Like a holistic approach to personal health, the process of providing financial fitness involves four basic steps. If you have the time, objectivity and expertise in investments, taxation, insurance, and estate planning, you can complete this four-step process on your own. However, most people find it helpful to seek the aid of various professionals to derive the most benefit from this comprehensive process.
Let’s review the four-step action process:
1. Examine: It is important to first develop a profile of your financial health. This is accomplished by gathering and organizing your financial and personal data. Your financial data should include a current tax return; a listing of your assets and liabilities; a breakdown of your monthly living expenses; information about your personal and company retirement plans; life, health, and casualty insurance policies you own plus any estate plan documents (wills or trusts) that you have. Your personal data should include information on all family members; a clarification of your goals and objectives and an accurate assessment about your tolerance for risk.
2. Diagnose: This step should analyze the data that has been gathered to determine your strengths and weaknesses. Proven concepts and principles may then be applied to reach decisions regarding aspects of your financial situation.
For example, your cash reserves should be reviewed. Are they sufficient? Are they equal to at least ‘X’ months fixed living expenses? Are you hindered by too much debt? Are your current (liquid) assets sufficient to meet all current obligations (those due within the next twelve month period)?
Also, do your investments match your stated objective. Do you understand market risk, inflation risk, investment specific risk, portfolio composition risk, etc.? A desire to provide for your survivors in the event of your death would call for the drafting of an estate plan to meet your specific requests.
4. Monitor: You and/or your planner need to review your plan on a regular basis (at least annually) to make appropriate adjustments based upon changes in economic, financial and/or your personal circumstances.
This regular “follow-up” will also provide an opportunity to compare results with your goals and objectives.
What are your goals and objectives? If income is your goal, would you consider a bank deposit or a money market fund more appropriate than a portfolio of shares?
3. Prescribe: This step is where specific courses of financial action are selected. For example, if one of your objectives is to generate tax-free income, you (or your financial planner) might select an investment in a bond fund and take a SWP – no dividend distribution tax, no income tax because you are below taxable income. If you desired greater growth potential for a portion of your cash reserves, equity mutual funds or direct equity might be more appropriate.
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