Developing a Financial Strategy
The prospect of developing and adhering to a financial strategy can be overwhelming.
However, it does not have to be so complicated. Consider taking the following three
- Measure your current financial status.
- Identify your financial objectives.
- Identify the steps to get you there.
Measuring your current financial status can be accomplished by preparing a personal
Identifying your financial objectives is simple. Most people indicate that retirement
security, funding children's education, increasing current income, reducing taxes and
passing accumulated wealth to their families at death are their primary financial
Quantifying what it will take to reach those objectives can be more complex.
Here are some points to include in your financial strategy.
Understand how you spend your money. Prepare a household spending worksheet. It will enable
you prioritize your spending and identify areas of potential saving.
Borrowing can enable you to obtain things that are otherwise beyond your current reach, but
borrowing costs money. Loans for things that provide lasting and ongoing value (such as an
education, a home or auto) are smarter than borrowing for short term gratification
(extravagant vacations or expensive jewelry).
Prudent borrowing also includes making sure the rates and terms of your loans are as
attractive as you can get. Before borrowing (whether it is a credit card, auto loan,
mortgage or other loan), make sure you understand all the terms. The interest rate, length
of loan and method of calculating interest should be clearly understood.
Utilizing a payroll deduction or another automatic savings program is usually more
successful than trying to save on a less regular basis. Automatic saving plans result in
consistent deposits and are available in a number of forms. Select one that fits your budget
and meets your long-term needs.
Investments come with risks, and hopefully higher returns to compensate for those risks.
Understanding the risks of loss, price fluctuation and inflation are necessary when creating
a sound investment strategy. Diversification, asset allocation (dividing funds into stock,
bond and cash investments) and investment costs should all be considered as part of a wise
Periodically, you should review all your insurance coverage. This includes
homeowners/renters, health, disability, auto and any umbrella policies you may have. For
peace of mind, make sure you have the right combination of coverage and deductibles. If you
use insurance primarily for "catastrophic" coverage, remember that higher deductibles
usually translate into lower premiums.
For life insurance, evaluate how much you really need. If your family would need
significant funds to replace your income, a larger policy may make sense. If you are single,
perhaps a smaller policy (and smaller premiums) will be sufficient. Also, compare the
benefits and costs of term and whole life policies. For younger, healthy individuals without
a need for permanent protection, a term policy may be a better choice.
Use a qualified advisor, if you need one.
In areas where you need or want help, find the right advisor. It may be an investment
professional, insurance agent, financial planner, credit counselor or trusted family friend
that can provide guidance. Make sure they are qualified and that you can comfortably work
with them. Do your homework. The more knowledgeable you are, the better you will be able to
evaluate recommendations. Remember, that your decisions will affect you and your family for
a long time.