Determining the true value of that raw land

Exclusive: Jody Tallal explains how to evaluate potential future income streams

In my last column, we started a discussion about investing in real estate and how raw pre-development land was in my opinion the best option. I also promised that in this column we would discuss how to understand the true value of land.

One prime method the majority of land investors use to establish the value of a tract of land (or any real estate for that matter) is by comparing other comparable sales. I personally have found this method an easy trap in which to get snared when used as the exclusive method of valuation.

Granted, I do look at other comparable land transactions in making my analysis, but it is not my principal tool. If you are going to use comparable sales, allow me to share a few observations. First, do not compare asking prices of other tracts around you. They are usually inflated because of the pride of ownership. What everyone is asking is not near as important as what has sold and to whom.

Sales of comparables can be useful in negotiations if you fully research your comparable: who was the buyer; what were the terms; and what is the zoning for the tract. If the buyer is McDonalds, Home Depot, or Ross Perot, its sale is probably a good indication of true market value. Such buyers do extensive research prior to making an acquisition. On the other hand, if the buyer is Joe Blow syndications and his merry group of investors, take it with a grain of salt. Many investor groups buy stories, concepts and pretty illustrations that sometimes have nothing to do with real future value.

The best method I have found to determine value is to determine the future best use of the land. You can best determine the future ultimate value of land once you first understand that land is worthless until you can put something on it that generates an income stream. The capitalization of that income stream denotes its ultimate true value.

If a tract is farmland and will not have usable utilities for at least 20 more years according to the nearest city’s plan, I do not care how many speculators like its location or freeway frontage, or whatever – to me this land is farmland for a long time to come. Since time is a very important part of the investment-return equation, you have to factor into this process how long it will be before a tract of land can produce revenue.

In the above example, farmland’s value can be determined by its potential productivity. If it can generate $200 an acre, if you want a 10 percent return, then its worth is $2,000 an acre.

If, however, the farmland becomes surrounded by development, utilities arrive and you can divide that acre into 4 lots and sell them for $50,000 each, then you can calculate your development costs and build in your profits to determine the land’s true future value.

In the above example, farmland’s value can be determined by its potential productivity. If it can generate $200 an acre, if you want a 10 percent return, then its worth is $2,000 an acre.

If, however, the farmland becomes surrounded by development, utilities arrive and you can divide that acre into 4 lots and sell them for $50,000 each, then you can calculate your development costs and build in your profits to determine the land’s true future value.

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Once land becomes scarcer and the population density increases around it to the point it can be zoned and justifies multi-family development, then the value for the same acre of dirt magnifies again. This is because you can now rent that foot of ground monthly and create a continuous stream of income. That income stream when capitalized at the desired rate of return determines its value.

If the acre happens to later end up as a corner intersection with a high traffic count and the acre can be zoned retail, its value changes once again. The reason is because now instead of a one-time rent per month like apartments, you can sell products from that same square foot of land, over and over again several times each day, generating higher profits.

Finally, once you have land in an area that is so densely populated, you can justify building on the same square foot into the air over and over again, you have reached land’s ultimate value: a high rise development. Its value again will be determined on the amount of net revenue that can be generated from rents, so that will be greatly determined by how many stories high can be successfully developed.

Let us go back to our original premise that dirt is worthless. If a piece of land is ultimately going to be developed as a shopping center, then you can gauge its ultimate value by determining what major developers have just paid for shopping center land they are currently developing. Once you determine this, you can work backwards to determine a fair value today. Simply anticipate the projected period for this tract to fully mature to prime development status, and then calculate your desired return. Using this approach, you can arrive at what you are willing to pay today.

In my next column we will look at the impact that all of this has on commercial undeveloped land values.



Exclusive: Jody Tallal explains significance of knowing ‘science’ of risk vs. return

In my next several columns, I am going to be discussing real estate as a potential investment vehicle. More specifically, how to invest in raw land.

Back in the early 1970s, I began analyzing my clients’ investment portfolios, and it readily became apparent to me that no matter what size income a particular client might have, or where they choose to invest it, prior to my assistance, most of the time they ended up losing a significant amount of what they invested. It did not seem to matter much whether they invested in stocks, gold, oil, cattle, or genetic research in Brazil – they all seemed to fail the vast majority of the time over the long haul.

Occasionally, however, I would see a client whose investments were worth several millions of dollars. It was not until after several years of additional research I realized that all of those clients had one thing in common. Each of these clients had made principally all of their money in real estate investments – more specifically, Raw Predevelopment Land.

Many times, it seemed to occur quite by accident. I remember one case where a client had bought a couple hundred acres of farmland north of town to get away on the weekends. Then several years later, a country club bought the land adjoining his. His land immediately jumped from $1,000 an acre to $25,000 an acre, and he was an instant multi-millionaire. In other cases, it was apparent my clients had a predetermined plan to buy property in the line of future growth. Regardless, I felt it more than coincidental that this pattern was present.

