Identifying your financial values and goals sets the stage for financial success. Values and goals keep a balance between spending and saving and help you stay committed to your financial plans. Once goals are set, you can develop the strategies necessary for their achievement. Financial planning, the process of developing and implementing a coordinated series of financial plans, can help you achieve financial success. By planning your finances, you seek to manage your income and wealth so that you reach your financial goals.
Figure 3.1 provides an overview of effective personal financial planning, and Table 3.1 illustrates one couple’s overall financial plan. Your managerial efforts push you toward achieving financial success. The couple has made plans in specific areas spread across three broad categories: spending, risk management, and capital accumulation. Many people ignore certain areas (retirement planning is a common example) and act with only partial knowledge in other areas (relying on their employers’ often inadequate disability income insurance, for example). Yet achieving success in financial matters requires effective financial planning in all
Values Define Your Financial Success
Your values provide the underlying support and rationale for your financial and lifestyle goals. Your values are your fundamentalbeliefs about what is important, desirable, and worthwhile.They serve as the basis for your goals. All of us differ in the ways we value education, spiritual life, health, employment, credit use, family life, and many other factors. Personal financial goals grow out of these values because we inevitably consider some things more important or desirable than others. Weexpress our values, in part, by the ways we spend, save, invest, and donate our money.
One major benefit of financial planning is using money wisely. People who are smart about personal finance typically value saving some of their income. They adhere to the personal finance philosophy of “Pay myself first.” If you earn money, shouldn’t you be “paid” first? Successful money managers do this instead of spending it all, or even worse by spending more thanthey earn by using lots of credit. They establish a current spending level based on the necessities of life. They set aside money for future spending, such as for a vehicle purchase, home, child’s education, vacation home, and living expenses during the years of retirement.
Figure 3.1 provides an overview of effective personal financial planning, and Table 3.1 illustrates one couple’s overall financial plan. Your managerial efforts push you toward achieving financial success. The couple has made plans in specific areas spread across three broad categories: spending, risk management, and capital accumulation. Many people ignore certain areas (retirement planning is a common example) and act with only partial knowledge in other areas (relying on their employers’ often inadequate disability income insurance, for example). Yet achieving success in financial matters requires effective financial planning in all
Values Define Your Financial Success
Your values provide the underlying support and rationale for your financial and lifestyle goals. Your values are your fundamentalbeliefs about what is important, desirable, and worthwhile.They serve as the basis for your goals. All of us differ in the ways we value education, spiritual life, health, employment, credit use, family life, and many other factors. Personal financial goals grow out of these values because we inevitably consider some things more important or desirable than others. Weexpress our values, in part, by the ways we spend, save, invest, and donate our money.
One major benefit of financial planning is using money wisely. People who are smart about personal finance typically value saving some of their income. They adhere to the personal finance philosophy of “Pay myself first.” If you earn money, shouldn’t you be “paid” first? Successful money managers do this instead of spending it all, or even worse by spending more thanthey earn by using lots of credit. They establish a current spending level based on the necessities of life. They set aside money for future spending, such as for a vehicle purchase, home, child’s education, vacation home, and living expenses during the years of retirement.
Financial Goals Follow from Your Values
Successful financial planning evolves from your financial goals. Financial goals are the specific long-, intermediate-, and shortterm objectives to be attained through financial planning and management efforts. Financial and lifestyle goals should be consistent with your values. To serve as a rational basis for financial actions, they must be stated explicitly in terms of purpose, dollar amounts, and the projected dates by which they are to be achieved.
Setting goals helps you visualize the gap between your current financial status and where you want to be in the future. Examples of general financial goals include finishing a college education, paying off debts (including education loans), meeting financial emergencies, taking a vacation, owning a home, accumulating funds to send children through college, owning your own business, creating a better peace of mind, ensuring family harmony, and having financial independence at retirement. None of these goals, however, is specific enough to guide financial behavior. Specific goals should be measurable, attainable, relevant, and time related. Saving for retirement should begin with a calculation of how much money you will need in retirement, and saving for retirement should start soon after you begin a full-time job. Saving for a child’s education should begin when your first child is born, if not earlier.
Consider the example of Heather Vogel, a dance instructor from Cincinnati, Ohio. Heather has just made the last $347 payment on her four-year car loan. She does not like being in debt, so she does not want to take out such a large loan again. Heather
Successful financial planning evolves from your financial goals. Financial goals are the specific long-, intermediate-, and shortterm objectives to be attained through financial planning and management efforts. Financial and lifestyle goals should be consistent with your values. To serve as a rational basis for financial actions, they must be stated explicitly in terms of purpose, dollar amounts, and the projected dates by which they are to be achieved.
