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The prospect of developing and adhering to a financial strategy can be
overwhelming. However, it does not have to be so complicated. Consider the
following three steps:
· Measure your current financial status.
· Identify your financial objectives.
· Identify the steps to get you there.
Measuring your current financial status can be accomplished by preparing a
personal balance sheet.
Identifying your financial objectives is simple. Most people indicate that
retirement security, funding children's education, increasing current income,
reducing taxes and passing accumulated wealth to their families at death are
their primary financial objectives.
Quantifying what it will take to reach those objectives can be more
complex.
Here are some points to include in your financial strategy.
Sensible spending.
Understand how you spend your money. Prepare a household spending
worksheet. It will enable you prioritize your spending and identify areas of
potential saving.
Prudent borrowing.
Borrowing can enable you to obtain things that are otherwise beyond your
current reach, but borrowing costs money. Loans for things that provide
lasting and ongoing value (such as an education, a home or auto) are smarter
than borrowing for short term gratification (extravagant vacations or
expensive jewelry).
Prudent borrowing also includes making sure the rates and terms of your
loans are as attractive as you can get. Before borrowing (whether it is a
credit card, auto loan, mortgage or other loan), make sure you understand all
the terms. The interest rate, length of loan and method of calculating
interest should be clearly understood.
Consistent saving.
Utilizing a payroll deduction or another automatic savings program is
usually more successful than trying to save on a less regular basis.
Automatic saving plans result in consistent deposits and are available in a
number of forms. Select one that fits your budget and meets your long-term
needs.
Wise investing.
Investments come with risks, and hopefully higher returns to compensate for
those risks. Understanding the risks of loss, price fluctuation and inflation
are necessary when creating a sound investment strategy. Diversification,
asset allocation (dividing funds into stock, bond and cash investments) and
investment costs should all be considered as part of a wise investment
strategy.
Adequate protection.
Periodically, you should review all your insurance coverage. This includes
homeowners/renters, health, disability, auto and any umbrella policies you
may have. For peace of mind, make sure you have the right combination of
coverage and deductibles. If you use insurance primarily for
"catastrophic" coverage, remember that higher deductibles usually
translate into lower premiums.
For life insurance, evaluate how much you really need. If your family would
need significant funds to replace your income, a larger policy may make
sense. If you are single, perhaps a smaller policy (and smaller premiums)
will be sufficient. Also, compare the benefits and costs of term and whole
life policies. For younger, healthy individuals without a need for
permanent protection, a term policy may be a better choice.
Use a qualified advisor, if you need one.
In areas where you need or want help, find the right advisor. It may be an
investment professional, insurance agent, financial planner, credit counselor
or trusted family friend that can provide guidance. Make sure they are
qualified and that you can comfortably work with them. Do your homework. The
more knowledgeable you are, the better you will be able to evaluate
recommendations. Remember, your decisions will affect you and your family for
a long time.
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