It was at this point I decided to start studying different actual land investments, in an attempt to differentiate the good transactions from the bad. It was my objective to identify potential areas of risks and try to develop methods to remove those risks, without affecting the industry-wide chance for return.

I began my own investments in real estate in 1973. My first couple of investments did not work out as well I had thought they would; but I studied them and learn what I did wrong. By 1975, things were working out much better. In fact, by 1985, I had produced 46 programs for me and my clients. By 1985, 33 of these properties had sold. The average rate of return received by my clients was 63.8 percent per year, and this was net of my fees. These properties were acquired for $25 million and were held an average of 3.5 years. They were later sold in excess of $50,000,000, and all 33 of the programs were profitable.

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One thing I learned in the process of successfully investing in land was that to maximize profits you need to adopt a contrarian philosophy. The reason is because real estate runs in well-defined cycles of booms to busts to booms again. The difference in real estate cycles when compared to, say, stock market cycles is that they are elongated and take years to develop. I will cover more real estate cycles and how to read them in later columns.

What I want to demonstrate in this series of columns is a strategy that proves that land investing is a science and by understanding that science, you can substantially reduce the risk while maintaining extremely high returns. This is done primarily through using a negotiation matrix I developed which will be share throughout this series.

Experience gives the 20/20 hindsight needed to see the irrational, invisible side of the investment world; or to put it another way, experience allows us to ask the irrational question that are invisible to the purely intellectual mind.

Real knowledge is the key that makes the wealthy land investors wealthier and over the long run keeps transferring the assets of the average novice investor to them. I found this lesson very important to recognize as I entered the land-investment maze.

I learned that there is one important thing that must always be done first before the negotiations start. That is to set out your bottom-line criteria in advance of your first offer. Now, most people feel that their bottom-line investment criteria are simply to make as much money as possible. Maybe that is right and maybe not.

What are your true objectives? How much risk are you willing to take? Are you a speculator, land banker, or developer? What is the bottom-line value you are willing to assign to the dirt, and what is the probable upside potential?

These questions have to be answered before you should make you first offer. I learned after my first real estate crash, which was in 1975, that dirt was basically worthless. You could not eat it, build out of it, or create anything else in value from it; and, in an illiquid depressed market, you cannot sell it.

Therefore, how do you determine its future value? We will cover that in my next column.


Exclusive: Jody Tallal has 13-question quiz to determine how much chance to take

In the past several columns, we have been discussing putting price tags on each of your long-term financial goals, so you can reduce those to a monthly price tag just like your home or car payments. In this column, we are going discuss investment philosophies.

Your risk tolerance

This column is not designed to offer advice as to which investments are best. Instead, I will cover several investment philosophies that should help you find your way through the investment maze.

A good first step before making any investments is to understand how much of a risk taker you are. The test below has been designed to help you determine where you fall on the risk tolerance scale.

The value of understanding your propensity for risk is the same as understanding any aspect of your personality. Knowing that you have a tendency for jealousy, for example, does not mean you should never put yourself in a position where you might feel jealous. It means that whenever those feelings occur you know it is normal for you – it is a part of how you are wired. It does not mean you will never feel jealous. It simply gives you some degree of freedom to feel that way and continue with whatever you are doing.

The same is true with investment risk. If you are to achieve financial success, even if you are very conservative, you will have to put your money in places where it can be productive; and sometimes that may feel risky.

Similarly, if you are a gambler, you may have to force yourself to use some restraint, especially when pursuing short-term goals. That may feel boring, but it is usually not wise to take excessive risks when you do not have the time to ride out financial downturns.

Your risk-tolerance factor

Dorothy W., a 61-year-old widow, lies awake nights worrying about how she is going to manage when she retired. With limited savings, a small company pension and Social Security, her retirement income would be meager indeed.

Therefore, in a moment of panic she invested her available cash in a limited real estate partnership a friend mentioned. If she is lucky, the investment will pay off and improve her financial situation.

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However, Dorothy still lies awake. Now, she worries about her investment; knowing the risks associated with it. If she lost a portion of it, that would mean she would have even less to live on in retirement than originally expected.

Are you a play-it-safe investor? Or, are you willing to take a few risks for a potentially greater financial gain? The short quiz below will help you decide what propensity you have for risk tolerance.

1. On a trip to Las Vegas, you lose $150 playing the slot machines. You:

a. Get another $50 worth of quarters, hoping to recoup part of your loss.

b. Go sightseeing and forgo the casino.

c. Keep playing, but plan to stop when you have lost another $150.

2. The aphorism that best describes your attitude toward life is:

a. The early bird catches the worm.

b. No pain; No gain.

c. A bird in the hand is worth two in the bush.

3. A friend who is a stockbroker calls with a hot tip. You are most likely to:

a. Say you are not interested.

b. Pull out your checkbook.

c. Ask for more information.

4. You park most of your cash in:

a. Money market funds.

b. Bank savings accounts.

c. Certificates of deposit.

