Seven Steps to Good Personal Financial Planning
Good investors know that investing is a process. As such, investing is a journey, not a destination. Therefore, sensible investors develop and execute sound investment principles. Thus, practicing the following seven-step personal financial planning process will help optimize your own lifetime investment management plan:
1. Meet Financial Planning Prerequisites
Before developing an investment plan, a potential investor must provide for the basic necessities of life. So, make sure that you have the necessary funds for requirements like housing, food, transportation and taxes. Also, ensure that you have adequate protection against any financial losses which might ensue from unexpected events like death, illness, disability, and natural disaster.
“Your future is created by what you do today not tomorrow.” – Anonymous
2. Establish Investment Goals
Second, develop the financial objectives you wish to achieve through investing. For example, you might want to accumulate retirement funds; enhance current income through interest and dividends; save for a major expenditure like a home or a car; or shelter income from taxes.
“Setting goals is the first step in turning the invisible into the visible.” – Tony Robbins
3. Adopt an Investment Plan
Third, prepare a written document which describes how your funds will be invested. Specifically, write a target date and risk tolerance for each goal. The more precise the investment goal, the easier it will be to establish an investment plan consistent with your goals.
“Plan your work and work your plan.” – Napoleon Hill
4. Evaluate Investment Vehicles
Fourth, adopt measures of risk and return to estimate the perceived worth of an investment vehicle. In other words, valuate your securities.
“Successful investing is about managing risk, not avoiding it.” – Ben Graham
5. Select Suitable Investments
Fifth, choose investment vehicles that are consistent with your established goals and can offer acceptable levels of return, risk, and value.
“Know what you own, and know why you own it.” – Peter Lynch
6. Construct a Diversified Portfolio
Sixth, select a variety of investment vehicles. Consequently, this will help you to reduce risk and increase return. Indeed, diversification is a key factor in developing a valuable portfolio.
“Portfolio theory, as used by most financial planners, recommends that you diversify with a balance of stocks and bonds and cash that’s suitable to your risk tolerance.” – Harry Markowitz
7. Manage the Portfolio
Seventh, monitor the portfolio and restructure it as dictated by the actual behavior of the assets. Compare your actual portfolio results to your expected investment performance. Then make any changes necessary
“Always keep your portfolio and your risk at your own individual comfortable sleeping point.” – Mario Gabelli
Practice Personal Financial Planning Strategy
Investing your money is the best use of your economic resources. However, if you invest those funds without study and thought, you can lose everything you own. Therefore, good personal financial planning begins with an effective investment strategy. Thus, following these seven steps will provide you with the best lifelong financial planning process. In the long run, these steps will save you time and money.
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