7 Vital Steps of Personal Finance
One of the biggest questions investors may be asking, How can I structure my finances to take full advantage opportunities? The numerous answers can be grouped under Personal Finance Strategies. The topic of personal finance encompasses a very broad area. With a clear understanding of these different arenas, any individual can design and build a successful financial future. There are seven distinctive areas to be reviewed when constructing a financial future. In this article I will include 3 of the 7 steps for you:
Determine Exactly What You Want: Before you begin any investment strategy, determine exactly what you want from your time and effort. For example, do you want $100,000 in the bank in 5 years, or be completely debt-free in 2 years? By defining and writing down exactly what you want, you'll have something to aim for.
Design an Action Plan to Guide You: Once you have determined exactly what you want, the next step is to design a plan to get there. Your action plan is divided into three areas. These areas include short, medium and long-term goals. Short-term goals are things you want to accomplish within one year. Medium-term goals have a time frame of 1-3 years, while long-term goals are 5 or more years in time.
Implement Successful Money Management Strategies: There are several important areas that must be considered when discussing money management strategies. These include: creating a personal budget, income statement and a balance sheet.
Implement Successful Tax Planning Strategies: By following certain tax planning strategies, an individual will be able to take advantage of the current tax code. For example, if you invest in an Individual Retirement Account (IRA), you will be able to defer the annual tax liability from the investments inside the account until you start withdrawing the money. Some of the best tax deferral strategies are participating in your employers retirement plan, funding an IRA, and purchasing tax-deferred annuities.
Understand and Manage the Risk: In its broadest definition risk, as it relates to personal finance, is financial uncertainly. One of the best ways to manage risk is to understand it. For example, the stock market involves a certain type of risk. An excellent way to manage market risk is by diversification. Another example of risk is if the head of the household suddenly dies, this may leave other members of the family under financial pressure. A good way to manage this risk is to purchase life insurance. By understanding and managing risk, you’ll be better prepared to weather uncertainty.
Review Your Plan on an Annual Basis: By reviewing your plan on an annual basis, you’ll be able to determine if you are still on course to meet your goals. One of the best times to review your goals is about the time the new year starts. During this time of year, most people are gearing up for the coming year.
Reward Yourself Along the Way: Finally, you should reward yourself for all of your hard work. By rewarding yourself along the way, you’ll be able to combine hard-work and fun.
The 7 Steps of Personal Finance were taken from Andrew LaPointe's Book: How to Survive the Retirement Crisis of the 21st Century - What to do Now!