5. You win a contest sponsored by your local radio station and have a choice of three prizes. You take:

a. An all-expenses paid trip to a resort.

b. $1,000 in cash.

c. 100 shares of stock in the radio station.

6. You spend a rainy Sunday afternoon with:

a. Monopoly.

b. Chess.

c. A crossword puzzle book.

7. Your son persuades you to buy stock he says is a winner, but three months later you have lost $1,000. You:

a. Sell the stock and cut your losses.

b. Do nothing and hope the price will rise again.

c. Buy more shares (the price is so low!).

8. You are thinking about buying a house in Florida to rent out, then eventually retire to. You tell the real estate agent to look for:

a. A large house that needs some work in a good neighborhood.

b. A small, well-maintained house in an established neighborhood.

c. A large house located in an up-and-coming neighborhood.

9. You have developed a way to take the calories out of cakes and cookies without affecting the taste. You:

a. Sell the patent to General Foods for $1 million.

b. Try to raise the money to setup a company to produce the new product.

c. Accept a position with General Foods managing the division that markets the new product.

10. Your attitude toward managing your pension money is:

a. I want my investments to grow faster than inflation.

b. Beating inflation is less important than preserving income and capital.

c. I will risk some income for a chance to beat inflation.

11. The bill for your weekly groceries comes to $285, and you have $300 in your wallet. You pay for the groceries with:

a. A check.

b. Cash.

c. A credit card.

12. You would put a $75,000 pension plan lump-sum payout into:

a. A mutual fund that invests in government securities.

b. A high-yield certificate of deposit in a shaky Savings and Loan.

c. A blue-chip stock fund.

13. On a cross-country trip, you would eat lunch in:

a. A restaurant recommended by the guidebook.

b. A restaurant belonging to a national chain.

c. A place the locals say is the best in town.

Now add up your score using the scoring key provided below. The top row of number across represents each question’s number and the letters down the left side represent your answers.

If you scored below 19, you are conservative by nature. If you scored between 20 to 32, you are willing to take a chance or two. If you scored 33 or more, you are aggressive by nature. Remember, you should try to select investments that fall within your personal risk tolerance level so you do not lose sleep over them.

The above quiz is reprinted from “Financial Success: A Guidebook to Your Financial Future” by Joseph Tallal with permission from Carole Gould.


Exclusive: Jody Tallal explains how to save money on insurance costs

In last week’s column, we covered how to create a retirement plan and began a discussion of how to cure a negative cash flow should your newly identified investment goals’ costs create one. I defined three processes for curing a negative and covered the first one in that column. Therefore, in this column, I will cover the final two.

Saving on insurance

The second process for curing a negative cash flow is reducing insurance premiums. Insurance is a category of expenditures where overspending is very common. I recommend you look at all areas of your insurance needs by developing a Personal Security Formula as discussed in much greater detail several weeks ago in my columns on this topic.

As a brief review, the Personal Security Formula creates a system of defenses that will eliminate all vulnerability in your long-term financial planning.

For most people, there are five areas of vulnerability:

1) Death of the main breadwinner.

2) Disability of the main breadwinner.

3) Major illness of a family member.

4) Casualty loss – home, car, personal possessions.

5) Personal or business liability lawsuit.

Each of these areas of vulnerability can and should be covered by insurance.

Determining life insurance needs

The only way to determine how much life insurance you really need is to assume that your family’s main breadwinner died last night. If that happened, you would find that there are four main financial problems that would need to be solved:

1) Estate Liquidity

2) Survivorship Income

3) Special Obligations

4) Liabilities

Estate liquidity

Estate liquidity pertains to all the expenses immediately related to death, including estate taxes, probate fees, attorney fees, accounting fees, appraisal fees, funeral costs and last expenses. Since you can now leave almost $5.5 million estate-tax free to your heirs ($11 million if you are married), a good general rule of thumb is to allow for $50,000 worth of expenses or 6 percent of the net estate, whichever is greater.

For larger estates, please see an attorney specializing in estate planning.

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Survivorship income

How much of the main breadwinner’s income would you want to replace should that person die prematurely? The chart below will help you come up with a close estimate of how much you would need to invest at 8 percent in order to provide an annually inflating income stream. It is based on a survivorship income need of $1,000 a month. For higher levels of income, simply multiply the figure by the appropriate multiple. For example, if your spouse is 45, you would like him/her to have $2,500 a month in survivorship income, and you are using an inflation rate of 6 percent, multiply $298,286 by 2.5. Your survivorship income need is $745,715.


Special obligations

This category includes such items as a college fund for your children. If you were to die before they enter college, you could ensure that they will have enough money to go to school by factoring that need into your life insurance. Here is a simple way to run the calculation. Long-term CD rates tend to mirror the inflation rate. Therefore, if you had a sum of money large enough to cover today’s cost of tuition bills and you invested that amount in a log-term CD, it would keep pace with inflation. The only problem is that the money earned in the CD is subject to tax and inflation is not.

