You probably know that one of the most important things you can do to build wealth is to invest. Investing can help you take advantage of compounding returns and grow your nest egg. However, in order to succeed at investing, it helps to have a plan.
Here are 5 steps to creating a successful financial plan:
1. Identify Your Goals for the Money
The first thing to do is identify your goals. What will the money be used for?
Figure out why you are investing. You can have multiple goals if you want, creating a different portfolio for each goal. Investing can help you reach a number of goals, from buying a home, to retirement, to saving for your child’s college, to creating a stable income stream. Decide what you want your money to accomplish.
2. Decide on a Realistic Time Frame
When do you think you will need the money? You will need a time frame to proceed, if you want to meet your goals. A retirement portfolio might have a time frame of 20 or 30 years, while your income portfolio might need a time frame of seven to 10 years to build up to the point where it provides a regular, substantial revenue stream.
3. Figure Out the Best Asset Allocation
Next, it’s time to research your investment options, and decide on an asset allocation that will help you reach your goals within your specified time frame. If you are looking to use your investments to buy a home in five years, you might want a more aggressive choice, to build up your fund as quickly as possible.
An income portfolio would focus a great deal on dividend stocks, with some long-term bonds to help matters. Your retirement account, or a college savings investment fund, might start out with a heavy allocation in stocks and then shift to bonds.
You can also include cash products, real estate, commodities and currencies in your investment plan, provided you understand how they work and how they might fit into your risk tolerance. Realize, too, that part of asset allocation is adjusting your allocation as you approach your goals so that you retain the appropriate amount of risk for your situation.
4. Determine How Much Money You Need to Invest
There are numerous calculators online that can help you figure out how much money you will need to invest each month in order to reach your goals.
Using your asset allocation and your time frame, estimate how much you will need to set aside each month to reach your goals. You can have this money deducted from your paycheck or automatically debited from a checking or savings account.
You can also integrate your other financial goals with your investing plan. You can plan to pay down debt while investing, and then, when your debt is paid off, take the payments you were making and invest them each month.
5. Stick to Your Plan
Every investing plan will need some tweaking as you go along. You might even need to make substantial changes if something major and unexpected should happen with your finances. However, by and large, you should try to stick to your plan.
Don’t stray from your plan when panic sets in; keeping with your plan during tough times and not letting fear push you into discarding your plan will help you avoid making big mistakes that could negatively impact you later.