Interest rates
The cost of money; the cost of credit when you borrow; the return on money when you save or invest
Higher interest rates make buying on credit more expensive; higher interest rates make saving and investing more attractive and encourage reducing the amount of debt.
Money supply
The dollars available for spending in our economy
Interest rates tend to be reduced as more people save and invest; but higher saving (and lower spending) may also reduce the number of job opportunities.
Unemployment
The number of individuals without employment who are willing and able to work
Individuals who may become unemployed should reduce their debt level and have an emergency savings fund to take care of their living costs while they are out of work; high unemployment reduces consumer spending and job opportunities.
Housing starts
The number of new homes being built
Increased home building results in more job opportunities, higher wages, more consumer spending and overall economic expansion.
Trade balance
The difference between a country's exports and its imports
If a country continually exports more than it imports, imported items and foreign travel will cost more.
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LIFE STAGES OF FINANCIAL PLANNING
Common financial goals and activities: Obtain appropriate career training
Life situation: Young single (18-35)
Specialized financial activities: Establish financial independence.
Obtain a disability insurance policy to repay income during prolonged illness.
Consider home purchase for tax benefit.
Create an effective financial recordkeeping system.
Young couple with children under 18
Carefully manage the increased need for the use of credit.
Obtain an appropriate amount of life insurance for the care of dependents.
Use will to name a guardian for children.
Develop a regular savings and investment program.
Single parent with children under 18
Obtain adequate amounts of health, life and disability insurance.
Contribute to a savings and investment fund for college.
Name a guardian for children and make other estate plans.
Purchase appropriate types and amounts of insurance coverage.
Young dual-income couple, no children
Coordinate insurance coverage and other benefits.
Develop savings and investment program for changes in life situation (larger house, children.
Consider tax-deferred contributions to retirement fund.
Create and implement a flexible budget.
Older couple, no dependent children at home
Consolidate financial assets and review estate plans.
Obtain health insurance for postretirement period.
Plan retirement housing, living expenses, recreational activities and part-time work.
Evaluate and select appropriate investments.
Establish and implement a plan for retirement goals.
Mixed-generation household (elderly individuals and children under 18)
Obtain long-term health care insurance and life/disability income for care of younger dependents.
Use dependent care service if needed.
Provide arrangements for handling finances of elderly if they become ill.
Consider splitting of investment cost, with elderly getting income while alive and principal going to surviving relatives.
Make will and develop an estate plan.
Older single
Make arrangement for long-term health care coverage.
Review will and estate plan.
Plan retirement living facilities, living expenses and activities.
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COMMON FINANCIAL PLANNING MISTAKES
1. Not setting financial goals.
2. Making an unrealistic budget.
3. Maintaining poorly organized financial records.
4. Not establishing a credit history in both spouses' names.
5. Using credit unwisely.
6. Not having enough insurance for your home and valuables.
7. Not having an emergency savings fund.
8. Buying insurance without taking discounts.
9. Failing to shop for the best interest rates.
10. Not insuring lives and earning power.
11. Not putting money to work for you.
12. Paying too much in taxes.
13. Making major financial decisions without professional help.
14. Making spur-of-the moment investments based on tips.
15. Not having a will.
Source: Kapoor, Dlabay and Hughes, "Personal Finance," Irwin.