So here is what to do: Take the total current cost to fulfill this education goal and divide the reciprocal of your tax bracket into that number (i.e., if you are in the 15 percent tax bracket, divide by .85; if you are in the 28 percent tax bracket divide by .72; and if you’re in the 33 percent tax bracket divide by .67).

For example, if you wanted to provide today’s equivalent of $36,000 in college assistance and you are in the 33 percent tax bracket, divide .67 into $36,000. The answer is 53,731. You should allow for $53,731 in life insurance proceeds to cover the cost of your children’s college education fund.



The main breadwinner’s salary is required to pay for such items as the house mortgage and car payments. If that person dies, you may want to have enough life insurance money to pay off such items entirely. Therefore, ask yourself if the main breadwinner in your family died, which liabilities would you want to be able to payoff’?


Totaling your life insurance needs

Now add up the various categories to determine your total life insurance needs:

In next week’s column, we will discuss term verse whole life insurance, and when each is the best solution based on a specific need.


Exclusive: Jody Tallal explains how to figure out amount to set aside each month

In my last column, I showed you how to calculate the cost of and plan for the accomplishment of your financial goals, including help children/grandchildren with their college expense. In this column, we will discuss the process of successfully building your retirement fund.

Determining today’s cost of building a retirement fund is far more complicated than determining today’s cost of a college fund. This is because it is crucial that you calculate the ongoing effects of inflation into and through retirement in order to guarantee the development of a successful, secure retirement. Below I will attempt to give you the basic tools to do this for yourself.

Building an accurate retirement plan normally requires complicated algorithms that require a computer. If you find the process described below too complicated, or wish to be able to model different inflation and invest yield scenarios, I have made my personalized financial planning software available here.

If you build a retirement nest egg that provides just enough interest income to meet your needs in the first year of your retirement, you would not have anything left over to invest in order to offset future inflation after that. Therefore, based on the Rule of 72, discuss in a past column, 14 and a half years into retirement, assuming inflation ran at 5 percent average, your standard of living will be cut in half.

The two charts below will give you an idea of how much you need to set aside each month to build a retirement fund that will provide you with enough income to offset the effects of inflation. It was developed a number of years ago by the accounting firm of Coopers & Lybrand and appeared in U.S. News and World Report, but it is still one of the best tools I have seen without computer software to develop a retirement plan. Please note that this chart assumes an inflation rate of 4 percent, so if you want to project something different, you will need to use the type of financial planning software discussed above.


“Billionaire Cab Driver: Timeless Lessons for Financial Success” is an easy-to-read financial primer from a man who revolutionized the personal financial management industry. Jody Tallal’s latest book offers timeless lessons for financial success, no matter your occupation, salary or personal savings

Can you afford your goals?

Between this and last week’s columns, you now know the cost of each of your financial goals, including a college fund and retirement. You have broken them down to monthly payments you can start making today to ensure their accomplishment. However, one question remains: Can you afford the payments? Because if you do not pay for future goals like retirement and children’s college, they will be forfeited just like if you stop paying the payment on your home or car loans.

To find out, go back to your budget (covered in this column) and plug in these new expenses for you long-term goals. Do not be alarmed if this gives you a negative cash flow, as this is common. The reason is that you have added new burdens on your budget that are very necessary. If you find this to be the case, below you will discover where to find the extra money to meet your goals.

Curing a negative cash flow

There are three steps to reversing a negative cash flow:

1) Re-evaluate any advance payment schedules you have set up for your debts.

2) Cut your insurance costs.

3) Use “The Back-down Compromise” option.

I will discuss No. 1 above in the remainder this column, and address No. 2 and No. 3 in next week’s column.

Reevaluation of advance payment schedules

Many of us have been taught that it is best to pay off debts as soon as possible. That is good advice if you have high-interest credit card debts, or you have enough money to invest for your future and can still accelerate the payoff of your debt. However, in many cases, especially if you are making accelerated payments on your home or car and that is causing a negative cash flow, it is not such a good idea.

Do you remember our earlier discussion in this previous column about the importance of time? It is crucial that you start setting aside money for your goals today. Accelerating debt payments to the point where you do not have enough money left over for your goal payments is not a good idea.

If you are trying to pay off your home or car early and you have a negative cash flow, going back to the original schedule will free up money for your other goals.

In next week’s column we will explore how to use No. 2 and No. 3 above to cure the remainder of your negative cash flow.


Exclusive: Jody Tallal shares chart used to calculate monthly amounts to be saved

The best way to take a long trip is to break it down into smaller trips, determining how far you can travel each day. If you take the trip one day at a time, focusing only on that day’s goal, you will easily make it to your ultimate destination.

That process is called the science of navigation. Applying this same process to the accomplishment of your financial goals will turn seemingly impossible objectives into smaller, easy-to-understand steps.

In last week’s column, I showed you how to make the cost of your goals more accurate by factoring in the effects of inflation. Now let us break them down to monthly costs you can start paying today just like you do with your house and car payments.

