The art of financial mapping - B.E. Money Management Special Section

Black Enterprise, Oct, 1994 by Gracian Mack

YOU'RE THE CAPTAIN OF YOUR ship, and you never leave your home port without a map. The analogy is also applicable to your financial stability. Sure, you might be able to island hop through Wall Street's many offerings, picking up profitable investments along the way. But without a plan, that route may be fraught with calamitous whirlpools or heavy fog that could cause you to go astray of your real financial goals.

That's why more financial pros are advising even timid investors to start their financial journey with a map that carefully plots a course around the rocks of ruin--straight to financial stability.

"There are a lot of ways to break down the financial mapping process," says Margarita Perez, president and portfolio manager with Fortaleza Asset Management in Chicago. "But these four steps basically apply to everyone": Step 1: Establish your financial goals. Step 2: Take stock of your financial responsibilities and obligations. Step 3: Quantify your tolerance for risk. Step 4: Stick with the plan.

It sounds so simple that you may wonder why you weren't told of these steps before. Well, easy doesn't do it all of the time, which is why most reputable finance experts demand all the particulars of your situation before they offer advice.

Unfortunately, says Perez, most people start their financial trek on the wrong foot--by failing to be specific about their goals and financial prospects.

In setting your career goals you don't just say, "I want a job." Instead, you're definite about what you want with a potential employer. It's the same thing with setting your financial goals. The wrong answer is, "I want a car." The right answer: "I want a 1927 Bently." That focus helps you determine exactly how much you need and how long it will take you to reach a particular goal.

Musing about the future, no matter how fanciful your dreams are, isn't as silly as it sounds. In fact, a little wishful thinking could help you focus on what you really want out of life.

For Driek Farrington, 53, and Theresa Gardner, 49, of Southfield, Mich., dreaming is what fuels their ambition. Farrington, an agency manager with AllState Insurance Co., and Gardner, a counselor with the Ser Business and Technical Institute, pull down a comfortable six-figure income. But when asked what they want their net worth to be in the next ten years, they say in unison: "We want to be multimillionaires!"

STEP 1: SET SPECIFIC GOALS

"With goal setting, you have to go beyond 'I want to be financially comfortable.' You must establish why you are saving and investing," Perez explains. She advises her clients to begin by asking themselves questions such as: Do you want to retire early? Are you investing to finance a child's college education? Or do you want to buy a house in the next six months?

Now comes the hard work. Each goal must have a time frame and a dollar amount. The second round of questions must be more specific: At what age do I want to retire? In how many years will my child start college? How much will it cost?

But before you rush out to open the accounts, categorize your needs into short-, intermediate- and long-term goals. Short-term goals tend to be more immediate and consumption-oriented--a new car, new furniture, a new kitchen or den in your home. Intermediate goals are usually more expensive items or events that require more planning and saving, such as the purchase of a home, start-up capital for a business, or college tuition and expenses for your children. Long-term goals include saving for a comfortable retirement, seeing to it that your aging parents have adequate health care coverage and even providing for your loved ones after your death.

The ideal strategy would be to set up a separate investment account for each goal and prioritize them according to the time frames you establish. By assigning different accounts to each goal, you can fulfill the investment credo of diversification while creating an easy method to monitor and track your holdings.

Joyce and David Greenwood, both 37, are advocates of this philosophy. The former college All-American and professional basketball player and his wife have their game plan down pat for their two children (ages 5 and 9), their parents and their own retirement.

"While I was still in the NBA," explains David, who with his wife owns a Blockbuster video franchise in Los Angeles, "I secured annuities for my parents and set up trust funds for my kids. Those trust funds along with other investments are intended to carry the kids through college, and relieve my wife and I from having to dwell on our own retirement needs."

The general consensus among the finance experts like Fred Crutchfield, a senior vice president of asset management at W.R. Lazard in New York, is that growth securities are ideal investments for long-range goals, those that have a 10-year or longer time frame. "Investments that emphasize growth should be mostly stocks, because it's a proven fact that over time stocks will outperform all other investments."