What is a Personal Finance Plan – And How Does Investing Fit In?
By Marlon Green of Prosperous Athletes – Financial Consultant, CFEI®, and Member of the Texas Financial Educators Council Advisory Board
When people are equipped with the proper tools, resources, and solutions to be confident stewards of their finances, they become empowered to make choices that will lead them toward financial independence and security. Laying a firm foundation in personal finance planning is the first step toward that security. This article describes how Marlon Green of Prosperous Athletes approaches the topics of personal financial planning and beginning to invest.
A personal finance plan is a comprehensive framework that lays out every aspect of a person’s financial life. Those aspects include budget, cash flow, account management, credit and debt, taxes, insurance, estate planning – and finally, investments. Your financial plan is an actionable roadmap that allows you to track and manage your money with the end purpose of reaching your financial goals. That means goal-setting is a key action toward creating a sound financial plan. While financial planning is essential to achieving your financial goals – both short- and long-term – at the same time it prepares you to meet future obligations and potential risks.
An individual’s personal finance plan is unique to that individual; no two plans are the same. Your plan should paint an accurate picture of your own financial needs, goals, and best action steps toward reaching those goals. Everyone benefits from having a solid financial plan in place.
As noted, investing is one key component of a good financial plan. In today’s financial landscape, investments are virtually the only way to get your money working for you. Savings accounts pay interest rates far too low to keep up with inflation, so investing is one of the only ways to obtain solid returns on your money. That’s due to compounding interest – where you earn interest not only on the original money you invest, but also on the money you’ve earned as interest over time.
So your financial plan should include both a personal budget and an investment budget. And just like your financial plan, your investment plan should start with goal-setting. People have different visions for their futures. Do you want to spend more time with loved ones? Travel and have adventures? Kick back on a beach? Make a difference in the world? Whatever your motivation, reaching your goals for the future will require money and free time. So your first question to ask along the investment pathway is not “What should I invest in?” but “What am I investing for?” For example, retirement savings is an initial goal for many investors.
Once you’ve clarified your goals for investing, your investment plan will have three main parts: the type of account you’ll set up, how much money you will invest, and which investment vehicles you will use.
Which Type of Account?
For retirement savings, if your employer has a 401(k) plan, you should take advantage of that benefit – especially if the employer matches your contributions. Or open an Individual Retirement Account (IRA) through a financial institution. Learn the difference between traditional and Roth IRAs and decide which option is best for you.
If retirement is not your primary investment goal, you might open a taxable brokerage account from which you can withdraw at any time without penalties.
How Much to Invest?
How much money you invest depends on your financial situation, investment goals, and your timeline for reaching those goals. In today’s financial environment, it’s become much easier to invest with small dollar amounts, so there’s no excuse not to start early. The younger you start investing, the more time you’ll have to ride out market fluctuations and watch your money grow.
Using retirement as an example, a common rule of thumb is to aim for setting aside between 10% and 15% of your income per year.
Which Investment Strategy to Choose?
The investments you choose also depend on your situation and goals. Before settling on an investment strategy, it’s important to calculate your own risk tolerance. Every investment carries risk. You need to know how much loss you’re willing and able to accept before you start.
You have multiple choices for investments including stocks, bonds, mutual funds, Exchange Trade Funds (ETFs), annuities, real estate, cryptocurrency, and more. Many inexperienced investors select all-in-one funds that invest in thousands of individual stocks and bonds to help mitigate their risk. The important thing is to do your due diligence – conduct research and learn as much as you can about any investment option before you decide.
Get Help
Choosing investments can seem overwhelming, especially at first. It’s a good idea to have a team of advisors you trust in place before you get started. If you can’t afford to pay much for financial advice, robo-advisors offer a low-cost option.
Personal financial planning services help you map out and advance toward your life goals through proper money management. Getting advice from trusted professionals can empower you to develop a holistic financial plan that makes sense for your goals and the future lifestyle you envision.
