Lisa Alcalay Klug

Money Watch:
Financial Management 101
By Lisa Alcalay Klug

Although her strategy sounds basic, elementary schoolteacher Beverly Feldman is an exception when it comes to personal finance.

She jointly manages her money with her husband, Norman, a mathematics professor. �I�ve always known where our money is,� Feldman says, �but in my age group [sixties], I don�t know any other women who do. And my daughters, who are in their thirties, don�t know either.�

Unfortunately, these experiences are common among women of all ages�whether they work outside the home or not. Feldman is an exception only because her husband was determined to �correct� the disaster that befell a relative who married a miser. �Soon after [the relative] died at 55 from complications of a stress-related illness, [the husband] retired as a wealthy man,� Feldman says. �He vacationed and did many other things he had said they could never afford.�

Learning about money matters is a means of empowerment. And although it may seem burdensome at first, it doesn�t take years to increase your personal-finance I.Q. Acquiring skills to save, spend and invest wisely actually helps build confidence.

If you�re just beginning to learn how to manage your money, financial counselor Eric Tyson recommends assessing your �financial fitness.� In his best-selling, Personal Finance for Dummies (IDG Books), the syndicated columnist suggests creating two tables. In the first, list your financial assets, such as your savings and retirement accounts, as well as a business or any real estate you will eventually sell to support yourself in retirement. In that same table, list projected employer pensions and social security that you will receive in retirement (social security information is available by calling 800-772-1213 or at www.ssa.gov/applytoretire). Multiply this second figure (pension and social security payments) by 240, which translates to 12 months a year for 20 years of expected retirement. Then total your assets.

In a second table, list your credit card debt, mortgages and loans. Total that amount. Then subtract the liabilities from the assets for your net financial worth. Interpreting your net worth is key to understanding your financial goals. �What is a lot of money to a person with a simple lifestyle may seem like a pittance to another with desires for an opulent lifestyle,� Tyson says. If your net worth is less than half your annual income, or even a negative figure, you�re in the same situation as most Americans.

If you calculate your savings rate�your net worth this year compared to your net worth last year�you�ll have an additional piece of insight. If you can�t bear to create another table, simply add up your monthly contributions to a retirement account or a separate savings account. For longer-term financial goals such as retirement, your savings should equal 5 percent to 10 percent of your annual income.

The priority is to eliminate debts, starting with those incurring the highest interest. Next, create a safety reserve of three to six months of living expenses. Then invest it in a money market fund or another liquid investment where the principal doesn�t fluctuate in value. The final step is reducing debt, curbing spending and investing in the most tax-savvy ways.

This article marks the first in a series on personal finance. In each issue we�ll provide expert advice on topics such as overcoming emotional obstacles to investing, planning for retirement, learning about mutual funds and more. We�ll also serve up profiles on newsmakers in the world of finance. Send us your feedback on more ways we can help you meet your financial goals.