What is your current financial situation? Whatever it is, as a single person or head of a growing family, financial planning can help in taking control of your hard-earned money, especially for those not born with a silver spoon. The three key steps of financial planning are to identify your financial objectives, to define your investor profile, and to know your asset allocation.
1. Identify Your Financial Objectives
The first step in the financial planning process is to identify objectives. These objectives are largely determined by your stage in life and the length of time you have to invest, as well as any personal investment preferences you may have.
What do you want? When do you want it? Financial objectives are usually divided into categories based on how long you have to achieve them. Some of these wants, for example, can include a new car, a holiday overseas, or home renovations.
2. Determine Your Type as an Investor
Once you’re clear with your financial objectives, the next step is to determine what type of an investor you want to be. This is determined by two important aspects, as described below.
- Time horizon. The amount of time you invest before you need to use your money is your time horizon. This also determines whether your objective is short, medium, or long term.
- Risk and return. For example, if you have decided to invest some money, risk and return is generally linked to your investment’s risk level. Risk and return is the rate at which an investment grows or declines. Traditionally, risk has been thought of as the variability of returns or the potential to lose capital.
Investments that can produce high returns or losses are those with higher levels of risk. Another way of describing risk is when investment goals are not met. Typically, the longer the time horizon, the more risk an investor can afford in his or her investments. Therefore, to reach goals within the time frame, as an investor you need to balance the amount of investment risk with the returns you need to earn.
Your financial planner or adviser will consider your time horizon, attitude towards risk, concerns about taxation changes and inflation, your experience with investments, and other financial needs and objectives in helping with your financial plan.
3. Know Your Asset Allocation
After your investor profile has been worked out from step two, the financial planner helps in choosing the right investment or investments for your needs. This is called your asset allocation, which can be made up of different types of investments and with different levels of risk and potential return. There are two main categories of investment in regard to asset allocation, as outlined below.
- Defensive assets. Defensive assets are designed to protect your savings from a significant loss in value, but in general, they earn a lower rate of return. These assets include bonds and cash investments.
- Growth assets. Growth assets usually have earned higher rates of return, but they also carry higher risks. These assets include shares and property investments.
Issues and Other Investment Considerations
This checklist should be closely considered since it could have an adverse effect on your investment strategy or investment itself.
- Current income needs. Do you need to choose investments that pay income on a regular basis?
- Capital growth. Is building your wealth your most important objective?
- Liquidity. Do you need to choose investments that you can access on short notice?
- Social security. Do you expect to receive your age pension soon? Are you concerned about how your investments will affect the pension you receive or will receive?
Your financial planner will consider and factor out all of your financial needs and objectives in helping develop a workable financial plan.
Interested readers may want to check out these related articles: How to Manage Money Wisely, How to Make Money Work, Tips and Ideas for Wealth Creation and Tips to Financially Thrive.
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