Personal Financial Planning

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An important investment individuals can make is in planning their use of the financial resources they have. While there are skilled financial advisers in all types of financial services institutions, individuals should have some knowledge about their own affairs. Individuals who take time to learn about money matters will receive a rich rewarddividends in understanding that in the long run will maintain their financial position at a level that is in line with their expectations.


The first step in creating a financial plan is to identify personal and family financial goals. Goals are based on what is most important to an individual. Short-term goals (up to a year) are related to what is wanted soon (household appliances, a vacation abroad), while long-term goals identify what one wants later on in life (a home, education for children, sufficient retirement income). These short- and long-term goals are the basis for establishing priorities, including an emergency fund as the first item. Then the estimated cost of each goal and the target date to reach it should be determined.

Life-cycle changes influence changes in financial planning. A person's goals must be updated as needs and circumstances change. In one's young adult years, short-term goals may include adequate insurance, establishing good credit, spending for a place to live, and gaining skills needed for work. During a person's middle years, the goals shift from immediate personal expenditures to education for children and planning for retirement. In one's later years, when employment ceases, recreational and personal hobbies may become of primary interest.

Planning is for the future. Therefore, age influences the planning process. Here are some guidelines that reflect general descriptions of financial considerations at different ages:

Age 20 to 40

When a person is young, growth of financial resources should be a primary goal; a relatively high degree of risk is tolerable. Suggestions: Invest in a diversified portfolio of common stocks or in a mutual fund managed for growth of assets, not income. Speculation (in real estate, coins, metals, etc.) is acceptable, if the individual is willing to take such risks.

Age 40 to 60

Stocks are still an attractive choice, but now one needs a more balanced approach. This may be the time to invest in fixed-rate instruments (bonds) and, if income is high, bonds that are tax-free (municipals) may be appealing.

Age 60 and over

By this age range, the majority of an investor's funds should be in income-producing investments to provide safety and maximum current interest.

There is a rule of thumb that may be appropriate here. It suggests that the percentage of one's portfolio in bonds should approximate one's age, the balance going into equities (stocks). For example, at age forty an investor would keep 40 percent in bonds and 60 percent in equities. At age sixty the reverse would be appropriate60 percent in bonds and 40 percent in equities. Of course, this is a very general idea that may not be appropriate for everyone.

When planning investments for one's age bracket, consider the following:

  • Security of principal: This refers to the preservation of one's original capital. Treasury bills (T-bills) are guaranteed by the government, while stocks fluctuate greatly.
  • Return: This means the money one earns on investment (interest, dividends, profit).
  • Liquidity: This deals with the ease of converting investments into cash.
  • Convenience: This refers to the time and energy one is willing to expend on maintaining and monitoring one's investment.
  • Tax impact: Depending on one's tax bracket, each type of investment will have different impact on the taxes owed. Municipal bonds are completely tax-free if issuers are in the state of the investor, while certificates of deposit (CDs) are fully taxable.
  • Individual personal circumstances: These include such factors as a person's age, income, health, individual circumstances, and ability to tolerate risk.


The single most important factor in deciding on the best investments for an individual is the level of risk one can afford, and is willing, to take. Thus the first step in formulating an investment plan is a careful self-examination. How much money does a person have to invest? What are the financial needs for the foreseeable future? How much of one's capital can be realistically invested with the possible risk that all of an investment might be a loss? What degree of risk is the individualand the familywilling to accept psychologically? Each of these factors will be helpful in determining the degree of risk that should be tolerated when making investment decisions. The trade-off is simple: To get larger rewards one has to take greater risks. Yet, greater risks present possibility for greater losses.

A person can achieve a balance by investing in a pyramid fashion: Begin with conservative (safe) investments at the foundation (Treasury obligations, insured money markets, CDs) and then gradually build up, accepting a bit more risk at each step. At the very top, an investor may have high-risk investments (e.g., coins, gold, real estate), but because of the pyramid, these investments will be small compared with the rest of one's holdings. Also, to minimize loss, one should have at least two different types of investments that perform differently during a specific period. For example, when interest rates are low, stocks usually gain while money markets do poorly.

Every investor must find a comfort-zone balance of security and risk. This is one of the cardinal rules of financial planning. Ironically, the goal is to live in comfort, but the key is not to get too "comfortable." From time to time investors must reconsider their earlier decisions and the results of those decisions to date. Investors must recognize that they should not miss out on profitable opportunities.


