HOW DOES ONE BEGIN A FINANCIAL PLAN?

The best investment a person can make is in himself. Financially, he must have some knowledge about his own affairs because he cannot hand over everything to a financial adviser or broker and expect that person to do it all. If he takes the time to learn about money matters, he will receive a rich reward�dividends in understanding that in the long run will improve his financial position.

The first step he should take in creating a financial plan is to identify his personal and family financial goals. Goals are based on what is most important to an individual. Short-term goals (up to a year) are things that one desires soon (household appliances, a vacation abroad), while long term goals identify what one wants later on in life (a home, education for children, sufficient retirement income). Take these short- and long-term goals and establish priorities, making sure an emergency fund is listed as the first item. Then estimate the cost of each goal and set a target date to reach it.

The changing life cycle affects financial planning. A person’s goals must be updated as his needs and circumstances change. In one’s young adult years, short-term goals may include adequate insurance, establishing good credit, and just getting under way. During a person’s middle years, the goals shift from immediate personal spending to education for children and planning for retirement. In one’s later years, travel may become a primary goal.

When planning for the future, age is a vital factor. Here are some guidelines to use, depending on one’s present age:

Age 20 to 40: When a person is young, growth of financial resources should be a primary goal; a relatively high degree of risk is tolerable. Suggestion: Invest in a diversified portfolio of common stocks or in a mutual fund managed for growth of assets, not income. Speculation (in real estate, coins, metals, etc.) is acceptable.

Age 40 to 60: Stocks are still an attractive choice, but now one needs a more balanced approach. Begin to invest in fixed rate instruments (bonds) and look into bonds that are tax-free (municipals). Age 60 and over: By now, the majority of an investor’s funds should be in income- producing investments to provide safety and maximum current interest.

There is a rule of thumb that may be appropriate here. It is based on the concept that the percentage of one’s portfolio in bonds should approximate one’s age, the balance going into equities (stocks). For example at age 40 an investor would keep 40 percent in bonds and 60 percent in equities. At age 60 the reverse would be appropriate; 60 percent bonds and 40 percent equities. Of course, this is a very general idea that may not be appropriate for everyone.

When planning investments for one’s age bracket, consider the following:

1. Security of principal: This refers to the preservation of one’s original capital. Treasury bills are guaranteed by the government, while stocks fluctuate greatly.

2. Return: This means the money one earns on investment (interest, dividends, profit).

3. Liquidity: This deals with the ease of converting investment into cash.

4. Convenience: This refers to the time and energy a person is willing to expend on his investment.

5. Tax status: Depending on one’s tax bracket, each investment will bear heavily on one’s personal situation. Municipal bonds are tax-free, while certificates of deposit (CDs) are fully taxable.

6. Individual personal circumstances: Included under this category would be a person’s age, income, health, individual circumstances, and ability to tolerate risk.

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