It may seem a bit far fetched, but some investors have butterflies in the stomach when they hear about financial planning. There is no doubt that planning one’s finances is a very necessary and beneficial practice, but what does the plan really entail? I feel strongly that a good answer can help to calm the fears of investors.
Financial planning basically involves making decisions in five main areas: budgeting, liquidity management, management of large purchases, long-term investment and insurance.
In budgeting, the investor is supposed to decide how much of his income will be saved and how much will be spent. When income exceeds expenditure, there is saving, and hence an increase in assets. When the reverse occurs, there is negative saving, or a rise in liabilities. The excess of assets over liabilities represents the net worth of the investor.
Saving broadly relates to three different time horizons. Short-term saving such as saving for day to day expenses has a connection with liquidity management which will be soon discussed. Medium-term management deals with saving for items such as a car, or deposit towards buying a house, and borders on financing large purchases. Long-term saving is needed to achieve long-term investment.
Liquidity stands for cash that can be readily spent. Generally speaking, the more liquid a financial instrument is, the lower the returns it provides. Examples of very liquid instruments are bank notes, and chequeable accounts. These instruments pay little or no interest. Bank and building society deposits are slightly less liquid instruments that pay some interest but with some amount of limitation in accessibility. Stock market securities such as shares and bonds provide much higher returns but are equally much less liquid. It is necessary for an investor to decide how much of his saving should be in very liquid form and otherwise, in order to maximise returns.
Some form of money management is needed. For example, the high dealing cost involved in the purchase and sales of shares will make it unreasonable to embark on a share investment, when one is saving towards a holiday. A deposit or chequeable account will be more suitable. Liquidity can also be maintained via the use of credit cards, except that this form of credit attracts high interest. One must decide as to how much of liquidity will be provided by credit cards, through credit management.
When considering large purchases such as buying a car or house, one can use his own savings, borrow or combine both savings and borrowing. It pays to bear the interest as well as duration of repayment in mind when borrowing. Allowance should be made for possible hikes in interest, and a resultant rise in the size of the loan, and regular payments.
Returns increase more than proportionately with time, and risk increases less than proportionately with time when considering investment in shares. In other words, shares are more suitable for long-term investment than many other securities. There is time diversification which means that losses are evened out by gains with the passage of time. Another benefit of employing shares in long-term investments is their ability to nullify the negative effects of inflation. Shares have been proven to provide returns that are proportionately higher than inflation in the long-term.
Insurance is also considered in financial planning and essentially means paying money to an insurer for financial protection. Life insurance protects the beneficiaries in the event of the death of the policyholder. In fact insurance can be taken out to cover various assets such as car, property, and so on. It can provide protection against eventualities such as critical illness, sickness, income continuity during death and so on. Certain insurance policies such as endowment and whole-of-life combine both features of savings and life insurance in one package. It is wise to decide during planning whether it is better to keep savings and life insurance apart.
Financial planning should be demystified. It is like any other plan, except that it relates to finances. As long as one stays focused and methodical, and touches on the aforementioned decision zones there shouldn’t be any anxieties. The plan is for a particular individual to use and it is crucial that decisions are made to suit the unique financial situation and circumstances of the person under consideration.
There are two kinds of People, first are those who do not know where their next pay check is coming from and the second are those who know where their next pay check is coming from.
Planning Financially is must for everyone from the lower right up to the Upper Class.
It has has been taught to every child, even you! Remember your Mom telling you don’t buy this don’t buy that it’s not good for you and stuff?? Yes! That was one of your important lessons.. But we as children ignored the important lesson and ran out and bought sugary candy which just made us Nuts and eventually drove our Parents Nuts (If you are laughing now don’t forget you will have kids of your own)
The Ideal expense to pay check ratio would be 1 : 2 or even better 1 : 3 and so on.
Every Company aims for it and so should you!
But unfortunately not many get it that way.
