"Money is a terrible master but an excellent servant."--P. T.Barnum
Beyond the charts and general principles of investing, personal financial planning is really as individual as the people involved. Age, financial situation and acceptable risk will vary greatly from investor to investor. But the following are three investing situations that can serve as a guide. The financial planning was done for The Times by Harvey S. Gettleson, a partner with the Ernst & Whinney accounting firm in Los Angeles.
Christina Bentley wants to be a doctor, teacher and dancer when she grows up. All at the same time, of course, her mother Denise said.
"No," the rambunctious 4-year-old countered, "I want to be a doctor."
"That's going to take a long time," her father Kenneth warned, no doubt tallying the years of tuition ahead.
"I don't care," Christina laughed as she bounced around the family den.
Label Christina investment worry No. 1. Like most parents, the Bentleys are concerned about providing for the future education needs of their child at a time when education costs seem to be rising unchecked.
Besides monthly savings set aside for Christina's future, the Bentleys are investing in savings bonds every month for their daughter through a program established by Carnation, where Kenneth works as manager of community relations.
The Bentleys' primary investment, in addition to their Baldwin Hills home, is in rental property. They figure that between their combined salaries--Denise Bentley is manager of contracts and pricing at AVW Inc., an El Segundo electronic systems company--and investment income, the couple brings home more than $100,000 a year.
The couple also has invested in individual retirement accounts and a few stocks. They also have made some handsome profits through the sale of earlier residences.
Kenneth Bentley, 35, acknowledged that they have something of a one-track mind when it comes to investing, sticking primarily to real estate. But, he added, "In the last year, we've decided to get more aggressive."
"We're thinking of the future," said Denise, 34.
Planner Gettleson recommended that the Bentleys refrain from buying any more rental property until they have built up at least the equivalent of six months' earnings as a cushion against unforeseen developments, such as one of their rental units remaining vacant for a long period. Gettleson advised building cash for at least two years and probably longer with the goal of creating "a more balanced portfolio."
Starting a serious savings program can be difficult, so Gettleson suggested starting small and increasing the monthly savings tab. "You've got to treat it like a bill," he said. "Cut it off the top like a bill."
Reducing credit card debt and paying off their student loans also are a good idea because credit cards represent a fairly high-cost way of borrowing, and the interest deductibility on both types of loans is being phased out, he said.
As for Christina's education, cash gifts to children under 14 years old are no longer attractive because the new tax law requires that earnings of more than $1,000 be taxed at the parents' rate.
The Bentleys might consider earmarking a percentage of their rental property income for Christina's college fund rather than investing in savings bonds, which earn 6% tax-free until the bonds are cashed.
"If you took the same funds and put them in real estate they would earn more than 6%," Gettleson said.
The Bentleys probably should establish a "living trust" so that administration of their rental property won't be tied up in probate court if one of them dies.
They also should greatly increase their insurance coverage to more than $1 million, Gettleson said. "Life insurance needs to represent the earnings potential of the earning spouse" over several years, he said.
The Bentleys could buy term insurance for 10 or 15 years, and then reduce it as their wealth increases and they accumulate assets that can replace the insurance, he said.
The couple should do an analysis of their cash flow for the next five years to plan for the future, Gettleson suggested. In addition, they should think about starting a savings plan for Denise's retirement because she is not covered by a pension at work.
Despite the stepped-up saving program, Gettleson recommended that the Bentleys should not be too austere.
"All of us work hard and you deserve certain things," he said, "or why do you want to work so hard?"