Wednesday, August 17, 2011

Be a CFO

"If you don't know where you're going, you might not get there." ~ Yogi Berra
To me a CFO has two responsibilities: 1) Help set the financial goals for the corporation; and 2) Develop and ensure strategies enable the corporation to achieve the goals. Individuals should be the CFO of their own or their family's finances. In our case, I set the financial goals for our family, and our family works together to achieve those goals. 
So here's my simple process for being a family CFO:
  • Estimate one's lifespan.   OK, not easy to do.  To be safe, I chose 95.   For me that's about 40 more years.

  • Estimate annual expense needs.   A little easier.   If I did the calculation myself, I would cheat and ignore inflation.  However, my financial advisor can do the calculation for me:-)

  • Divide savings by annual withdrawal needed.  A number equal to or greater than the lifespan is good.

  • A CFO doesn't need to do all the technical analysis work.  However, a CFO needs to ask the one question, "Is what's being done going to enable achievement of the financial goal?"

    In our case, we've done the Monte Carlo analysis and I'm satisfied with the confidence level being above 85%.  However, I haven't asked for an analysis with a fixed return, which is equivalent to being mostly in cash.  Given that I've sold most of our equities in the past two months, I plan to ask for a fixed return analysis from my financial advisor.

    For more on  The Practice of Personal Finance, check back every Wednesday for a new segment.

    This is not financial advice. Please consult a professional advisor.

    Copyright © 2011 Achievement Catalyst, LLC

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