Regardless of how well a plan is developed, certain obstacles are likely to arise. Four factors that could have a major effect on successful planning are:

  1. Inflation: To plan financially, one must receive a return that will outpace any long-term effects of inflation. If, for example, funds for retirement are maintained in a money market account paying 2.5 percent per year and over the same period the inflation rate averaged 3 percent, an investment would have less purchasing power at retirement than it did when it was initially made.
  2. Interest rate risk: A change in interest rates will cause the price of fixed-rate instruments (bonds) to move in the opposite direction of interest rates. If interest rates go down, the value of bonds goes up, and, conversely, if interest rates go up, the value of the bonds goes down. All types of bonds have interest rate risk. The longer the maturity of the bond, the greater the interest rate risk, so if an investor is concerned about this risk, it is wise to invest in short-term instruments, such as T-bills.
  3. Taxation: Determining to what extent any tax-advantaged investment would help is a serious consideration. Factors requiring attention are tax bracket, present income, future income, and investment holdings at the point of undertaking financial planning.
  4. Procrastination: This is an obstacle that is solely the responsibility of the individual. There is nothing gained with the thought: "Someday I'm going to stop procrastinating and do something about my future finances." A well-designed financial plan that is in one's mind is not sufficient. If there is not concrete specification of what is to be done and if the relevant decisions are not implemented, little of value is likely to follow.

Here are some guidelines for handling risk, which should increase an investor's sense of security:

  1. Do not invest in any instrument in which one can lose more than one can potentially gain. This factor is sometimes referred to as risk-reward balance.
  2. Diversify one's holdings. Spread investment dollars among a variety of instruments, thereby reducing potential risk.
  3. When investments fail to perform up to expectations (the period to hold them is based upon one's objectives), sell them. Cutting one's losses is the only sure way to prevent minor setbacks from turning into financial nightmares. A rule of thumb is to sell when the value declines by 10 percent of the original cost.
  4. Institute a stop order. A stop order is an instruction given to the broker who sold stock to the investor, directing the broker to sell that stock if it should decline by, say, 10 percent of its original purchase price. The moment the predetermined level is reached, the stock will be sold.
  5. Do not discount risk altogether. The rewards may justify "taking a chance." Remember the turtle. It makes progress only when it sticks its neck out.


An investor needs a road map, so that all documents and their locations are known to the investorand ultimately to heirs. Records that should be kept accessible are:

  • Professional numbers: telephone numbers of lawyers, doctors, accountants, insurance companies, business associates, and financial advisers or brokers
  • Account numbers: brokerages, banks, credit cards, insurance policies (and beneficiaries), and safe-deposit boxes (along with keys and authorized deputies)
  • Business records, tax returns, payroll data, etc.
  • An updated will and trusts agreements, if any
  • Retirement benefits: Social Security, Keogh plans, simplified employee pension plans, 401(k)s, and the like
  • Burial arrangements: cemetery plots, deeds
  • Listings and details of outstanding liabilities

Financial records should be kept in a secure place and organized for easy review and updating from time to time. Copies of basic financial records are best placed in a safe-deposit box.


Once a person has developed an overall plan, the decision might be made to handle the task of implementing the plan alone. Or, the decision might be to seek a professional financial planner. Financial planners are paid for their work in one of three ways: fee only, commission only, or fee plus commission. As investors will quickly discover, financial planners do not all charge the same level of fees. Think about how one selects a physician, a school for one's children, a home for one's family. Investors should choose a financial planner who is well qualified and who shares the same basic beliefs and judgment about financial planning.

One may seek recommendations from friends whose judgment is trusted, from a professional organization that maintains lists of financial planners, or from advertisements. In many instances, preliminary personal appointments with a few financial planners will provide additional insight in making a decision about whether to engage a professional planner and/or which one to select.

Furthermore, once a decision has been made about the type of financial professional that seems best, an investor may want to visit a few to seek information on how other clients' investments have performed under their guidance. It is wise to assess how well the planners have been able to achieve their clients' objectives.

Investors should not delegate all interest in their own financial plans. It is important to maintain considerable attention to plans and related decisions. Wise investors read financial information in newspapers, magazines, annual reports, books, and material available at Web sites. Investors also find that they learn much through seminars, lectures, and courses.

A key point is simple: It is never too early for an individual to begin building a firm financial future. There is a saying that sums up financial planning in ten two-letter words: If it is to be, it is up to me.

see also Bonds ; Insurance ; Investments ; Mutual Funds ; Stocks


Lerner, Joel (1998). Financial planning for the utterly confused. New York: McGraw-Hill.

Orman, Suze (2003). The road to wealth (Rev. ed.). New York: Riverhead.

Quinn, Jane Bryant (2006). Jane Bryant Quinn's smart and simple financial strategies for busy people. New York: Simon and Schuster.

Joel Lerner

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Personal Financial Planning

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