Developing a Financial Plan (Part 1)

What should my long-term financial goals be?

The first step is to figure out a realistic financial goal for yourself and your family. Talk with your loved ones to ensure that everyone has the same goals in mind. Clearly not all families will have the same end goal - figure out what is important to you, whether it is early retirement, financial comfort, children’s education, travel, taking care of elders, or your children.

Are there simple guidelines to follow towards a comfortable retirement?

Someone starting their savings in their early 20s can save 10% of their income and have a sufficient nest egg, while someone starting in their 40s may have to bump that number up more towards 20%. This is all dependent on the time of your life that you choose to start, the size of your current nest egg, and the amount of money that you will need to retire comfortably.
It is always a good idea to contribute as much as possible to retirement plans, to take advantage of tax deferral and employer matches.
Generally people need around 80% of their pre-retirement income after they have retired for the first few years and then learn how to live on less. This will greatly depend on the expenses that you plan on having:
Is the mortgage already paid off?
Do you have car payments?
Are you sending your children through school?
Another strategy worth following is to always have an emergency fund of at least 6 months of expenses. Considering your situation and the situations of the people that you depend on or depend on you, you can adjust the number of months accordingly, but 6 is a good ballpark number. This will also depend on how many bills you need to pay.

What should I take into account when I start investing?

Risk vs. Return
Asset Allocation
Diversifying
Monitoring Progress

Risk vs. Return

The first step in the investment process is to figure out what sort of Return on Investment (ROI) that you are seeking…

Asset Allocation

Asset Allocation is the selection of assets from across the asset classes…

Diversification

Diversification is similar to asset allocation, but within the asset class…

Monitoring Progress

You can start by examining your trading records and ensuring that all of the trades went through at the prices that you instructed…

Keep tabs on how your assets are performing. If they seem to be underperforming, you may want to change your investments to some that may be more lucrative. You may want to also check to make sure that the investments that you own are in line with your current investment strategy. Your strategy may change over time. Be sure to compare your investments to your current situation.

What risks will I be exposing myself to by investing?

There are definite risks to investing, but educating yourself can drastically limit your exposure to these risks.

• When the rate of return is great, the risk usually is as well. Depending on the situation, you may put yourself at risk to lose all of your initial investment.
• There is a great difference in the liquidity of assets. Some can be sold in moments, and some may take quite a bit of time - take this into consideration when buying. Some may also have penalties for selling early or maturation dates.
• Investing in a company with little or no history is much riskier than those with a proven track record.
• The previous performance of a stock doesn’t necessarily mean that the stock will follow that pattern.
• Pay attention to news that pertains to the companies that you hold, information that is released about the companies in the news can seriously affect the values of the investments you hold.

How can I avoid taking unnecessary risks?

• Always trade through your brokerage firm.
• Never make purchases from phone solicitations offering the next hot stock.
• Never send personal checks to a sales rep, always to the company.
• Always receive your monthly statements to double check that everything is correct and that there are no irregular charges.
• If any sales representatives attempt anything that seems out of place, contact the branch manager of the company.

What factors should I consider before making a stock investment?

• Is this investment too risky for me?
• Do I feel comfortable with this investment?
• Do I have any moral conflict with what the business provides?
• Is this investment registered with the SEC?
• What sorts of fees are associated with this investment? Does it have a load that could possibly cancel out the earnings that you would receive?
• How liquid is the investment? Could I sell this quickly?
• What would need to happen in order to profit from this investment?

What factors should I consider before making a mutual fund investment?

• How has this fund performed previously?
• Is there a load? What fees are associated?
• How often will they produce statements?
• What does the fund invest in?
• Are there any specific risks related to this investment?