Creating a personal financial plan will help you achieve any goal you’ve set for yourself. However, the prerequisite to creating a winning plan is to first take an inventory of where you are now. Sit down, take out a pen, and make a list of everything you own (e.g., assets such as cars, stocks, bonds, mutual funds, cash, bank accounts) and everything you owe (e.g., liabilities such as student loans, credit card balances.) This balance sheet is going to be extremely important as we craft our way through the following steps. You can’t determine how well you are doing if you don’t know where you are right now!
Once you have created your balance sheet, you can start to put together a winning strategy that you can follow for many years to come. While it may seem like a daunting task, you can put together a solid plan using the following five steps:
1. Create a list that includes your short-term, mid-term, and long-term goals. It should be realistic and specific. Short term goals are within one year, while mid-term goals are between two to five years and long-term goals are greater than five years from today. Next, decide how much money you want to contribute to each goal and include the amount into your budget. Don’t forget to also invest in your greatest asset: yourself!
2. Find ways to minimize the taxes on your contributions. This not as important for your short-term goals but make sure that you are taking advantage of every opportunity to use tax deductible and tax deferral to your advantage. For example, most employer-provided retirement plans allow for tax deductible contributions that grow tax deferred over time.
3. Minimize potential losses of your money. In order to win the money game, you’ve got to learn to concede some battles. You’ve got to admit you’re wrong sometimes. That means cutting your losses early before they can become catastrophic losses. The miracle of compounding returns depends upon a constant rate of growth. Losses, or negative returns, can throw an investment plan off course and severely impact the ending value of the investment. And just like compounding growth impacts wealth in an exponential, nonlinear fashion, so do losses.
4. Protect your money from destructive economic factors. In medieval times, the wealthy built castles to store their wealth. More importantly, they also built a moat around the castle to protect their wealth. The same wealth-building principle applies today. You must protect your wealth from destructive economic forces like: inflation, lawsuits and creditors, probate and inheritance taxes, loan interest, financial expenses like commissions and fees, lost-opportunity costs, psychological factors and death/disability.
5. Make sure you have money available whenever you need it. Your money doesn’t do anybody any good if you can’t use it when you need it. It is important to have access to your money in times of emergency as well as to invest in opportunities that arise. You’ll also want to have multiple sources of income in retirement and you want to minimize taxes on your distributions. The only way to make sure you have choices is to remember to begin with step number one!
You should always try to be as efficient as possible with each account or financial product you own and take advantage of the opportunities at hand. Any financial decision you make must be considered thoroughly because of the impact that it has on your whole financial picture and how it may affect other assets you own.
The only real financial plan that works in the long run is one that works under every set of circumstances. These steps will help get you on the right track for the new year (and beyond).
Your goal as savers and investors is to constantly work on creating a plan that can work under any scenario. Once you know where you are financially, you can simply measure your progress each year by recalculating your net worth. If you don’t like the result, you’ll have a better idea of what needs fixed and can take the appropriate steps to get back on track.
Looking ahead to 2017 and all the promise that it brings, here’s hoping for a healthy, happy and prosperous year for us all…