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Financial Planning
Create a Financial Plan |
Once you identify your goals, you'll need to take
them and develop a financial plan for achieving them. Creating a plan will help you size
up your current financial situation. It will allow you to measure what you owe, what you
have, and whether your on the right track to meeting your goals.
What is a Financial Plan?
A financial plan is simply a list of things you would like to accomplish some time in the
future. Your list should include short-term, mid-term, and long-term goals. It should also
list the action steps you'll need to take to achieve those goals. There are many software
programs that can help you develop a financial plan on your own. If you need assistance,
you also have the option of using a financial planner.
A plan should be designed according to your personal needs. If you're just getting
started, for example, you might need a more comprehensive plan that covers all the aspects
of your finances. If you're nearing retirement, however, you may just want to review
estate planning options.
Outlining Your Plan
When developing your financial plan, first decide want you want to accomplish. What
are the most important aspects of your plan going to be? Ask yourself questions. Do I want
to eliminate debt before starting an emergency fund? What risks am I willing to take to
achieve my goals?
Here are some basic goals included in many financial plans. They will serve as a good
starting point.
- Beat Inflation. If you want to
maintain the same standard of living when you retire, the rate of return on your
investments will have to beat inflation. You'll have to accept the fact that the power of
your money is going to be worth less in the future.
- Minimize Risk. Your financial plan
should be designed based on the risks you're willing to take to meet your goals.
What is your investing style? Conservative, aggressive? You have to feel comfortable with
the decisions you make if your plan is going to work.
- Minimize Taxes. This means taking full advantage of tax-deferred
investments -- 401(k)s, IRAs, trusts, annuities, etc. Employ a buy and hold strategy for
individual equities or pick mutual funds with a low turnover rates (tax-efficient funds).
You may want your plan to address how you are going to minimize taxes for your heirs.
- Emergency Fund. You should plan
for the unexpected -- medical bills, loss of a job, car repairs. Emergency funds should
normally include at least 3-6 months salary placed in a liquid account for easy access.
Checking, savings, and money market accounts are all great places to stash your cash. You
can build up the account by starting an automatic deduction from your paycheck each month.
Lines of credit also help -- as a last resort, of course.
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