Setting goals helps you visualize the gap between your current financial status and where you want to be in the future. Examples of general financial goals include finishing a college education, paying off debts (including education loans), meeting financial emergencies, taking a vacation, owning a home, accumulating funds to send children through college, owning your own business, creating a better peace of mind, ensuring family harmony, and having financial independence at retirement. None of these goals, however, is specific enough to guide financial behavior. Specific goals should be measurable, attainable, relevant, and time related. Saving for retirement should begin with a calculation of how much money you will need in retirement, and saving for retirement should start soon after you begin a full-time job. Saving for a child’s education should begin when your first child is born, if not earlier.
Consider the example of Heather Vogel, a dance instructor from Cincinnati, Ohio. Heather has just made the last $347 payment on her four-year car loan. She does not like being in debt, so she does not want to take out such a large loan again. Heather
would like to put at least part of the money she has been paying monthly for the loan into a savings account, which would allow her to replace her current vehicle in five years. Heather figures that it would take about $22,500 to buy a similar inexpensive high-mileage vehicle in five years. She assumes she could earn a 3 percent return on her savings and, using Appendix Table A.3, has determined that she would need to save $4238 per year ($22,500 5.3091 for five years at 3 percent interest from Appendix Table A.3), or roughly $353 per month.
Heather’s thinking offers a good example of how financial goal setting works. She recognized the value she put on staying out of debt and proceeded to the general goal of paying cash for her next car. After determining an overall dollar amount needed,she broke that amount down into first annual and then monthly amounts. For only $6 more per month than she has been paying on her loan ($353 $347), Heather will be able to pay cash for her next car. This is the small sacrifice she is willing to make to avoid using credit to buy a vehicle in the future
Financial Strategies Guide Your Financial Success
Financial strategies are preestablished plans of action to be implemented in specific situations. Heather Vogel implemented a very effective strategy in the preceding example. That is, when a loan has been repaid, start a savings program with the same monthly payment amount. Saving may be easier for Heather if she arranges for the amount she’d like to save to be automatically deposited from her paycheck into her savings account. Another effective savings strategy is to arrange for onehalfof every raise to go into savings before you become accustomed to the additional income.
Heather’s actions have nothing to do with her earning more money. Many people think that being wealthy is a function of how much you earn or inherit. Accumulating wealth is much more related to your ability to understand trade-offs among current and future wants and make the sacrifices that will save money and generate wealth for you. In Heather’s case, all that remains for her to do is to put the strategy into action. She can then review her strategy annually and adjust it as necessary to keep pace with her shifting circumstances.To sum up, successful financial planning includes the following elements that guide behavior: (1) specified values that underlie the plans, (2) explicitly stated financial goals, and (3) logical and consistent financial strategies. Smart financial strategies will be presented throughout this book, as they help you keep a balance between spending and saving. Only after this values-based process is complete do you take actions to achieve the goals. In other words, your financial planning comes before you take action.
Financial Strategies Guide Your Financial Success
Financial strategies are preestablished plans of action to be implemented in specific situations. Heather Vogel implemented a very effective strategy in the preceding example. That is, when a loan has been repaid, start a savings program with the same monthly payment amount. Saving may be easier for Heather if she arranges for the amount she’d like to save to be automatically deposited from her paycheck into her savings account. Another effective savings strategy is to arrange for onehalfof every raise to go into savings before you become accustomed to the additional income.
Heather’s actions have nothing to do with her earning more money. Many people think that being wealthy is a function of how much you earn or inherit. Accumulating wealth is much more related to your ability to understand trade-offs among current and future wants and make the sacrifices that will save money and generate wealth for you. In Heather’s case, all that remains for her to do is to put the strategy into action. She can then review her strategy annually and adjust it as necessary to keep pace with her shifting circumstances.To sum up, successful financial planning includes the following elements that guide behavior: (1) specified values that underlie the plans, (2) explicitly stated financial goals, and (3) logical and consistent financial strategies. Smart financial strategies will be presented throughout this book, as they help you keep a balance between spending and saving. Only after this values-based process is complete do you take actions to achieve the goals. In other words, your financial planning comes before you take action.
.
0 comments:
Post a Comment