But roughly even if you are saving 1/3 of your pay check you are doing well enough.
People are spending a lot on Consultation, getting people to help balance their lives. Don’t forget you got to pay people for Financial help!
So instead of paying someone for a solution here are some rules, to keep your self balanced and live a Happy Life.
MUST-DO List for a happier life
Financial Planning rule no. 1
STOP using Credit Cards:
As convenient as it is, it’s an added expense and a very good reason to spend money. Only use Credit Cards where necessary. Consider this step as a bad habit and drop it where Financial Planning is concerned.
Financial Planning rule no. 2
Get rid of your Loans:
This is must you have no idea, how light you will feel.
Speak to your Bank and pay more to get rid of them faster.
Rule no. 3
Buy in Bulk:
When you buy grocery in bulk not only you get them cheaper you can use them for longer. For e.g. you use 3 soap bars in a week instead of getting just 3 next week, get a pack of 10 you will get it cheaper plus you will save time and money to go back to the Store the following week. Use this Financial Planning rule where ever possible.
Financial Planning rule no. 4
Cut down on luxuries:
You don’t need to eat out everyday, Cook at home sometimes, its healthy (that’s if you know how to cook) and cheaper, Apply this Financial Planning rule where ever possible.
Financial Planning rule no. 5
Get to the 1 : 2 Ratio:
Try as hard as you can to reach to this ratio, earning at least twice as much as your Expenses. This step is a very important step in Financial Planning!
Financial Planning rule no. 6
Save money on Gas.
Reviewing is like a medical health screening, personal financial statements need to be examined to diagnose the state of financial health.
Similar to analyzing a company, the personal financial statements to review are the balance sheet, income/cash flow statement and budget allocation.
Balance Sheet
It lists the assets and liabilities at a specific point in time.
The types of assets are:
1. Liquid (Cash, fixed deposits, money market, short term investments)
2. Investments (Shares, unit trusts, bonds)
3. Personal (Property, car)
Some assets may fall into more than 1 category, it depends on your intention of the item. For example, shares can also be liquid or a second property could be for investment.
Liabilities are mainly categorized as short term or long term.
Net Worth will be determined by Assets minus Liabilities.
Income/Cash Flow Statement
It illustrates the income versus expenses over a period of time, typically a year.
List all sources of income, like employment salary, rental, dividends, interest, CPF contributions, royalties, etc.
List all sources of expenditure, like taxes, mortgage, loans, insurance, living expenses, entertainment, purchases, etc.
Income minus expenses will arrive at a surplus or a deficit.
Budget Allocation
If there is a deficit on the income statement, budgeting is a key solution. Even for surpluses, having a proper budget prevents living too miserly.
Divide expenses into 3 categories:
1. Committed: Mortgage, loans and insurance premiums.
2. Essentials: Living expenses like food, clothing, transport, utilities.
3. Luxuries: Holidays, branded goods, latest gadgets.
Review the list and look into excessive spending areas and aim to reduce any debt if there is. There might be sacrifices to be made, but a balance needs to be strike to achieve the financial goals.
Subsequently, the spending patterns need to be monitored to ensure the budget is adhered to.
Financial Ratios
A quick way to look at the results of the financial statements generated above is to calculate the financial ratios.
1. Liquidity ratio, number of months of emergency funds available: Liquid assets / Monthly expenses. (Should be between 3 – 6 months)
2. Debt to asset ratio, the amount of assets financed by debt: Liabilities / Assets. (Should be less than 50%)
3. Debt service ratio, the amount of take home pay used to pay off loans: Annual loan payments / Annual income. (Should be less than 35%)
4. Savings ratio, amount of savings: Savings / Income. (Should be more than 10%)
The recommended level is only a guide and it varies depending on personal circumstances.
This closes the financial planning cycle loop and should be carried out at least once a year.
