4 Tools of Financial Planning You Need To Know.
Keeping it Short and Sweet. For You. My Beloved Users.
Financial planning is a dynamic process that takes into account your personal and monetary needs to create a guide designed to achieve your goals. Financial planning examines your current finances and long-term goals, helping you prioritize spending and investments to achieve those goals.
Here are the 4 keys to successful financial planning.
Debt Management
Consumer debt has exploded in recent years and many people have borrowed and set themselves back a great deal. Credit cards, loans allow you to buy more things than your income would allow. Unfortunately, many people are in debt and are living a lifestyle of unsustainable spending. Credit cards have created a facade in many people’s minds, where think of credit cards as their own assets and not expensive liabilities. Gains in the stock market rarely beat the average credit card interest rate of 19.24%. Paying off high-interest debt should be the number one priority for the people that are in this unfortunate position.
Automated Savings
Many people live above their means and spend money on impulse purchases on consistent bases. Resist the temptation to keep up with the Joneses and don’t buy material possessions that you do not need. Increasing your savings and is one of the most vital parts of a financial plan.
If you don’t have one already, use a budget to plan your expenses and use it to keep your spending in check. Automated deposits are easy and effective because they take money directly from your paycheck and put it where you need it — into your trading account, so you can buy stocks, bonds, ETFs etc.
Your savings should be growing on a monthly basis so you can optimize the cash flow that is going into your investments.
Investment Planning
To be financially successful you need to create an investment strategy that integrates your personal financial plan, income needs and risk sensitivity. Before getting your investing underway it’s important to set some clear financial objectives. Not having a plan is playing the investing game without direction and focus. Asset allocation plays an important role in financial planning and is crucial to long term investment planning. These two videos will help you get started:
Risk Management
All investments do come with risk and proper due diligence is essential for long term success. Risk Management is the process that determines what risks exist and if you are comfortable with them for the potential returns that you are hoping for.
There are numerous approaches to investing, you can chase high-flying momentum stocks, invest in income-producing dividend stocks or hunt for bargains. Regardless of your individual approach, it is important to diversify your portfolio. Overexposure is one of the most common mistakes that investors make as this increases your market risk and can lead to large portfolio loses. Implementing stop losses with each trade will ensure you keep the majority of your principal whenever you are wrong.
Warren Buffet’s most famous quote should be kept in mind when managing risk:
Rule #1: Don’t lose money
Rule #2: Never forget rule #1
Bottom Line
The complex world of investing can be overwhelming for the average person and at times even for finance professionals. It’s easy to find excuses and give up control of your finances. Implementing the 4 keys to financial planning will liberate you and set you in the direction towards financial freedom.