Knowing this cost, and of course paying it, should give you tremendous peace of mind. Not only will you have reduced the seemingly abstract cost of large future financial goals to a cost you can understand and afford, but you will also be taking the proper steps to ensure the accomplishment of those goals.

Determining today’s monthly cost of your goals

Below is a chart titled The Price Tag Chart, which will help you calculate how much you need to invest each month to achieve each of your goals. The Price Tag Chart shows how much money you will have accumulated after taxes at the end of the period indicated, if you invest $100 a month, assuming various annual returns. Results for other amounts can be calculated as fractions or multiples of $100. The table assumes that the investment is made at the beginning of each month.

In last week’s column, we used an example of needing to save $67,000 over five years for the down payment to buy a condominium. Let us use that as an example now using the Price Tag Chart below to see how this is done.

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First, pick an interest rate you believe you could earn on money invested for this goal. If you feel you can get 10 percent on your money, follow the 10 percent column down to where it meets the five-year column and you will find $7,808.

Then divide the required $67,000 by the $7,808 found in the chart and the answer is 8.581. Multiply this by $100 and you will see that a monthly investment of $858.09 at 10 percent growth over five years will develop the $67,000 you need.

Therefore, here is how to calculate today’s monthly cost of each of your goals:

  1. Start with the future cost of each of your goals as calculated at the end of last week’s column;
  2. Select a rate of return you feel you could achieve on money invested for the goal;
  3. Using the chart below, follow the interest column down to where it meets the number of years you have to meet your goal;
  4. Take that number and divide it into the future cost of your goal;
  5. Multiply that number by $100 and you have the monthly amount you need to invest at the interest rate you selected to meet your goal.


Now fill in the Monthly Costs for Goals chart below for each goal you have using the process above.


Calculating the costs of college

Helping children or grandchildren pay for college is a very common goal. It is a bit more difficult to calculate the price tag for this goal because college costs continue for four or more years, giving inflation more time to complicate matters.

The worksheet below will give you a good idea of what you need to invest in order to meet future college expenses. It is based on the following assumptions:

  1. Your child/grandchild will enter college at age 18;
  2. He/she will attend college for four years;
  3. Costs will grow by 7 percent annually;
  4. Your investments will earn 8 percent a year after taxes;
  5. While you are paying for college out of the fund, you will continue to save and your fund will continue to earn 8 percent annually.


1) Today’s cost of college. _________________________

(Call the college you would like your child/children to attend.)

2) Estimated future cost of 1st year of college.________________________

(line 1 times factor from column A in the College Multipliers chart below)

3) Amount that you would like to provide. ___________________________

(If you would like to pay the full amount, enter the number from line 2. If you would like to pay half, multiply line 2 by .5)

4) Estimated total future cost of your goal. ___________________________

(line 3 times 4.44)

5) Estimated amount you need to invest annually. ______________________

(line 4 times factor from column B in the College Multipliers chart below.)

6) Estimated monthly cost._____________________

(divide line 5 by 12)

The chart below contains the College Multipliers needed to complete the form above


Exclusive: Jody Tallal offers advice to keep your money growing and get ahead

In past columns, I have discussed the impact of inflation on your long-term financial planning. This is a brief refresher, as the topic is very important at this stage of your financial plan’s development.

Inflation is everyone’s largest financial obstacle. It is what causes the cost of goods and services to keep increasing year after year. Looked at another way, it is what causes the value of your money to shrink. The following graph assumes an inflation rate of 8 percent (the average inflation rate for the last 45 years) and shows the long-term effects of inflation. It follows the plight of an 18-year-old who starts out with $1 in his pocket.

By age 27, the $1 will have shrunk in value to 50 cents. What the 18-year-old could have bought for $1 will cost $2 by age 27. If you follow this path, by the time this person reaches 63 (around retirement age), the value of the original dollar will be just three cents, and it will cost $32 to buy what $1 bought back at age 18.


Fighting inflation

To counter the effects of inflation, your money must be earning a higher rate of interest than the rate of inflation.

If you put $10,000 in a savings account earning 1 percent, after one year, you would earn $100. Of course, you will have to pay taxes on your earnings. So if you are in the 28 percent tax bracket, that comes to $28.

However, you cannot stop your calculation there. You also need to factor in the effects of inflation. At 2.5 percent inflation, your money would lose $250 in buying power over the course of a year. In other words, one year after depositing your money in the bank, after interest, your $10,000 would be worth $$9,822! This illustration gets much worse if inflation and interest rates rise.

No wonder so many people find it hard to get ahead.


“Billionaire Cab Driver: Timeless Lessons for Financial Success” is an easy-to-read financial primer from a man who revolutionized the personal financial management industry. Jody Tallal’s latest book offers timeless lessons for financial success, no matter your occupation, salary or personal savings

Number verses value of dollars

The main problem with inflation is that most of us are taught to think in terms of the number of dollars we spend. We do not give enough thought to the value that those dollars represent.

