Personal Financial Planning
| Author | Joel Lerner |
| Pages | 590-592 |
Page 590
An important investment individuals can make is in planning their use of the financial resources they have. While there are skilled financial advisers in all types of financial services institutions, individuals should have some knowledge about their own affairs. Individuals who take time to learn about money matters will receive a rich reward—dividends in understanding that in the long run will maintain their financial position at a level that is in line with their expectations.
The first step in creating a financial plan is to identify personal and family financial goals. Goals are based on what is most important to an individual. Short-term goals (up to a year) are related to what is wanted soon (household appliances, a vacation abroad), while long-term goals identify what one wants later on in life (a home, education for children, sufficient retirement income). These short- and long-term goals are the basis for establishing priorities, including an emergency fund as the first item. Then the estimated cost of each goal and the target date to reach it should be determined.
Life-cycle changes influence changes in financial planning. A person's goals must be updated as needs and circumstances change. In one's young adult years, short-term goals may include adequate insurance, establishing good credit, spending for a place to live, and gaining skills needed for work. During a person's middle years, the goals shift from immediate personal expenditures to education for children and planning for retirement. In one's later years, when employment ceases, recreational and personal hobbies may become of primary interest.
Planning is for the future. Therefore, age influences the planning process. Here are some guidelines that reflect general descriptions of financial considerations at different ages:
When a person is young, growth of financial resources should be a primary goal; a relatively high degree of risk is tolerable. Suggestions: Invest in a diversified portfolio of common stocks or in a mutual fund managed for growth of assets, not income. Speculation (in real estate, coins, metals, etc.) is acceptable, if the individual is willing to take such risks.
Stocks are still an attractive choice, but now one needs a more balanced approach. This may be the time to invest in fixed-rate instruments (bonds) and, if income is high, bonds that are tax-free (municipals) may be appealing.
By this age range, the majority of an investor's funds should be in income-producing investments to provide safety and maximum current interest.
There is a rule of thumb that may be appropriate here. It suggests that the percentage of one's portfolio in bonds should approximate one's age, the balance going into equities (stocks). For example, at age forty an investor would keep 40 percent in bonds and 60 percent in equities. At age sixty the reverse would be appropriate—60 percent in bonds and 40 percent in...
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