The Mississippi State Agency that oversees the collection and reporting of State income taxes deducted from payroll checks is:
State Tax Commission
Income and Franchise Tax Division
P.O. Box 960
Jackson, MS 39205
(601)-923-7083
[http://www.mstc.state.ms.us/taxareas/withhold/main.htm]
Mississippi requires that you use Mississippi form “89-350, Mississippi Employee’s Withholding Exemption Certificate” instead of a Federal W-4 Form for Mississippi State Income Tax Withholding.
Not all states allow salary reductions made under Section 125 cafeteria plans or 401(k) to be treated in the same manner as the IRS code allows. In Mississippi cafeteria plans are not taxable for income tax calculation; not taxable for unemployment insurance purposes. 401(k) plan deferrals are not taxable for income taxes; taxable for unemployment purposes.
In Mississippi supplemental wages are required to be aggregated for the state income tax withholding calculation.
You must file your Mississippi state W-2s by magnetic media if you are have at least 50 employees and are required to file your federal W-2s by magnetic media.
The Mississippi State Unemployment Insurance Agency is:
Employment Security Commission
P.O. Box 1699
Jackson, MS 39215-1699
(601) 961-7755
[http://www.mesc.state.ms.us/tax/index.html]
The State of Mississippi taxable wage base for unemployment purposes is wages up to $7000.00.
Mississippi has optional reporting of quarterly wages on magnetic media.
Unemployment records must be retained in Mississippi for a minimum period of five years. This information generally includes: name; social security number; dates of hire, rehire and termination; wages by period; payroll pay periods and pay dates; date and circumstances of termination.
The Mississippi State Agency charged with enforcing the state wage and hour laws is:
Department of Health
Occupational Safety and Health Branch
2423 North State St.
Jackson, MS 39215
(601) 960-7400
There is no provision for minimum wage in the State of Mississippi.
There is also no general provision in Mississippi State Law covering paying overtime in a non-FLSA covered employer.
Mississippi State new hire reporting requirements are that every employer must report every new hire and rehire. The employer must report the federally required elements of:
Employee’s name Date of hire Employee’s date of birth. Employee’s address Employee’s social security number Employer’s name Employers address Employer’s Federal Employer Identification Number (EIN)
This information must be reported within 15 days of the hiring or rehiring.
The information can be sent as a W4 or equivalent by mail, fax or electronically.
There is a $25.00 penalty for a late report and $500 for conspiracy in Mississippi.
The Mississippi new hire-reporting agency can be reached at 800-241-1330 or on the web at https://newhirereporting.com/ms-newhire/default.asp
Mississippi does allow compulsory direct deposit but the employee’s choice of financial institution must meet federal Regulation E regarding choice of financial institutions.
Mississippi has no State Wage and Hour Law provisions concerning pay stub information.
Mississippi requires that employee be paid no less often than semimonthly, biweekly, or on 2nd and 4th Saturdays of month for manufacturers and public service corporations.
Mississippi requires that the lag time between the end of the pay period and the payment of wages to the employee not exceed ten days after pay period; 15 days for public service corporations.
Mississippi has no general provision on when terminated employees must be paid their final wages.
Deceased employee’s wages must be paid when normally due to the surviving spouse or next of kin.
Escheat laws in Mississippi require that unclaimed wages be paid over to the state after five years.
There is no provision in Mississippi law concerning record retention of abandoned wage records.
There is no provision in Mississippi law concerning tip credits against State minimum wage.
In the Mississippi payroll law there is no provision covering required rest or meal periods.
There is no provision in Mississippi law concerning record retention of wage and hour records therefor it is probably wise to follow FLSA guidelines.
The Mississippi agency charged with enforcing Child Support Orders and laws is:
Division of Child Support Enforcement
Department of Human Services
750 N. State Street
Jackson, MS 39205
(601) 359-4863
(800) 948-4010
http://www.mdhs.state.ms.us/cse.html
Mississippi has the following provisions for child support deductions:
When to start Withholding? First pay period after 14 days from service. When to send Payment? Within 7 days of Payday. When to send Termination Notice? “Promptly” Maximum Administrative Fee? $2 per payment. Withholding Limits? Federal Rules under CCPA.
