TIAA-CREF's five-step program for financial health: Fidelity Observer fails!

There's an article in the June 2006 issue of TIAA-CREF Advance, "Get Your Financial House in Order." It suggests five steps members should take as part of a financial review. Unfortunately, Fidelity Observer only had one of the recommended steps fully under control. The other four steps were either partially completed, or not even started. Here are the five steps, and Fidelity Observer's status for each:

1) Organize your finances

This step involves effectively filing and organizing all of the important documentation you receive. Included are bank and credit card statements, mutual fund documentation, insurance policies, and kids' accounts. This is the only step Fidelity Observer got right -- almost all day-to-day documentation goes into one of those accordian files, with different pockets for bank statements, medical receipts, documents that I might need for filing taxes, etc. At the end of each year I close the accordian file and stow it in the basement, usually only bringing it out at tax time the following April. For the new year, I buy a new accordian file at the office supply store for $10 and start over. Important documentation (birth certs, car and house title, etc.) goes into a fireproof safe that's in the basement. For my mutual fund accounts, which generate too much paperwork for the accordian file, I use 6" three-ring binders -- one for Fidelity, and one for Vanguard. They take years to fill up. I used to use a system of manila envelopes and binders, but there were too many different places to file things, and it was a pain to punch holes in so many documents.

2) Create a Budget and 5) Build an Emergency Fund

Step two in the Advance article explains that you should plan out your budget according to liabilities, net worth, cash flow, etc. By doing so, you'll be better able to plan for retirement and free up money for savings. Step five says you should create an emergency fund to carry you through crises. Fidelity Observer isn't so thorough with budgeting; our family pretty much spends everything we have on living expenses without any planning and the extra goes into retirement accounts.

We know our mortgage and average credit card bill; when our USAA bank account seems to build up an excess of cash it usually gets eaten up by one-time large expenses -- car repairs, a crown not covered by dental insurance, summer camp fees, or our trip to visit the in-laws overseas. When savings gets up to $5000, we put a few thousand dollars into our Roth IRAs or the kids' 529 plans.

Over the past few years I've noticed we've been unable to fully fund our Roth IRAs; we simply don't have the extra cash. I am not sure budgeting -- perhaps using an electronic tool like Quicken or Microsoft Money -- would help, as we already are very stingy. We don't get cable TV, we don't have monthly mobile phone plans, we drive used cars and I carpool a few days per week, and we clip coupons. Building an Emergency Fund is simply out of the question, unless I decreased my workplace 401k contributions.

3) Review and Update Your Insurance

This step is all about life insurance, and it's an area that Fidelity Observer must admit that's lacking. My wife is probably the only person in the family who's adequately covered through a term insurance policy and my workplace group insurance. I have maxed out my workplace group insurance (about 1.2 times my annual salary), but got a rude awakenening when I applied for term life insurance: a medical condition effectively doubled what I would have to pay every year. We simply didn't have the money. Until we do, there's not much I can do for life insurance.

4) Work on a Will

Bottom line: Fidelity Observer simply doesn't have one. I don't know how much lawyers cost if I want to get a will professionally drawn up, but I've heard that there are simple computer-based wills you can generate which do a basic job. I'll look into these and report back in a different post.

5) See step 3

Do any readers have advice regarding the five steps described above? Can anyone say that they have all five under control?


Read this post on the PFBlog.com/fidelityobserver mirror -- Reader comments often appear there that won't show up on this page. You can leave comments on either page, I'll read 'em all!