Personal Money Management 101

Identify Your Goals

Every journey starts with knowing where you want to go. Your financial journey is no different. This article will help you identify your and plan the route most likely to achieve them.

Everyone is different. We all have different present circumstances, different goals and priorities, and different attitudes to issues like risk. Just as we are all different to one another, so our circumstances, goals and priorities continue to change throughout our lives. Financial planning, therefore, isn't something that we can do once and file away. We need to keep reviewing our financial position and goals on a regular basis.

The first stage of financial planning is to take an inventory of where you are now. What is your income? What are your assets? Your debts? What is your expenditure? Consider also your prospects? How stable is your income? Does it remain constant, or is it dependent on factors beyond your control? And what about prospects, are you in an occupation where you can reasonably expect your income to increase year on year?

The next step is to identify your goals. These will depend upon your age, circumstances and individual tastes. For example, the young will probably be concerned with purchasing their first home, the early middle-aged with paying their kids college fees, and the late middle-aged with providing sufficient retirement income.

Goals exist within different timeframes. A short-term goal might be to save enough for next year's vacation. A medium term one may be to pay off your mortgage. And the longest term one may be building a decent pension fund. Work out how much you have, and need, to fulfil each timeframe's goals and allocate your available funds accordingly.

In itemizing our goals we most likely come up with a lengthy wish list. It is necessary to prioritize these goals, eg into essentials, desirables, and luxuries. Don't be afraid to add "blue sky" goals, so long as you recognize them as such. You never know, some day you may pick the winning lottery numbers!

In investing, reward is invariably linked to risk. Our capacity to accept risk is highly individual, and should be a matter for much reflection before making financial decisions. The risk of an investment is the degree to which returns may be expected to fluctuate, or to put it another way, the degree of uncertainty in predicting returns.

Generally risk decreases with the length of time frame under consideration. For example it is quite possible to lose on a stock market investment of one year. But over just about any 20-year period stocks have shown a healthy return. Thus someone saving for next year’s vacation would expect to exercise greater caution than a 20-year old just starting to build a pension fund.

A useful exercise before entering any investment is to visualize yourself and how you would feel in the event of the best, worst and most likely outcomes for the investment. A simple rule of thumb is that if an investment is going to make you lose sleep, don't do it!

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