Many people do not have a financial compass, and they are constantly blown around by the financial winds of the day. The winds come from many directions; the demands of our personal and business needs, wants, emergencies, the emotions of the stock and bond market, and from sales offers from a wide range of investment and insurance institutions.
Make 2012 the year to get a financial plan. Your plan will be the ’compass‘ that you refer to when making all financial decisions. A financial plan is your personal mission statement for your money. It’s a centralized location to record all of your financial information, formulate your goals, your individual style of investing, and outline the steps you must take to reach your future goals.
Your financial plan should cover many areas including the following:
- Balance Sheet: this provides an “at a glance” statement of your net worth (assets – liabilities), and helps you track your overall progress over time.
- Specific Goals: identify how much savings are needed to obtain specific financial goals, such as how much more you need to save to reach retirement, fund college or save for large future purchases.
- Risk Management: plan the prudent use of insurance to protect you and your family in case of death, disability, long-term-care, property and casualty protection, and professional and business needs. Having the right amount and type of insurance will prevent unexpected events from de-railing your plans.
- Debt management: helps you to monitor the level of debt that you carry so that it doesn’t get out of hand.
- Investment profile: covers the right mix of investments that meet your tolerance for risk and expectancies for rate-of-return.
- Estate planning: wills, trust, powers of attorney, life insurance and health care directives to plan where money goes upon death and how your assets are managed after death, if you become legally incompetent, or need to direct doctors or family members regarding end-of-life issues.
When you have a plan, and someone offers to sell you insurance, you can refer to your risk management section to determine your needs. If someone recommends an investment, or you are in a panic because of the stock market swing, then refer to your investment profile to remind you of your investment philosophy, how investments function over the long-term and the overall make-up of your portfolio.
Before an impulsive purchase, refer to your plan to decide which of your other goals you are willing to delay. A financial plan will help you to determine where you will allocate additional money from a raise or bonus. It should be used as a reference guide before incurring new debt, spending emergency funds, and on and on.
Having a financial plan doesn’t control you, but becomes a tool you use to control your future. It is like a master plan for a house. As you build each room of the house you must refer to the master plan to make sure that each room is built with the correct proportions. In other words, you don’t want to end up with too much square footage in the laundry room and no room for a sofa and TV in the family room. Without a plan, you may be allocating too much square footage, for example to your ‘debt’ room and not enough to your ‘retirement room’. Your master plan should not be cast in stone. Perhaps the ‘house’ will need to have a ‘nursery’ room added. Your master plan should change as your life’s goals and priorities change. Most written financial plans just sit on a shelf to gather dust after they are created. However, once you go through the time and effort of creating your plan, you should periodically refer back to your financial compass whenever faced with major financial planning decisions.
