Developing a Financial
The prospect of developing and adhering to a financial strategy can be
overwhelming. However, it does not have to be so complicated. Consider
taking 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.
Understand how you spend your money. Prepare a household spending worksheet.
It will enable you prioritize your spending and identify areas of potential
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
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.
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.
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
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
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, that your decisions will affect
you and your family for a long time.