Personal Money Management 101

Asset Allocation

Asset allocation describes the process of how your available funds for investment are allocated to different types of asset. How you allocate your funds depends on factors including:

1. your goals, and their timeframe
2. your propensity for risk
3. the amount of funds available for investment

It is always wise to have 3-6 months living costs on short-term cash deposit. Internet-based accounts generally offer the best rates for such funds. Beyond this how you split your assets will depend on the characteristics identified above.

Working Income vs Passive Income

Working income refers to income that you have to actively work for. Passive income refers to income obtained from your investments (assets). Instead of you working for money, your money works for you. The problem with working income is that when you stop working, it also stops. Now maybe you're young, fit, strong and love what you do. But what if some time in future you had an accident or suffered an illness that prevented you from working? Your working income would cease. That's why a major goal of financial planning should be to increase, and keep increasing, your passive income.

Insurance

Insurance serves a useful purpose but is often something we avoid thinking about because it reminds of the worst things that can happen. Insurance comes in all shapes and sizes. Some we cannot avoid. If you hold a mortgage the lender will almost certainly insist that the mortgaged property is adequately insured in order to protect his investment. In most places automobile insurance is compulsory if you drive a car.

Other kids of insurance are discretionary, eg life insurance, critical illness insurance, health insurance, accident insurance, legal insurance, critical illness insurance, unemployment insurance, pet insurance..... The list is endless and if you ever get to talk with an insurance salesperson they'll do their darndest to convince you that you need the lot, probably by scaring the hell out of you. Instead avail yourself of the broadest possible information, decide how much you have to spend on insurance, and allocate it to the types that are most useful FOR YOU!

Like most industries the insurance business is highly competitive. Before signing on the dotted line, check out what a range of companies are offering, and at what cost. Only then is it right to decide who gets your hard earned dollars.

Pension Planning

The golden rule of pension planning is that it's never too soon to start. Pensions are long-term investments that benefit hugely from compounding, ie the re-investment of earned income.

If you're in stable employment and your employer offers a pension scheme it is well worth checking out. Company schemes are usually an excellent choice because in most cases the employer contributes to the fund. The best schemes are generally reckoned to be those based on the employee's final salary, although in the U.K. such schemes are now being phased out.

Many countries offer generous tax breaks on pension savings, though funds may be required to be held in a designated pension scheme, and there are usually restrictions on gaining access to the money, ie it cannot be touched before a certain age.

On the Web:

Financial Planning Complete Guide to Personal Finance and financial success from About.com