Not having a plan
a trip, how many people do you suspect jump into their car, knowing
the trip will take many years, without making any preparations or
planning, or without at least taking a map? Not many. Your financial
plan should be no different than the trip. If people have no real
plan in place or a clear understanding of what they wish to achieve,
nor any idea of the outcome or route they are going to take, then
it is no surprise that they would get lost or misdirected along
To be successful at managing your finances, you need to develop
a plan that looks at both your short and long term needs and obligations,
remembering that planning doesn't have to be overly complicated.
A simple set of objectives is a great place to start.
having any goals for their future
of the major reasons people don't plan in the first place is that
they are unsure of, or haven't determined what their goals and objectives
are for the future. There are the obvious goals that we set throughout
life, such as saving for a car, a house or paying for your child's
education, up to your own retirement date or that of your spouse.
Many people recognize them, but without articulating their objectives
and subsequently developing a plan to achieve them, they fall short
of reaching their dreams of financial security.
to use the magic of time for their benefit
Time is probably
your best friend when it comes to financial planning. The Rule of
72 is a commonplace calculation that is useful for future financial
planning as it can help to determine the number of doubling periods
that you have left in your working life. By taking the interest
rate of your investments into account, the rule of 72 can calculate
how many years it will take for your money to double. Simply put,
take 72 and divide it by an interest rate factor, for example with
a 10% interest rate your money will double in 7.2 years. Keep in
mind that the earlier you start saving, the more doubling periods
you will have.
to realize that time can also be an enemy
Just as the
time factor can be beneficial in financial planning, it can also
become an enemy for some. Procrastination is the biggest thief of
time. Using the Rule of 72 formula, take a moment and think about
how much a dollar saved today will be worth in 30 years by considering
the number of doubling periods it has. If procrastination steals
10 years, your doubling time will be greatly affected and you will
have given up a considerable amount of money that could be collecting
interest. In terms of choosing investments, procrastinating can
result in you choosing higher risk investments since the amount
of time that you have allowed for consistent long term growth has
been reduced. We have only so many hours to earn a living in a life
time and the closer you get to retirement, the more decisions you
have to make on how you are going to fund it. Always keep in mind
that regret is a poor man's second prize.
investing is like a race
As an investment
philosophy, chasing the "hottest" or the "latest"
investment and always trying to be in front may not be your best
option. The key is to determine if an investment is appropriate
for your portfolio and whether or not it contributes towards your
goals and financial plan. This may mean that you need a plan to
even know if you are.
"I can do it all by myself"
It is not misleading
to think that you can do everything by yourself, but if you are
not doing it all day, every day, year in and year out like a professional
does, then how well are you going to manage? Here are some things
to consider: Would you do the "closing deal" on a house
without a lawyer? How about a spending a couple of years at school
learning how to fix your own teeth? Too many people try to do everything
by themselves because they think they should be able to, or they
don't want to pay the fees that professionals may charge. Financial
planning is no different so don't be foolish. Know your limitations
and get help when you need it.
inflexible - locking-in
In the realm
of financial planning, the ability to remain flexible is very important.
Too many people have made decisions that they cannot get out of,
or if they can it is still very expensive to do so if they change
their minds. Remembering the importance of flexibility when drawing
up a financial plan, your goal and objectives will change over time.
Regardless of the investment you choose, give yourself the option
to change your mind on some things.