Your Financial Plan: Getting Started On a Secure Future
This Financial Guide tells you how to begin the financial planning process. It provides worksheets to help you find out where you are financially and where you want to be in the future. It will help you identify your goals, determine your net worth and cash flow, plan to achieve your goals as well as begin to put your plan into action.
Financial security derives not only from acquiring more money but from planning. A solid financial plan can alleviate financial worries about the future and ensure that you will meet your financial goals - whether they relate to retirement, asset acquisition, education, or just vacations.
Review your financial plan every year to keep it up to date. If you set it up properly initially, it is relatively easy to review and keep current.
This Financial Guide allows you to take the first step towards a solid plan. By following the instructions and guidelines contained in it, you can find out where you are now and how you can put your plan into action.
There are many ways to approach setting up a financial plan. The one outlined in this guide is just one of a number of approaches. Your financial advisor can assist you in setting up the financial plan that best meets your particular situation and needs.
Identify Your Goals
Spend some time thinking and talking with family members about what you would like to achieve financially. What would make you and them happy? What would be fulfilling? Would you like to start your own business? Retire early? Acquire a vacation home? Pursue a hobby? Travel?
- Perhaps you'd like to change careers, and you'll need money to finance an education in a different field. Or perhaps you'd like to have a large amount of money to give to your favorite charity.
Plan To Achieve Your Goals
Now that you know what your goals are and have an idea of your financial resources, it's time to begin making a plan.
Financial Safety Net
Determine the funds you'll need in case of a disaster or emergency. Coverage of such contingencies comes from insurance and from an emergency fund.
Emergency Fund
You should have a fund of three to six months (we'll leave the number of months to your judgment) worth of living expenses to tide you over in case you lose your job or have unexpected bills. The emergency fund should be kept in an accessible account: a money market account is good for this purpose.
Life Insurance
Make sure your coverage is adequate. You should have enough coverage, should a catastrophe occur to ensure your family would continue to enjoy the same level of income it does currently.
Disability Insurance
Disability insurance is intended to replace lost income due to the occurrence of illness or accident. Consider whether you need to provide coverage for your family.
Auto, Home, and Health Insurance
It's important to make sure these types of policies provide adequate coverage. If not, an accident or other catastrophe could wipe out a large portion of your assets or cash flow and you may be unable to achieve your goals.
Establish How Much You'll Need
Once you have covered your insurance and emergency fund needs, you can start working towards your financial goals.
Put the Plan into Action
Make a savings plan. How will you save the amounts you have targeted? Will you have them deducted from your paycheck? Will you deposit them into a savings account each month?
Once you've accumulated a chunk of savings for each goal, you'll need an investment strategy. For each goal, determine how much risk you are willing to take with your savings. This will depend on how much of the money you can afford to lose, how essential the goal is, and your own risk preferences.
You may have read recently about asset allocation and wondered whether an investor such as yourself needed to worry about this concept. The answer is a resounding yes. Asset allocation - not fund or security selection, not market timing - is the most important factor in determining how much money you make on your investments. In fact, according to Nobel Prize-winning research, asset allocation the type or class of security owned - determines 90 percent of the return. The remaining 10 percent of the return is determined by which particular stock, bond, or mutual fund you select, and when you decide to buy it. In short, asset allocation and diversification are the cornerstones of good investing.
Here, in a nutshell, are the three most important things an investor can do:
- Establish a financial profile. Your financial profile is the translation of your goals, risk threshold, and time horizon into a graph or curve, using a computer software program. The three factors we just mentioned are plotted on a graph according to the program's formulas.
- Find the right mix of "asset classes" for your portfolio. The right mix of asset classes will balance each other in a way that will give the best possible return for the amount of risk you are willing to take. Using computer programs, asset allocation professionals will determine the proper mix of assets for your financial profile. Over time, the ideal allocation for you will not remain the same; it will change as your situation changes, or in response to changes in market conditions.
- Choose investments from each class, based on performance and costs.
How Does Asset Allocation Work?
Using computerized formulas, asset allocators take down information they glean from a questionnaire you have filled out. This information gives them what they need to become familiar with your needs, constraints, and unique circumstances.
The following factors should become apparent from the questionnaire.
- Your risk threshold (how much of your capital you are willing to lose during a given time frame),
- Your goals (whatever financial planning goals you and your family want to achieve), and
- Your investing time horizon (mainly, your age and retirement objectives).
In addition, the professional needs to consider how wealthy you are, what your income tax bracket is, how much of your portfolio needs to be kept liquid, and how often withdrawals will be made from the portfolio.

The allocator's goal now is to come up with the right blend of six or seven asset classes, in the right percentages, that will match your financial profile - your risk profile and time horizon.
