The best way to have insight into your financial plan is to identify what you wish to achieve with you money. The first place to start is with having some “goals”. And you can begin by grouping your goals into three categories:
- Short-term goals — 5 years or less
- Intermediate-term goals — 5 to 15 years from now
- Long-term goals — 15 years +
Now it’s time to prioritize the goals within each time frame.
Once you’ve prioritized your goals, the next step is to estimate how much those goals will cost. Keep in mind a goal within the next 5 years is much easier to estimate than one that is in the future. Future calculation may be more complicated; don’t forget to factor in inflation as well as a reasonable rate of return from your investments. In order to help you estimate long-term goals you can find tools online that use historical inflation rates to help you determine how much you will need to save for goals like, college tuition and retirement.
Now that you have prioritized your goals, the next step is to make sure your savings and spending habits are on track to achieve those goals. Is your current savings rate enough to obtain your financial goals or do you need to rev-up your savings to improve your chance of success? For retirement planning try using tools like T. Rowe Price’s Retirement Income Calculator.
Once your goals are established and your savings on track, take the time to go over your investment portfolio with your advisor. Checking your asset allocation (stock/bond/cash mix) should be high on your priority list. Your portfolio should always reflect your risk tolerance. Many factors may affect this such as, time horizon, future earning capacity and the presence of other assets like home, pension, social security or inheritance. Discuss these factors in detail with your advisor.
Financial planning is a lifelong process; knowing and understanding what your needs are today — and what they will be tomorrow — is the key to successful financial planning.
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