If you have a 30-year mortgage, have you ever multiplied your monthly payment by 12 to figure out the annual cost of your home, and then multiplied that number by 30 to figure out the total cost of your home? If so, you were probably shocked to discover that your home will end up costing you about three times the purchase price. You may have even wished you could have paid cash for your home so you could avoid paying all that interest. That’s thinking in terms of number of dollars.

A new perspective

Try looking at your mortgage dollars this way: If inflation is running at 8 percent, we know that in nine years the value of your money will be half of what it is today. Therefore, while you will spend exactly the same number of dollars in nine years, the value of those dollars will be only one-half. In another nine years, you’ll be spending 25 cents on the dollar. And in another nine years, you’ll be spending 12.5 cents on the dollar.

If this still isn’t clear, here’s another way to look at it: When you first bought your home, it probably required a significant percentage of your monthly income to make the mortgage payment. But if you have lived in your home for any length of time, because your salary has grown while your monthly payment has remained constant, the mortgage now takes a much smaller percentage of your income.

To properly understand inflation and accomplish your financial goals, you must realize that money has a value corresponding to the year in which you spend it.

Inflation’s impact

In last week’s column, I showed you how to establish your financial goals. Now let’s see how inflation affects costs. Let’s say you’d like to have enough money for a 20 percent down payment on a condominium near the ocean in five years. You look at what is available today and determine that today’s cost of the condominium you’d like to buy is $250,000. Twenty percent of that is $50,000.

Now refer to the chart below to calculate the impact of inflation on your current goas. Use whatever inflation rate you feel the asset class you want to buy will experience over the anticipated time. For example, if you select six percent, use the multiplier where the six percent and five year columns intersect. Multiply $50,000 by 1.34 and you get the answer of $67,000; that is what the down payment on your desired condo will cost in five years.

This chart will help you calculate the future cost of today’s financial goals, based on various rates of inflation and the number of years that you have to meet your goals. However, do not use this chart for your retirement or college fund goals. Separate charts and methods for calculating the costs of those goals will be provided in later columns.


In my next column, I will teach you how to put a price tag on your goals.

So let’s recap the procedure:

  • Determine today’s cost of each of your goals;
  • Determine how many years you have to meet your goals;
  • Choose an inflation rate you feel is realistic for the time period between now and the date you’d like to accomplish your goal;
  • Find the multiplier where your inflation rate meets your time period;
  • Multiply today’s cost of your goal by the multiplier.
  • The answer is the future cost of your goal.

You should use this procedure with each of your goals, except a college fund and retirement. Those goals will be covered later columns.



Exclusive: Jody Tallal on how ‘Rule of 72’ helps us make financial goals

Last week we began the process of developing  your own personal financial plan. This week’s column will discuss  maximizing you most valuable asset.

Putting time on your side

Arriving at your destination on schedule has much to do with how well you manage your time. Allowing ample time enables you to arrive at your journey’s end without extra effort or unnecessary risk. The same is true with financial journeys.

Many people believe that the most important factor to consider when making an investment is the rate of return. Of course, the rate of return is important, because it determines how fast your investment will double in value. However, how large an investment ultimately becomes depends on how many times it doubles in value; and that is a function of time.

In this column you will discover that time is the single most important factor in the accomplishment of your financial goals.

The Rule of 72

The speedometer on your car helps you determine how long a trip will take. If your trip is 220 miles and you travel at an average speed of 55 miles per hour, it will take you four hours to arrive at your destination.

Fortunately, there is a speedometer available for your financial journeys as well. It is called the Rule of 72. Just take the rate of return on your savings or investments and divide that number into 72. The answer is the number of years it will take for that investment to double.

This formula also enables you to chart the effects of inflation. Just take the inflation rate and divide that number into 72. The answer is the number of years it will take for the cost of goods and services to double; or for the value of your money to be cut in half. For example, if inflation is running at 6 percent, the cost of goods and services will double in 12 years.

Geometric progression

One dollar invested at any interest rate will eventually turn into two dollars. Once you know the interest rate, the Rule of 72 enables you to calculate how long that process will take.

It is important to understand that one dollar turning into two is the same thing as $500,000 turning into $1,000,000. Both figures simply doubled. However, would you rather be waiting for your first invested dollar to turn into two? Alternatively, would you prefer to be waiting for $500,000 to turn into $1,000,000?

The point is that it is vitally important to start setting money aside early to meet your goals! The next illustration further emphasizes the point.

The value of starting early!

Let us say a 36-year-old has $20,000 to invest. He feels he can get 12 percent on his money. Using the Rule of 72, we know that his money will double every six years.

Turning $20,000 into $320,000 is not bad. However, now let us see what would happen if this person started his investment program just 6 years earlier.

By adding one more geometric progression to his time chain, he would have accumulated twice the money for his retirement! It is impossible to over-emphasize the importance of starting early.

