Financial Literacy Now | Creating a Financial Plan

The list of required equipment for creating a financial plan isn't very long: a sharp pencil, an eraser, blank paper.

Getting your goals down in black and white helps you focus on what's really important to you. Nothing is too trivial or too fantastic, at least in the initial planning stages. And creating a complete list of what you'd like to be able to afford in the future will probably help you clarify your priorities.

DEFINING FINANCIAL PLANS
It's easy to get confused about just what a financial plan is because the same term is used to mean different things.

Yellow Pencil

At its simplest, a financial plan is an informal list of the things you'd like to be able to afford in the future, and the steps you'll take to obtain them. It may cover just a few months, a couple of years, or the rest of your life.

A financial plan can also refer to a formal document prepared by a financial adviser that provides an analysis of your current financial situation, explains financial planning strategies, and recommends specific investments for you to make. In most cases, a formal plan takes a long-term perspective.

All financial plans — informal and formal — come to the same conclusion: The difference between just keeping your head above water, financially speaking, and realizing your goals is often based on how much, how soon, and how appropriately you invest.

PHONY SAVINGS PLANS
Remember, there's a difference between saving and investing. Be sure to distinguish between actually making investments and simply accumulating cash in an account.

A deliberately planned income tax refund is one of the worst ways to manage money. That's because all you get back is what you put in. You'd get the same results stuffing the money in a mattress. It's also smart to avoid holiday or vacation clubs if they pay no interest. If putting money away each week appeals to you, look for an account that provides a return at least equal to what regular savings accounts are paying.

Or, you might investigate having part of your paycheck direct-deposited into a mutual fund or brokerage account, or having a specific amount transferred regularly from your checking account. You can invest in US savings bonds directly, too, but you must hold each one a certain period of time to collect its full face value.

INVEST IN YOURSELF
To build a strong enough financial base to realize your goals, you'll need two things: money and time.

Sometimes, though, you may have financial opportunities, like buying a home or building up a business, before you have enough cash to afford the investment.

That's why financial plans often include borrowing to meet your more immediate goals. You can think about paying off these loans as the equivalent of putting money into an investment account — except you're already enjoying the benefits. The only caution is that you should also be investing to meet future goals.

FINANCIAL PLANNING WORKSHEET
SHORT-TERM GOALS Make specific investing decisions for the next year or so	TYPICAL GOALS New car Down payment on home More education Establishing a business	POTENTIAL CHOICES Treasury bills CDs Money market funds Short-term bonds Balanced funds

MID-TERM GOALS Sketch the major expenses you visualize for the next five to ten years	TYPICAL GOALS Education for children Larger home Second home Travel	POTENTIAL CHOICES Stock in well-established and growing companies Stock mutual funds Treasury notes Zero-coupon bonds

RETIREMENT GOALS Commit a percentage of your income to tax-deferred investments and let them grow	TYPICAL GOALS Affording travel, hobbies Maintaining life style Security for long-term care Helping children Inheritance for heirs	POTENTIAL CHOICES Growth stocks Stock mutual funds High-rated government and municipal bonds Zero-coupon bonds

EXPANDING HORIZONS One of the most exciting and rewarding elements of investing is that you can learn and hopefully earn as you go along. You don't have to pass any tests to start, and you can get instant feedback on how well you're doing. As with other learning experiences, you'll probably find that success brings added confidence. And you'll be encouraged to expand into new investment areas that offer increased earning potential without greatly increasing your risk. But you do have to be prepared for setbacks with individual investments and the market as a whole.

KEEPING YOUR PLAN ON TRACK
Financial planning is an ongoing process. First of all, you have to put your plan into action by investing regularly. For example, if you commit yourself to adding $5,000 a year — the maximum contribution in 2011 — to your individual retirement account (IRA), it's easier to contribute $416 a month, or a little more than $100 a week, than to come up with the entire amount at one time. If you're 50 or older, you can invest an additional $1,000 in 2011.

If $5,000 is more than you can invest, choose a smaller number. But use the same approach of committing a regular amount on a regular schedule.

Since IRAs have a contribution deadline (April 15 following the year for which you're putting money in), you risk missing this opportunity entirely if you don't have the money on hand. And remember, the earlier in the year you invest, the more time your money has the potential to grow.

Every year you should review and update your financial plan and the investment strategy you're following. For one thing, you probably don't have exactly the same goals today that you had a couple of years ago, or that you will have a couple of years from now.

What's more, investments change in value, depending on what's happening in the economy, within a certain industry, or with a particular mutual fund. You'll want to adjust your portfolio to stay on top of those changes.