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Financial Planning - Understanding The Basics

By Edited Mar 1, 2014 0 0

There is no shortcut to guaranteeing a financially stable future.  It takes planning and careful execution, and a mountain of patience to see it through.  Unfortunately, this unfaltering perseverance is the one thing that saves us next time.  No matter how much we earn right now, if we do not put some financial principles in place, we will not be able to secure that stability long-term. 

The mantra of every financially-savvy person is “it is never how much you earn, it is how much you put away” rings true.  If we spent every penny that we earned, we will not be able to enjoy that secure future.  Spending everything all the time will mean having to start over and over again every time we get a new paycheck.  If this happens, there will never be enough time and room for our money to grow, which means the pool remains the same size forever. 

To begin financial planning, we need to set our objectives straight first:
-    Why are we doing this?  If it for retirement or to start a home-based business that hopefully can generate its own income?  Or for our children?
-    What are our obstacles?
-    What is the ultimate goal?   Is it 1 million dollars at the age of 65? Or half a million at 50?

These are just some of the questions we should be asking ourselves so we know exactly what to reach for.  When setting a goal, we must stand firm in what we want to achieve and the ways we intend to get there.  There will be many weak moments along the way but perseverance is the one quality we need to have in order to get that financially secure future we want. 

Once we have started on the journey of financial planning, turning back is not an option.  And it should never be.  Ideally, this effort should begin as soon as possible – from the moment we get our first job and as soon as three months into it.  The earlier we begin this effort, the sooner we can reach our goal and the higher the chances of exceeding that goal. 

Any form of good financial planning involves the element of investment.  Only when using our monies as capital for investment can we expect to reach our goal faster.  It is definitely faster than just saving our money as the objective of saving money is essentially that – to save it so we have access to it later.  Investing the money, on the other hand, is based on the principle that it is to be used to make more money on its own. 

Some principles must be understood when investing:
-    Consistent investment is best.  This means regularly topping up our investment capital regardless of market conditions.  There is little point in starting an investment and never doing anything more about it as this would limit its ability to generate income.  Regular investing can be done via standing instructions from savings accounts or direct debit facilities.  Both guarantee investment top-up efficiently. 
-    Sensitivity to market conditions.  When there is an economic downturn, it is the natural instinct for us to pull out of our investments – cut losses, as they say.  While this may be the right thing to do for a business, it is the opposite for investments.  Often, investments are based on the number of units purchased.  When the economic is down, each unit price drops and this means with the same amount of capital during a good economy, we are able to buy more units.  This may not sound impressive right now but once the economy recovers and each unit price increases, it is a happy person that cashes out all those extra units bought at a cheaper price. 
-    Diversifying our portfolio.  So we have started investing.  But are they all in the same things?  Investing only in bonds, for instance, will not augur well for us when their prices are stagnant, as it would mean our profits will also be stagnant.  Since investment tools are often labeled generally as Conservative, Moderate and Aggressive, it may be a good idea to invest a little in each.  We can then invest more in the one that we are more comfortable with. 

 

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