Determining your destination

The last essential question that needs to be answered before you begin your financial journey is: Where are you going? That is an obvious question, isn’t it? It is a question just about everyone answers before going on a vacation. However, it is one question very few people answer when it comes to their lives in general – and their finances in particular. In fact, it has been estimated that just 2 percent of all Americans have written goals.

If you spend the time to determine where you want to go financially, you will take a very important step toward financial success. The questions below will help you do that.

1) At what age would you like to retire?

2) Based on today’s dollars, how much annual retirement income would you like?

3) Again, base this on today’s cost, if you have college-bound children, how much assistance would you like to give them and for how many years?

4) If you died prematurely, how much of your income would you like your family to continue to receive?

5) List your other financial goals. Remember to make them specific. Determine their cost in today’s dollars, and list the year when you would like to accomplish them.

In my next column, I will explore Financial Enemy No. 1.


Exclusive: Jody Tallal explains Step 1 in path toward fulfilling personal plan

Over the next eight columns, I will be showing you how to create your own financial plan. These columns will be linear in format, so starting with this one, we will go through a step-by-step processes to build your personal financial plan. The end-result will be a personal financial plan that can guide you to personal financial independence.

Accomplishing financial goals is much like taking a trip. While some people enjoy jumping in their car and heading off in whatever direction they feel like going, applying such a free-spirited attitude to your money will only lead to disaster.

To reach a specific financial destination you will need a map, but not the kind sold in gas stations. You will have to create your own.

You can begin by filling in the chart at the link below. This will help you determine where you are right now.

Precision counts

When taking a road trip it is usually sufficient to identify your starting point as the city where you live. However, when taking a financial trip it is important to narrow down your starting point even further.

You see, there are probably items included in your net worth you would not want to liquidate in order to meet your financial goals. For example, you may not want to sell your home to help your children pay for college. Therefore, before you begin your financial journey, make a list of only those assets you want to use to achieve your financial goals. I suggest you leaving off items like your home, cars, jewelry, clothing, etc. The link below shows a list of items I recommend being included in what I call your Hard Worth calculation.


Budgeting: A pre-journey tune-up

Before beginning any journey, it is important to look under the hood to make sure your vehicle’s engine is running smoothly. Applied to a financial journey, this means looking at your cash flow. And yes, this is leads to the dreaded word “budget.” But wait … keep reading.

A budget is not such an awful thing. In fact, if you give it a chance, having a smooth-running budget can be just as reassuring as a smooth-running car. It will enable you to live without fear of a financial breakdown.

Admittedly, this will require a bit of hard work. However, when you are zipping along toward the financial destination of your choice, you will be glad you did this work.

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Budgeting: In the driver’s seat

Creating a budget is not as difficult as you may think. In addition, once established, it will take you just a few minutes each night to keep your budget current. This is one of the most important steps you can take to help ensure your Financial Success.

There are dozens of free budget templates available on the Internet. Just Google “budget template,” and find one you feel would be easiest for you to use. Make sure it has categories that most closely align with where you spend your money and additionally has a space to input your “target expenses” for each category.

Then at the end of each day, write down what you spent according to the categories listed in your budget template, and at the end of the month total up the columns. Once you know how much you are spending on food, entertainment, etc., you can decide how much you want to spend in each category.

Plug your target expenditures for each of the subsequent months’ daily records. Then continue to fill-in your expenditures each day and you will be able to see how you are doing.

With periodic expenses, like a semi-annual insurance payment, break each one down to monthly cost and plug that amount into savings each month. Then when the bill arrives, you will have the money to pay it in the bank.

Maintaining a budget will put you in control of your finances instead of letting your finances control you.

How you compare

Most people like to know how their situation compares with others. The Bureau of Labor Statistics publishes a Consumer Expenditures Report each year showing the average expenditures of the average family. You can review 2016’s report at Remember, what this report shows are the average expenditures; these are not meant to be absolutes as each person’s situation depends on his or her income and other goals.

In next week’s column, we will discuss maximizing you most important asset.


Exclusive: Jody Tallal offers wisdom about securing the right policy

Note: This is Part 2 of a 3-part series of columns. Read Part 1, “Your Personal Financial Security Formula,” and Part 3, “Last step in your Personal Financial Security Formula.”

In Part 1 of this series, we explored the concept I call your Personal Financial Security Formula, with life insurance being the first element. The next part of your P.F.S.F. is protection against potential disability. Your profession determines the kind of insurance you need to buy to protect against this. Many people belong to professional societies and associations that offer group disability programs.

If you became disabled to a point that you could no longer work or practice the duties of your profession, would you be capable of performing any other job for wage, means, or profit? This question must be asked before you determine what kind of disability insurance is adequate for you. If you are a neurosurgeon and suffer a heart attack from the stress of your regular occupation, your cardiologist may tell you to rest and work only in your garden. If your insurance policy disability definition is “inability to perform any duty or occupation for which you may receive remuneration or profit,” then you are not disabled under this definition, because you are capable of being a gardener.

