10 steps to financial fitness

by John Fitzsimons on 21 November 2011  |  2 comments
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Guest blogger Mike Stafford, of the Institute of Financial Planning, highlights ten simple steps to financial planning success.

It’s Financial Planning Week this week, an initiative aimed at raising awareness of just what a difference planning your finances can make. Here are my ten tips for getting the most out of your money, thanks to a bit of planning.

#1 Work from a long-term plan

Like anything else, committing your specific goals to paper can help you focus and work towards them. By that I mean: "I need to save another £16,000 for Harry’s education by 2015". I don't mean: "I must put some money away for Harry’s education ."

It's critical to define your objectives clearly and plan to meet them. Check out the free financial planning software on www.financialplanningweek.org.uk to help you get started.

#2 Conduct a financial stock take

Before you undertake any investment of your hard earned cash, it's a good idea to know where you stand financially. What assets have you got already, where are they now and what are they worth? 

Do you have a financial cushion - a few months' worth of living expenses tucked away in a safe holding place like a deposit account? Are your debts under control?  Can you review your budget and find money to invest?

Getting your financial foundation in order makes sticking with an investment strategy easier for the long term.

#3 Start now and invest regularly

Begin investing as early as possible with as much as possible. Keep in mind that even small amounts add up over the long term. 10% of your net income is the target.

More is better. Less is okay. But make it something!

#4 Don't try to fund short-term goals with long-term investments

Be sure to distinguish between short- (three to five years) and long-term goals. Any assets earmarked to pay for short-term needs should be safely tucked away in deposit-type funds where there is little risk of capital loss.

#5 Use the power of equities

Whether you choose to invest in individual shares, or a mutual fund, be sure to invest in equities. History has shown that over the long-term, the stock market has outperformed every other type of investment - and beaten inflation.

For funding things like education and retirement – where you have many years in which to achieve your goal - there has been no better place for your funds to grow. With inflation currently running at high levels, you need to be savvy to make sure you increase the real value of your assets over time.

#6 Take all the free money you can get!

Put as much as you possibly can into employer-sponsored pension plans and/or other tax-advantaged investments like personal pensions and ISAs. These plans are a gift from the government to encourage you to save for retirement. They offer tax advantages that can't be beaten for long-term wealth building.

#7 Pay yourself first

Whether investing in a retirement plan or another investment, take advantage of automatic investment plans where money is taken directly from your bank account and invested.

This also lets you employ a strategy called ‘pound cost averaging’ - an automatic way to take advantage of market ups and downs.

#8 Be realistic

Expect ups and downs, particularly when investing in the stock market. Remember the only reason shares offer potential for superior long-term returns is because they carry higher short-term risk. Before you invest be sure you have a realistic idea of what to expect in terms of risk and reward.

#9 Practice good defence

Proper asset allocation that is appropriate to your needs, age and goals, diversifying your investments and pound cost averaging are three ways to help safeguard your assets and your peace of mind.

#10 Seek guidance when/if you need it

Do-it-yourself investors can benefit from regular planning and portfolio performance check-ups, too. Planning wisely involves accounting, estate planning, tax law - even psychology. So it's no wonder many more people choose to use a qualified financial planner, such as a CFPCM professional, on a regular basis.

Mike Stafford, of Stafford and Co, is a certified financial planner and member of the Institute of Financial Planning.