FORGET YOUR FEARS, MAKE A FINANCIAL PLAN
There are few words in the English language that will scare people more than the words "financial planning". People would rather make a speech or eat ground glass than tackle financial planning.
The main reason is that they see no immediate benefit so they can easily put it off. The second reason is that they don't know how to do it because there is so much information out there and so many people trying to tell you what to do (or sell you something) that it becomes an impossible task for the average person to put an intelligent, sound plan into place and maintain it.
Then there is fear. Many put off financial planning because they are scared. Fear of the unknown causes people to freeze and do nothing or even worse yet they succumb to fear and put money into bad investments. The top two things that people are afraid of is another financial crisis and stock market volatility. I have some bad news for you. Both are going to happen in the future just as they have been happening ever since markets have been around.
The only way to be financially successful is to get off of the sidelines, focus on the big picture, work through your emotions and create a long-term plan. Here's how.
Examine your current situation. What are your assets and how much are you investing for the future. If you have no assets and are not saving 10 to 15% of your income for retirement you need to discover why. Are you not making enough money? Do you have too much debt? Do you spend money that you could be saving? To have a financial plan you must first have a successful savings plan.
If your savings plan is in place you need to examine your investments. Is your money in the right place to position you for long term success? Are they earning enough given your age and risk parameters?
Set financial goals and make a plan. Even though the future is unknown you have to set some broad goals. Financial planning is an on-going process of setting goals and re-evaluating them. Retirement should be your number one goal. Determine a number. The number is amount of investments that you need to produce income from your investments. This investment income when put together with other income sources will be your total retirement income.
Other goals may be important like your children's education but if there is only enough money for one goal, your retirement needs to be the priority. If you have the means for more than one goal prioritize them and decide how much you need to fund each.
The number one mistake investors make in setting goals is not setting a risk goal and reviewing it periodically. Risk is usually measured by the volatility of the stock market. You must invest in stocks to be a successful long-term investor. Everyone likes upward volatility but when the market goes down they want to bail out. This is how many people get into trouble. Buying when the economy is good and stock prices are high and getting out when the news is bad.
Knowing this, select the percentage of your savings that you are comfortable keeping in stocks no matter what the market does. This is the target and may vary as you get older. The goal here is to take advantage of market declines and harvest some profits if the market goes up. For example, if you choose a target of 80% stocks then add 10% to the stock portion if the stock market goes down and your percentage of stocks reaches 70%. Likewise take 10% from stocks if the percentage goes above 90%. If you have a risk plan you won't be as likely to follow your emotions and make big mistakes over and over and over again. Just follow the plan.
Measure your progress . Do this at least once a year. Start out by determining if you are making progress in relation to your plan and make any adjustments necessary.
First, review your saving plan. Are you saving enough? Have any goals changed or new ones emerged?
Second, review the amount needed for retirement. This is "the number" outlined above. Is the number still valid? Are you on track to reach it? Do you need to increase the number as you make more money? Do you need to adjust your savings or do you need to adjust your retirement expectations?
Finally, you need to determine if the investments you are using are doing what they should be doing and if not, what changes need to be made.
Bill Oldfather is a fee-only financial planner and investment advisor. Oldfather Financial Services is an SEC Registered Investment Advisor based in Kearney NE. Email to [email protected]