2022 AFBA Financial Planning Guide

investment portfolio may serve as a rainy day fund that will help you through unexpected emergencies. A third factor is goals. Before you start the investing process, you need to establish your objectives. Investment objectives tend to vary by age. Younger investors usually want to build–up their investment portfolio as quickly as possible. Generally, they may want to invest in high risk, potentially high return securities. If they are successful, they will earn a good return. If they are not successful, they will still have the majority of their income producing years available to earn a living and continue the investment process. Mid–term investors need to continue to grow their investment base but they are also increasingly concerned with protecting the portfolio that they have accumulated. Older investors tend to consolidate their investment capital and concentrate on lower risk, income oriented investments. In short, prevailing financial wisdom says that you need to construct a diversified investment portfolio that meets your current goals while providing the necessary financial liquidity — clearly not an easy task! 10–15. TIME VALUE OF MONEY . A cornerstone of financial theory is the concept that money has time value. One dollar today will be worth more tomorrow based upon a specific compound interest rate and specific period of time. The practical application of this theory allows investors to approximate the future value of their investments given an assumed level of periodic contributions. The table on the next page provides an illustration of the concept and emphasizes the impact of time savings/investment process.

look into that as well. There are no income limitations or age restrictions with investing in a 529 plan. The Coverdell Education Savings Account is a custodial or trust account created for the purpose of paying qualified educational expenses from kindergarten through graduate school. Qualified expenses include tuition, fees, books, and room and board. Reimbursement for room and board is limited to the school’s normal charges for on-campus living. The annual contribution limit is $2,000 per beneficiary and is not tax deductible. Contributions cannot be made for beneficiaries who are over 18 years of age unless he or she is a special needs beneficiary. Account earnings are not taxed as long as distributions are made before the beneficiary is 30 years of age. The eligibility to establish these accounts is subject to phase out limits based upon the contributor’s Modified Adjusted Gross Income (MAGI). The phase out for Married Filing Jointly is $220,000. All other filers have a phase out of $110,000. Additional information and 529 comparisons can be found at www.collegesavings.org or www.savingforcollege.com . 10–14. INVESTMENT GOALS AND STRATEGIES. As you can see from this chapter, there are many ways to manage an individual investment program and each has its own advantages and disadvantages. Several financial advisors suggest that individual investment strategies should be built on diversification. The argument is that you should try to maximize the risk/return trade off by allocating your investment capital between low yield, safe investments and high risk, potentially high yield investments. In short, the adage “don’t put all your eggs in one basket” should be your guideline. Another consideration is liquidity. As you begin to invest, you should ensure that some of your investment capital can be immediately converted into cash. In effect, a portion of your


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