| When
it comes to money, planning is where it all
begins. Everything you do with money requires
a plan, whether you realize it or not. Without
a thoughtful plan, you're bound to get lost or
confused.
Planning
doesn't have to be difficult. We have
simplified basic financial planning into four
questions:
1.
Where do you want to be?
2.
How much time do you have to get there?
3.
Where are you now?
4.
What vehicles give you a chance to get there
on time?
Where
Do You Want to Be?
Setting
an investment goal is no different than
choosing a travel destination-you're trying to
get somewhere with your money. First, Part A:
What is the event for which you're planning?
Part B: What's a good estimate of the amount
of money you will need to achieve that goal?
Knowing
your goal means everything in money
management. If you don't know where you want
to be, you won't know how to get there. And
you won't know how to avoid or minimize the
risks along the way. You may not even
recognize the risks at all.
Where
Are You Now?
How
much money can you put toward your goal now?
What's your starting point? Whether planning a
trip or a financial goal, it's critical to
know the distance between where you are now
and where you want to be.
Let's
say you want to buy a car for $20,000. How
much money can you designate toward this goal
right now? Your answer will affect how you
plan to reach your goal.
Perhaps
you have $25,000 in a retirement plan and
$5,000 in a bank savings account. You don't
want to touch your retirement savings, but you
think you can set aside $2,000 from your
savings account toward the car.
If
so, then "where you are now" =
$2,000.
And
the distance you have to travel is $18,000 to
buy the car.
How
do you know where you are now? In terms of
money, there are two ways to know:
Your
net worth, which is the total value of
everything you own, minus the debts you have
to repay; and your budget (or cash flow
picture), which shows your monthly income and
spending patterns. It's a snapshot of how
money flows into and out of your life every
month.
How
Much Time Do You Have?
The
time you have to reach your financial
destination often influences whether you are
in a rush, or can plan a more leisurely
course.
The
question of time is the third question
because, like planning a trip, once you see
how far you have to go, you will:
Be
okay with the time you set to get there;
Give
yourself more time to get there; or
Adjust
your goal or starting point in order to
shorten the distance.
Time
is a huge factor in investing. The
relationship between time and distance always
plays a huge role in planning. If you have
five hours to travel 500 miles, you're going
to think about planning your trip differently
than if you have five hours to travel only 50
miles. It's the same with money. You have to
know (1) how far you need to go and (2) in
what period of time, in order to create an
intelligent plan for getting there on time.
What
vehicles have at least a chance to get you
there on time?
When
you plan a trip, once you know how far you
have to travel and how long you have to get
there, choosing the vehicle and the route to
take becomes almost second nature. It can feel
like second nature with investing, too, once
you answer the first three questions.
For
example, what if you had five hours to go 500
miles? You could take a car and speed,
averaging 100 mph. You might take a train that
goes that fast but won't take you
door-to-door. You could take a plane that
flies 600 miles an hour, and get there early.
You might try to get there by walking, or
running, or riding a bike, but you're
guaranteed not to get there on time.
Give
yourself at least a chance. When planning,
first look for vehicles that have at least the
potential to get you to your goal on time. In
the travel example, they would be the car, the
train, and the plane. You may not be entirely
comfortable with any of those—you might feel
safest walking, running, or on a bike—but
you're guaranteed to fail.
This
applies to your money too. First, look for
vehicles that have at least the potential to
reach your goals. If, for example, you have 2
years until you want to get a new car, and you
start out with $15,000. You will need to save
$5,000. You should save the extra money in a
safe investment, such as a money market fund,
because you will need it soon, you can't
afford to lose any of the money, and this
investment account will get you there on time.
Or
let's say that you want to retire in 15 years
and you need to save $200,000. Putting most of
your money in a money market account probably
won't get you there on time. Some combination
of stocks, bonds and cash is more likely to
help you reach your goal.
Find
out more about three major money strategies
and the vehicles that can help you reach your
financial goals:
Protecting
what you have (investing in CD, money markets,
or very safe short-term bond funds)
Earning
steady income (investing in bonds and/or bond
funds; and that also may increase or decrease
in value)
Growing
more money (investing in stocks and/or stock
funds; and that also may pay some steady
income from dividends)
The
purpose of this newsletter is to stimulate
thought for my clients and those professionals
with whom I network. If you are a real
estate, estate planning, taxation, financial
planning or insurance professional receiving
this newsletter, please call my office and
introduce yourself to me. I'm always
seeking to grow my referral network, and to
expose more service professionals to my client
base. I specialize in helping those
individuals looking to buy, sell or refinance
real property in the Pacific Northwest Area. |