Please note that this article is not updated for changes that can and will happen from time to time.
Many government entities use performance based budgeting and while it is not the traditional method for individuals to use, there are components of this method that can help you to achieve your financial goals. This type of budgeting is geared toward results, meaning the type of budgeting that is chosen is selected specifically to achieve a certain result. While you may indeed be adhering to a strict line item budget, if the results are not moving you forward financially, your budget is not doing its job.
Performance based budgeting is goal oriented. In other words, you tell your money how to perform in order to achieve the desired result. For example, if the only way you can squeeze money out of your budget to go on vacation is to cut into your grocery bill then you may decide to eat beans and rice or hot dogs two nights a week for several months and then bank the grocery savings for your vacation.
Incentives based on performance are valuable. Some companies that offer tuition reimbursement do so on a graduated scale. That is, if you make an A, you get 100% of your tuition back, a B nets you 75% of the cost, and a C will repay 50% of your tuition costs. Anything less than a C and you’re on your own. While not all companies that offer tuition reimbursement do so by this model, for the ones that do, it is a powerful incentive for employees to study hard and make the grade.
Performance based budgeting offers a way for you to save for the things you really want instead of letting your money fritter away on inconsequential expenditures. Instead of falling prey to every sale that comes along, reward yourself with one item that you truly want and can use. However, the reward only comes along after your budget has performed the way you have set it up to perform.
Budgeting, in general, is not especially hard but it can be difficult to change spending patterns that have been allowed to run free for years. While total denial usually doesn’t work, a reasonable budget that covers every aspect of your living conditions is a great tool to use to reach financial independence and prosperity. Setting goals along the way offers a powerful incentive to stay on target. While you may need to tweak your budget from time to time, performance based budgeting offers a system that can help you to get what you truly want.
For many years, the Better Business Bureau has been aiding consumers by taking their part against unscrupulous and crooked industries. When a customer complains, the bureau listens, advises on what actions to take, and contacts the questionable business to reiterate the customer’s complaint.
Although the Better Business Bureau has no authority to act on the behalf of the individual or one business against another, it does furnish as much support as possible, and it provides all consumers with updated information on frauds and schemes that criminals use. The consumer advocate still possesses the ability to make legislators and law enforcement groups take notice of the wrongs in the world.
With the advent of the internet, the BBB became more accessible to everyone. You can find interesting and informative articles on many worthwhile things when you visit their website. You can discover what con artists are concentrating on doing and learn the flags to look for when you are dealing with contractors or companies that are not on the up and up.
The BBB offers national and Canadian news and information, but most importantly, you can go to your region for facts on organizations. Many of the businesses that you deal with regularly are members of the BBB. If you deal with those who aren’t, you may be in for some surprises along the way.
The huge database of information at the BBB keeps track of businesses all over the country. If a company moves from one area of the country to another, chances are the BBB has them in their database. When a company has legal problems stemming from its dealings with consumers, that information remains in the system until someone checks into it.
Not all the information that the BBB offers is negative, however. Companies who have provided good service find their way into the database. The companies who are members of the bureau and have no unresolved issues receive good to excellent ratings, based on how those issues are resolved. They have also recently implemented a modified grade scale, which provides a broader ranking scale.
Businesses who are not members of the BBB are not singled out as being bad, but if their record of accomplishment is not good, the bureau takes note of it. It costs little to be a member of the Better Business Bureau, and many companies feel it is important to affirm their commitment to providing exceptional customer service.
Any entity that you consider as a possible service group to you personally or professionally should be checked out at the BBB. If there is no information on the group, that is at least better than finding a problem. It doesn’t make sense not to use this service whenever you are getting ready to engage a service provider. It is quick, simple, and can be very informative.