My husband often teases me about my tendency to plan everything, from vacations to breakfast. I’m constantly jotting down notes, making lists, and creating schedules. Of course, I know that not everything always goes according to plan, but having a plan is critical to achieving success, especially when managing your finances.
One of the most important things you can do to protect and grow your money is to invest, and there’s no better time to start than now. The earlier you start investing, the more you can take advantage of the benefits of compound interest.
However, having a financial plan in place is crucial, especially with record inflation and stock market volatility projected for 2023. To help you create a plan that’s both effective and flexible, here’s a five-step guide that can work for you today and in the future.
Step 1: Understand Your Cash Flow
The first critical step before investing is determining your monthly cash flow. This amount of money comes in and goes out of your account every month. While some people may already know their cash flow through their check register, there are also personal finance apps available that can help you determine your cash flow and other vital information to help you manage your finances. For instance, Empower is a free budgeting software that provides excellent tools for determining your cash flow, net worth, and other vital data. YNAB and PocketSmith offer unique features and tools for managing your finances and predicting future outcomes. Alternatively, you can also determine your cash flow manually through your bank statements and a spreadsheet.
Step 2: Define Your Investment Goal
Once you understand your cash flow and how much you can invest, it’s time to set your investment goal. Your investing goal could be anything from saving for retirement to buying a home or paying for your child’s education. Being specific with your goals to determine the right investment strategy is crucial. For example, “I want to retire at age 65” or “I want to buy a house in two years” are specific goals that enable you to create a manageable investment plan.
Step 3: Ensure Your Time Frame Is Feasible
After you have established your goal, make sure to double-check that your set time frame is realistic. If you intend to turn $5,000 into $50,000 in two years for a down payment for a house, then good luck with that!
However, you are in a good position if you are 25 years old and have $5,000 to invest for retirement or even to become wealthy by age 65!
Step 4: Determine Your Asset Allocation
Next, research your investment options and determine the asset allocation that will enable you to reach your goals within your specific time frame.
“Asset allocation” describes how much of your total portfolio (investments) you will allocate to stocks, bonds, commodities, and other investments. Each investment represents a different asset class; you can give your portfolio however you like.
Fortunately, the internet has made it possible to develop robo-advisors, which are automated investment platforms that can assist in developing the ideal asset allocation for you.
Step 5: Regularly Review Your Plan
Every investment plan requires some tweaking as you go along. You may even need to make significant changes if something important and unexpected occurs in your finances or personal life. Here again, technology can be unique. Use these robo-advisors to monitor the health of your portfolio!
However, audit your investment portfolio at least once yearly and make any necessary adjustments.
Although unforeseen circumstances will inevitably arise, the best thing you can do for your financial future is to create a financial plan and stick to it as best as possible.