The process of providing financial fitness involves four basic steps.
If you have the time, objectivity, inclination (to take time off from your family to do this) and expertise in accounting (to file your tax returns), investments, taxation, insurance, and estate planning, you can do this process on your own.
However, avoiding personal bias is not only difficult but almost impossible. The most important business for financial planners comes from fellow financial planners – who can bring objectivity to all portfolios except their own! Most people find it helpful to seek the aid of various professionals to derive the most benefit from this comprehensive process.
Let’s take charge!
1. See where you stand!
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 retirement plans; life, health, and other insurance policies you own plus any estate plan documents (wills or trusts) that you have. Do not forget your company pension scheme, your provident fund balance, any inheritances, divorce decrees, etc.
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 emergency cash reserves should be reviewed.
Are they sufficient?
Are they equal to at least three 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 goals and objectives?
If income is your goal, would you consider a money market mutual fund account more appropriate than a portfolio of speculative mutual fund schemes?
3. Prescribe: This step is where specific course of financial action are selected.
For example, if one of your objectives is to generate income, you might select an investment in an income (bond) fund. If you want greater growth potential for a portion of your assets, equity mutual funds or shares might be more appropriate.
4. Monitor: You also need to review your plan on a regular basis (at least annually) or on the happening of an event – birth, death, marriage, divorce, change of job are just some examples 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.
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