The Golden Rules of Financial Planning
No matter how basic or how sophisticated you are as
an investor, there are certain rules of thumb or guidelines
which seem to be timeless. Wise investors take heed:
1. Diversify. Never put all your financial
eggs in one basket. (But if you do, watch them very
carefully.)
2. Seek a return OF principal before seeking a
return ON principal. In other words put safety of
principal and certainty of income before gain on capital.
This is another way of saying, "If it looks too good
to be true, it probably is." Don't be greedy or you
may lose it all.
3. Cover your assets before taking greater risk.
Protect the ground you've gained. Never go to the next
level of financial risk before protecting the gains
you've already made. This is what personal and business
risk management is all about. So be sure you've managed
the risk in (a) property (such as fire, storm, loss,
and theft), (b) income (such as death, accident, or
sickness), and (c) liability.
4. No risk, no reward. The greatest risk of
all is doing nothing! Money is made and taxes are saved
by taking prudent risk.
5. Put yourself on your own payroll - at the top!
Budget for savings and investment just as you budget
for paying your bills.
6. Capitalize on the miracle of the "forgotten"
automatic investment. If at all possible, put money
aside on a regular automatic basis BEFORE you see it
and consider it spendable. For example, use salary savings
accounts, 401(k) plans, and similar devices that help
you compound money year after year. And create automatic
mechanisms to make money with the money you've made.
For instance, most investment vehicles provide automatic
dividend reinvestment plans.
7. Constantly increase the rate of your investing.
It is both easier and safer to gradually increase the
percentage of the amount you are saving and investing
than to increase investment return by taking greater
risk. A small increase in the input of a regular investment
is often equal to or greater than a dramatic increase
in the rate of return on a new investment.
8. Increase your expenditures at a lower rate than
you increase your income. Controlling inefficient
spending and debt acquisition is the lowest risk way
to increase the dollars you have available for investment.
Eliminating monetary waste and uncontrolled cash flow
are essential to financial success.
9. Always maintain a measure of liquidity.
Liquidity is the ability to turn assets back into cash
quickly with little or no loss. It is essential to meet
an emergency or take better advantage of a financial
opportunity. Insufficient liquidity often translates
into a forced (and then a fire) sale or a lost opportunity.
10. Remember that assets and income maintain their
utility only to the extent they maintain their purchasing
power. This means that you must consider the ability
of any investment to keep pace with or exceed the rate
of inflation.
11. Think of your financial security only in terms
of "the bottom line". It's not what you earn that
counts; it's what you get to keep. Don't judge the health
of your wealth at the top of the line. Be sure to consider
what's left after (a) taxes and (b) slippage. Consider
that state and federal taxes and other "slippage" reduce
bottom line spendable income considerably.
12. Always use the lowest risk solution that meets
your investment need. Risk should increase progressively
as each level of need is satisfied. For example, one
of the first and most primary financial needs is for
an emergency fund. After this "ground level" need has
been met, you can afford to take greater risk in seeing
a greater return.
13. When planning for retirement or for a child's
education, assume a lower than hoped for rate of return
on investments, a higher than anticipated level of inflation
and cost of living (or education), and put less reliance
on what social security or a company pension will provide.
In other words instead of projecting with just one set
of assumptions and thus putting unrealistic reliance
on figures that are mathematically accurate but that
are grounded on dubious long-range assumptions, do your
planning on a "worst case", "best case", and "probable
case" basis.
AS ALWAYS, FEEL FREE TO CALL TO DISCUSS THESE OR OTHER
ISSUES OF IMPORTANCE TO YOU!
The opinions voiced in this material
are for general information only and are not intended
to provide specific advice or recommendations for any
individual. To determine your specific financial planning
needs, consult your financial advisor.
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