Risks and Rewards: Eight Essentials for Planning Your Financial Future
Life is inherently risky. You know this. That’s why you need a financial plan, but making a plan is boring. You have to sit down and think about all of the things you don’t want to think about – money, death, taxes, some far-off future retirement. It’s hard enough to know what’s going to happen next week. How are you supposed to make a 30 year plan? It’s true – it’s hard. But it’s not difficult, and the price of stalling could put you in an early grave.
Invest In Yourself
The most important thing you have to do is reorient yourself. Instead of focusing on other peoples’ needs and wants, you must focus on yourself. At its heart, financial planning is about you – your needs, your wants, and the financial requirements of your life.
To succeed, you absolutely must invest in yourself. Your earning capacity as a productive individual is your greatest asset, so make sure you’re on the right career path. If you’re not, consider hiring a mentor or life coach to help you sort it all out. It’s important. If you don’t get this first step right, nothing else matters.
Live Within Your Means
It seems obvious, but how many people do you know have credit cards that they’re making payments on? Credit cards are lines of credit. They’re really designed to be paid off in the same month that you make the purchase. That’s why they almost always come with really high interest rates. It’s to encourage you to pay off the balance quickly. Sadly few people do this. Learn a lesson from those people. If you’re one of those people, stop. Pay down the credit cars ASAP, and create a written budget.
Don’t spend more than you make. It really is that simple.
Buy Life Insurance
Companies like Wealth Smart specialise in selling life insurance products – something you absolutely need. Life insurance isn’t fun to think about, but it’s necessary. Even if you don’t have a lot of expenses right now, odds are you will. Life insurance also isn’t just about covering immediate needs. It’s about covering lifetime needs. This is something you really need to talk with an insurance professional about. Make sure you understand all of your financial responsibilities, and buy enough life insurance to cover everything now and in the future.
Be Cautious About Chasing Yield
Investors often get caught up in chasing yield. Even many financial advisers do this to their clients. It’s always about finding a bank CD that pays more, a stock with a 2pc higher dividend, a bond with better interest yields. Don’t get caught up in that game. Why? Because yield isn’t something you have direct control over. The only investment that guarantees a yield is fixed interest. Even then, the guarantee isn’t what you might think it is.
It’s a guarantee stipulating that if an institution is going to pay, it will pay the stated rate of return. The guarantee is never, and can never be, a direct guarantee on rate of return.
The one thing you can control are your own actions – namely your savings rate. Instead of chasing yield, focus on saving more of your own money.
Keep An Eye On Expenses
A general rule of thumb is that you should never spend more than 40 per cent of your income on debt expenses. A better way of thinking about this is that you should always make purchases based on value to you and your family. For every purchase, you should be able to justify how it benefits you both in the short-term and in the long-term. If you can’t justify it, especially in the long-term, it’s probably something you shouldn’t be buying.
Start An Emergency Fund
An emergency fund protects you from the unexpected. But how do you plan for something like that – especially when it is, by definition, unexpected? Basically, you should save up at least a month’s worth of expenses and then go from there. After you’ve saved up enough to cover a month’s worth of expenses, take an average of the total cost to replace all major appliances and critical systems in your home and for your vehicle.
For example, take an average of the cost to replace your furnace, your appliances, major repairs on your vehicle. This should give you a target savings goal to work on. Once you’ve achieved that goal, build on it and keep adding money to the stockpile.
Start Saving Now
The best time to start saving for retirement was yesterday. When it comes to long-term savings, time is always against you. Even if you have only $100 to save, save it. Do something.
Pay Attention To Taxes
Taxes are a huge drag on your finances. Don’t underestimate the power of consulting with a tax professional every year. Usually, tax planning begins at the beginning of the year – not when it’s time to file your taxes.
Jessica Watts is a financial planner at Wealth Smart with several years under her belt. When she gets some free time, she likes to share her insights by posting on a variety of blog sites.
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