Think long term
When you make decisions about your financial plan, think long term. The idea is to have what you need when you stop working. Compound interest is of great advantage to you over time.
Assess your needs
Start by thinking about what you want to do in the future. Most people make an assumption that they will stop work at the age of 60 or 65. Others hope to stop working earlier at 55 perhaps. If you would like to return to school in the future to continue your studies, you should include this in your plan. You may want to make a career change in the future, or purchase a vacation home, or travel. Most people start a family which dictates a large part of their plans. Whatever you want to do must be considered in your financial plan.
Set goals & monitor
In assessing your needs it is helpful to estimate when they are likely to happen. This will give you a target for your plan, and you can measure your plan against it to know if you are on track or not. Keep in mind those things that will help you, like your employer's savings contributions and pension and government pension.
Start your plan
You can start your plan at any time, but you have the greatest chance of success the earlier you start it. Put some money away from the first job you start, and it doesn't have to be very much. The idea is to have this money invested for a long time where interest will accumulate the longer it is invested.
Investment Risk and Return
You have a great many investment opportunities available to you which offer varying degrees of risk and return. Whichever you decide to chose will be up to your comfort level for risk. A general rule of thumb is to keep the risk low and take a lower return until you have build up a small amount. Later in your plan it is more advisable to consider higher risk investments which yield higher rates of return.
Investment Opportunities
Your choice of the numerous investments available will depend on your stage in the plan. Different industry names are used for investments but the basic idea is the same. These are some general descriptions of types of investments;
Guaranteed rates of return are investments which pay regular interest to you over time and the rate stays fixed.
Locked in savings investments secure your money for the time of the investment and you cannot touch it. This usually pays higher interest than savings accounts.
Life insurance can be considered a way to save money over time while you protect your financial responsibilities, should you die.
Stock market investment allows you to invest directly in a company or other market product through a publicly traded market. This can be risky and should be considered accordingly.
Mutual Fund investment lets you invest in many companies through one investment in a fund of your choice. This is considered less risky than buying directly into one company through the stock market.
Real estate investment commonly takes place in the purchase of a residence which appreciates in value over time. Income property investment is similar except that the property generates revenue from people who pay to use it.
Collectibles are things that you collect which have value. You may be interested in coins, stamps, books or some other item which increases in value over time.
There are variations between these investments in how they specifically work, but the basic ideas are like listed above.
Working your plan
As time passes it is helpful to measure your plan against the goals you have set. Is your plan progressing like you want? Have there been changes in your life? Have there been changes affecting the investments you have chosen? Periodically check your plan to verify that your money is growing like you want. If changes that affect your investments are happening quickly, you want to look at the plan frequently.
Start phase: This represents the first one third of your plan. In this phase you may not be putting much money aside as your probably not earning much. Your investment objectives are for reliable returns on your money where little risk is taken. Common investments to consider for this stage are;
- Savings accounts
- Guaranteed returns
- Life insurance
- Locked in savings
- Collectibles
- Real estate (starter residence)
Middle phase: Once you have reached this phase you will have a small amount built up and are ready to take on more risk in your investments. In this phase you want to grow your small amount into something more substantial. Consider investments with more risk. You can put more aside each month now as you are likely earning more. You may consider borrowing money for investments which broadens your opportunities for higher returns. Common investments for this stage are;
- Locked in savings
- Stock market (growth opportunities)
- Mutual Funds
- Real estate (residence / income property)
Ending phase: Now that your plan has accumulated a significant amount you want to be safe with it and will look for stable investments with a decent return. With much more money now than in the start phase, you can shop for investments offering higher returns and you are still putting aside a monthly amount considering the higher wage you are earning. This phase ends when you retire from work and stop earning money from a job, at which time you move into a retirement plan. Common investments for this stage are;
- Stock market (blue chip investments)
- Mutual funds
- Real estate (income property)
- Locked in savings (larger balances for higher returns)
- Collectibles (rare or precious items of value)
Be realistic
Plans for different people vary depending on how much money they earn or can borrow. Keep in mind that you must live day to day and need to pay your way for this, which is why developing a budget for yourself is a good idea. Being in control of a good financial plan can bring you the things you want and avoid you from ending up where you don't want to be. Feel free to contact me about your financial plan.
