From a planner's side of the desk, it's important to start at the beginning. Financial planners and clients typically mutually define a client's personal and financial goals, needs, and priorities. The next step is what financial planners call the data gathering: Financial planners will obtain all the quantitative information and documents about a client before any recommendation is made and/or implemented.
In the case of the Palmers, it was critical to create a balance sheet — a snapshot of their wealth at a moment in time. The balance sheet reflects what they own (their assets), what they owe (their liabilities), and their net worth (the difference between their assets and their liabilities). A positive net worth indicates the Palmers own more than they owe. A negative net worth would indicate that they owe more than they own. More>
The other important document needed was statement of cash flow. The cash flow statement typically reflects a household's annual income less its discretionary and nondiscretionary expenses. Income minus expenses is what we financial planners call net cash flow. Positive net cash flow is good. Negative net cash flow is bad. The Palmers had, at the time of this analysis, negative net cash flow. More>
Debt Management Plan
The Palmers have to consider some of the following strategies to get a handle on their cash flow and to get out from under the debt they've accumulated, which could not be until the year 2014.
Debt Pay Down Plan – We put the Palmers on a debt payment plan, the essence of which does the following.
We have them on a 63-month plan to pay down their credit cards beginning with the balance on the highest interest rate card first. At the rate they were paying previously, it would have taken decades to eliminate this debt. The plan is strict and long — this is the burden of consumer debt. The couple is motivated however because they are tired of the pressure from the debt. They understand it is limiting their present and future options. More>
The Palmers first need to pay down their debt. But once that's down, they will need to come up with a savings strategy for long-term goals such as retirement and short- and intermediate-term goals, such as starting a family, as well. For retirement, for instance, they might need to accumulate an amount 20 times their annual expenses, or what the economists call consumption. When it comes to rules of thumbs on percentage of income to save for retirement, Bonnie recommends you save 15 percent of gross for retirement living expenses and another 2 percent of gross for retirement health care costs.
As for starting a family, they'll need to consider the cost of raising a child. The U.S. Department of Agriculture suggests that it costs on average an estimated $15,000 per year (in today's dollars) to raise just one child till age 18.
The other important expense that needs to be included in the budget is that for emergency expenses. Typically, financial planners recommend that families have three to six months of living expenses set aside in a rainy day fund. The Palmers, given their history, might need to consider building a fund with one-year of living expenses.
Insurance Planning & Risk Management
- Life – Both David and Marcia would want life insurance to cover the sum total of their indebtedness so the other party is not left with an overwhelming financial situation in addition to their grief. If children enter the picture, they will want to consider life insurance to cover the cost of raising children to age 18, the cost of college, and any other expense that would be affected by the loss of one income. More>