You should therefore analyze your policies to determine if disability is defined based on your “own occupation” or “loss of earnings” basis. The “own occupation” coverage is what the neurosurgeon wants because the policy would pay if he were unable to render services as a surgeon. The policy would not consider his being able to obtain gainful employment outside his specialty. You also need to look out for any restrictive words in the policy’s definition of disability, such as “any and all,” “completely unable,” or “each and every duty.”

List the forms of disability that could render you disabled from your profession. Determine which of those disabilities would not prevent you from assuming other employment. If you are in general labor and become disabled, you probably would be unable to perform any other job. If so, any disability policy with a fairly restrictive definition will cover you.

If your profession is a specialty that requires the use of hands, eyes, hearing, mental alertness, and so forth, then you may pay particular attention to specific things that could disable you in your profession but would leave you capable of working in another occupation. For those of you in this situation, be careful in the purchase of your disability policy. Definitions become critical!

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Your disability policy is the security blanket in your P.F.S.F. Your most important asset is your income. With the exception of gifts and inheritance, all of the assets you ever acquire will be byproducts of your earned-income stream. If you were to become permanently or partially disabled, this all-important earned-income stream would obviously cease or diminish.

Without your income you could not even be able to purchase other forms of insurance, much less provide for the other financial needs of your family. Therefore, buying the proper disability insurance is critical. Select a company that has a policy you can understand, and read that policy carefully. See if the policy can be canceled by the insurer. If a company can cancel your policy at any time, your security blanket has a gaping hole.

Once a primary disability has occurred, the probability of a secondary, related or unrelated disability increases. This is unlike death, which can occur only once. If your policy can be canceled at the option of a company, one disability is all it will take to make you uninsurable for any future disability. Make sure that the policy you have can be canceled only by you, through nonpayment of premium.

Next, make sure the premium rates cannot be raised. If the policy is non-cancelable, but the company has the right to raise the premiums, then once you become an unusual risk, the company could raise the premiums to an unattainable level. Locking in a premium from the date of purchase ensures that no matter what your future health may be, you will always be able to maintain the coverage. This removes the fear of losing the coverage because of the insurance company’s re-evaluation of your physical condition.

You need to select a monthly indemnity that fairly represents your needs and your family’s in the event of your disability. Far too many people are under-insured when it comes to disability. Determine your personal cash flow, the costs (such as house payments, groceries, taxes on property, etc.) that would continue if a disability occurred tomorrow, and make sure your disability insurance will be enough to cover your continuing expenses.

Another variable, other than the amount of benefits, to be considered is an analysis of the waiting period. The waiting period represents the number of days between the date of the disability and the date when coverage will commence. Disability coverage can be purchased in waiting-period increments of 1, 7, 30, 69, 90,180, days. The longer the waiting period, the less you pay for the same coverage. Suppose your disability occurred today and you had $50,000 in liquid reserves and expenses of $6,000 a month. This would carry you for approximately eight months. Therefore, a waiting period of not less than 180 days is recommended.

It is wise to select disability insurance that covers you to at least the age of 65 for sickness and accident. Disabilities usually will be either short-term or permanent. Should you have only a five-year coverage, you would face financial disaster after the fifth year. (If a disability runs as long as five years, the odds are that it will be permanent.) Don’t be afraid to pay a higher premium for a good disability policy, because in this particular area of the insurance industry, you get exactly what you pay for.

Purchasing a group disability policy through an association or society of which you are a member for your main coverage will be considerably cheaper. But it has one major flaw: The group is the owner of the policy. The group decides whether it wants to keep the coverage with that carrier. This may not seem to pose a problem at present.

Let us consider a 50-year-old man whose only disability insurance was through his group. He suffered a coronary at age 51. The insurance company paid him benefits without protest.

At age 52, this man was back at work and seemed very healthy. When he was 54, his group became dissatisfied with the disability carrier and decided to look around and renegotiate for a better premium rate. The new company it selected said that coverage would be provided at a much cheaper group rate. The catch was that the group would have to submit members over the age of 50 to an insurance physical examination and eliminate the coverage for those who could not pass. The group evaluated the number of members over age 50 who would not qualify and decided at most 5 percent would fall into that category.

Because the group had to negotiate for the benefit of the majority, it chose a premium reduction for 95 percent of its members, forcing the 5 percent who could not qualify to find insurance elsewhere. Our friend, at age 54, lost his insurance, and because of his past coronary is now uninsurable. He will never again be able to acquire disability insurance.

One option is to balance the amount of the inexpensive group coverage with the more expensive permanent coverage.

Disability should be the Rolls-Royce of your insurance programs. The other areas of insurance can very easily be stripped down to the Volkswagen model.

Note: This is Part 2 of a 3-part series of columns. Read Part 1, “Your Personal Financial Security Formula,” and Part 3, “Last step in your Personal Financial Security Formula.”