Print Article for : First Command Financial Planning

Your Online Guide » Guide to the Stock Market » Investing and Trading

[F313]First Command Financial Planning

by Amit Malhotra, Ami

It must be noted that we roughly remain dependent upon our parents during the first quarter of our life and almost become inactive in the last quarter after we retire from active life. So we are left with the middle half of our life to earn to make our living as well as save the money for our retirement days.

Does it mean that we should set some money aside in our lockers or in our saving bank accounts so we can take it out to spend it when we are old?
The answer is no. For one, the total amount of our savings will start depleting the moment we start pulling out a part of it for our day to day living.

Again, by the time we retire, the purchasing power of the money may deplete substantially due to the inevitable and continuous process of inflation. Inflation or depreciation in the purchasing power of money is a harsh economic reality that cannot be avoided. It is a historical fact. It is as true that we all become old and our biological powers deteriorate with the passage of time.

Inflation means that while one dollar may buy you one liter of milk in the present times, it may just buy half a liter after you retire. Alternately, you may require two dollars to meet your requirement of one liter of milk.
How do you face this situation especially when you are old and cannot earn?

This is where the financial planning comes in. Financial planning helps you to manage your savings in such a way that you continue getting sufficient supply of money throughout your life especially when you are too old to earn. This can be done only by investing your money so that that it continues to grow and multiply and nullify the effects of inflation.

So, the earlier you start planning in your life for your future, the better. The truth is that you should start your financial planning for your future as soon as you start earning money.

This can be done by saving certain amount of your earnings for investment in such avenues which yield the maximum returns. There are numerous investment options and each one appears more alluring than the other.
But you must go for the investment option that suits your personal financial circumstances.

Some of the popular investment options are putting your money in fixed deposit accounts, mutual funds or stocks and shares also called equities.
While deciding upon any option, you must aim at getting maximum returns on your investment with minimum risks of losses.

The first option is to invest your savings in fixed securities because they offer assured returns without any risks. But since there are absolutely no risks in fixed deposits, therefore, the returns too are not really high enough to meet the contingencies of inflation in the distant future.

The second option is mutual funds. The mutual fund managers invest your money according to their discretion and charge you high fund management fees without guaranteeing you any specific returns. They warn you even before you invest with them that your investment is always at risk. Most of your funds are invested in risky equities and above all you do not have any control over the avenues of investment.

Investment in stocks and shares or equities brings in the maximum returns. But you may be warned of the attendant risks of losses as well.
It is heartening to learn that you can derive the benefit of earning the highest returns from investment in equities without facing the attendant risks.

For this you first need to open an account with a brokerage firm. It takes only a few minutes to open an account. Your broker will offer you numerous investment options in equities such ETFs, DRIPS, fractional investment plans, scheduled investment plans, various retirement plans with tax saving options and much more which yield assured higher returns over a period of time. The whole process of investment and making profits is made automatic and hassle free. You only need to study the website of your broker and contact their customer services in case you have any doubts.

There are six key steps to the financial planning process, according to the Canadian Association of Financial Planners (CAFP). The following is partially adapted from material on the CAFP and FPSC web sites at http://www.cafp.org and http://www.cfp-ca.org respectively. It's an indication of what you can expect in a comprehensive personal evaluation with a qualified Financial Advisor.

(1)The financial planner examines your current financial situation by collecting and evaluating all relevant information, including:

-*Basic family information (name, age, marital status, employment history, details of the children's birth dates and other qualitative details)

-*Net worth & cash flow statements

-*Investment portfolio

-*Insurance policies

-*Tax returns

-*Wills

-*Powers of attorney

-*Employee benefit plans

-*Trust agreements

-*Pension statements

This tells the advisor what your financial situation is today. It is a record of all of the financial decisions and transactions you have made in the past up until the current time.

The preliminary assessment should include family obligations, goals and objectives. Although the advisor may be dealing primarily with one individual, he or she represents an entire household. The financial advisor should ensure that all concepts introduced are fully understood. Privacy issues, which are paramount to some, should be addressed at this stage to ensure that the planner is able to obtain enough accurate information to develop the financial plan.

(2) The financial planner will help you focus upon financial and personal goals and objectives as well as clarify your financial and personal values and attitudes. These may include providing for children's education, supporting elderly parents or addressing immediate financial concerns, which would enable you to improve your current lifestyle and provide for retirement. These considerations are important in determining your personal financial planning strategy. Goals established should be:

Specific.
If goals are not specifics, they are merely dreams. ?I require $500,000 by my 65th birthday? is an example of a specific goal. ?I want to be rich when I retire? is a dream, not a goal.

Measurable.
Financial goals are easily measurable since dollars and cents can be counted.

Realistic and attainable.
Your goals must be achievable, within reason. To accumulate $1 million by age 65, if you are currently 60 and have no savings is not realistically achievable. To accumulate $1 million by age 65, if you are only 25 is attainable and realistic.

Time bound.
All goals should be time bound in order to measure progress towards the goal's completion, with deadlines for meeting specific objectives. If time deadlines are missed then changes can be made in the action plan to improve the probability of success. If goals are seen to be unattainable and/or unrealistic, you can do one or more of the following to get back on track:

-*Reduce discretionary expenditures ? i.e. save more money to put aside for investments,
-*Increase income,
-*Choose more aggressive investments, with the potential for higher returns,
-*Increase the timeframe over which to obtain the goal, e.g., push forward your date of retirement until you have accumulated the funds you need.
-*Reduce the dollar value of your goal.

(3) The financial planner will identify the problem areas that are preventing you from achieving your objectives. These can include things like too little or too much insurance coverage, or an unnecessarily high tax burden. Maybe your investment portfolio needs to be upgraded to take advantage of current opportunities. Problem areas must be identified before solutions can be found.

(4) The financial planner will provide written recommendations and alternative solutions. This is your financial action plan and it should be structured to meet your individual needs and circumstances, without undue emphasis on purchasing certain investment products.

(5) The financial planner will implement your plan, either by actually executing the recommendations himself, or in coordinating their execution with other professionals as required. A financial plan is only helpful if the recommendations are put into action. Implementing the right strategy will help to reach the desired goals and objectives.

(6) The financial planner will schedule periodic reviews of the plan to assure that the goals are achieved, and implement revisions to the plan if required to meet your goals. Your financial situation and the progress of your plan should be re-assessed at least once a year to account for changes in your personal and professional life as well as current economic conditions.

The initial planning stages normally involve a meeting with the client to discuss the most important issues. Often, a questionnaire is used to quantify cash flow, current financial position, and goals. The development of a financial plan also involves an assessment of future expenses, obligations, earning or income prospects, and financial risk. Any constraints are noted at this time in order to facilitate the plan.

Once a draft version of the financial plan has been produced, your advisor will discuss it with you for clarity and final approval. All aspects of the plan should be clear to you at this time. If it appears to meet your needs and objectives, it may be implemented.

Article Source : Advantages Of Investing In

About Author

Both Amit Malhotra & Galen Weston are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Amit Malhotra has sinced written about articles on various topics from Stock, Stock Market Crash and Investing and Trading. SogoTrade stock broker:How Sogotrade offers low commissions:. Amit Malhotra's top article generates over 18100 views. to your Favourites.

Galen Weston has sinced written about articles on various topics from Life Insurance Annuity, Investing and Trading and Mortgage. ProfessionalReferrals is an on-line provider of high-quality referrals to professionals within the Financial Services industry. We operate an on-line library of articles and information designed to provide a consumers' guide to the financial services mark. Galen Weston's top article generates over 6600 views. to your Favourites.