Some Finance Basics
April 4, 2013 § Leave a comment
This finance basic is some of the most important aspects of your financial life and benefits from monitoring, even if you have already pretty set on your answers.
How to you determine risk? – There are several approaches. One is to ask yourself how would you feel if the value of your portfolio went down by 20%? By 40%? Are you a risk-taker by nature? In some financial respects are you conservative and then in other ways more aggressive? Do you prefer less volatility but are you willing to endure some of the ups and downs for better gains? Or is your preferred route little volatility?
In my practice we us a multi-questioned risk test to try to be scientific in our planning. You could do a general search online and type in ‘determine investment risk.’ Many links will be available that will help you gauge, with some objectivity, your risk profile.
Goals- One of the most difficult things about finance is balancing the needs of the future with the concerns and dreams of today and everyone’s limitations on income. If all your money goes towards paying down debt and you aren’t using the awesomeness of compounding to save for your future, I think that is not a great choice. Because compounding can really make a big difference in your saving strategy. But you may also need to consider the purchase of a new car, or buying a camp and saving for the kids and college.
One way to manage your goals is to break them down into short-term, intermediate-term and long-term goals. Because of the awesomeness of compounding, a relatively small amount of money saved early can help you more easily reach your long-term goals. That’s why beginning very early can be a big help.
While you are doing that long-term saving, you might also set aside money for the short-term goals you have identified. As you achieve them you can move into saving or working toward the intermediate goals.
Budgets are limited. Pick the most important goals in the various time categories and address them first. Add more to your plate if you can.
Revisit these basics, your risk tolerance and goals regularly because stuff happens. Life changes. So regularly tweaking your direction makes for a cozier life. (CR 9151)