How to take control of your finances and plan for the future
The need for developing a financial plan has become more important than ever in today’s financial climate. With inflation running rampant across the globe, it is likely that the money we earn no longer goes as far as it used to.
Even saving has become more difficult, owed to the fact that storing your money in a savings account with a bank that offers very low rates cannot outpace the growing rate of inflation.
So, how can you navigate your way in this financial climate to ensure that your finances remain healthy enough to support your future lifestyle when you eventually decide to retire?
To answer this question, we are going to explore:
What is a financial plan?
First of all, let’s take a moment to define what a financial plan is. In essence, a financial plan is meant to document and evaluate your current and future desirable financial status. These plans can be used as a blueprint to frequently measure whether or not you are on track with your financial objectives for the future.
It is important to note that a financial plan not only accounts for your salary or savings, but also the amount of assets you currently hold, the current and future price of those assets and any other variables that you may factor in which could influence your future financial position.
Financial advisors and those who have experience with developing a financial plan will frequently advise you that the best time to start is as early as possible. This makes a lot of sense in that logically the earlier you start to devise a plan and put it into action, the more likely you will have a much higher valuation in future.
Once you have committed to your financial plan, it is imperative that you save what you can with what you have – in most cases, any amount works, whether it is $10 or $100 dollars per month. The goal is to simply get started and to remain disciplined with the plan that you have put in place.
Also Read: How to Become a Financial Advisor
Formulate a strategy
We have already alluded to the fact that having a savings account where you store your money is no longer a viable solution given macro-economic factors such as inflation. One way to outpace inflation is by investing high value assets that will provide you with greater annual returns.
This is an excellent way to start investing the money that you have saved, instead of allowing it to erode in a savings account with very low interest rates. There are some great battle tested investments in which you can park your money in, these may include index, funds, mutual funds and treasuries. All of these often provide you with much higher yields due to the effects of compound interest which can be thought of as earning interest on the initial amount plus interest.
Diversify your investment portfolio
While traditional investment strategies have a proven record to be safe havens to store your money, they are often slow and require a lot of time and patience to grow your finances significantly. This is why it might be useful to deploy your capital across various investment baskets instead of adding all of your eggs to a single basket.
Some great examples to consider investing your money into include stocks and cryptocurrencies. Investing in stocks tends to be the safer bet here, mostly because many publicly traded companies will always try to remain innovative and offer utility through their products and services, which allows them to grow and generate revenue for all stakeholders.
Investments such cryptocurrencies on the other hand tend to be a lot riskier, but with much higher gains. There is a popular saying in trading and investments, the higher the risk, the higher the reward. This is especially true where cryptocurrencies are concerned due to the high level of volatility in the space. With over 15 000 cryptocurrencies available, it is safe to say that not all of them will be around for a very long time, in fact most projects are likely to fail given that they have no actual utility.
However, among these cryptocurrencies, several of them such as Bitcoin and Ethereum have been around for many years and while being volatile, they have provided massive returns for traders and investors. Since cryptocurrencies are still fairly new, it is always important to do your own research before investing.
Also Read: How to Create Your Own Financial Plan
Diversify your income streams
With the ubiquitous nature of the internet and mobile devices, it has become much easier to establish multiple streams of income. These days having a single day job may not be enough to make ends meet and have enough capital to deploy towards your financial plan for the long-term.
Investing in yourself and developing your digital skills is a great way to open up new opportunities where you can earn additional income which you can easily invest. For example, you could quite easily upskill yourself in a domain such as web design or content development and offer your skills as a freelancer to small and medium sized businesses that require an online presence. The beauty behind this approach is that in most cases all you require is a laptop and an internet connection which you can leverage in a remote work setting to earn additional income.
Determine your time preference
Understanding the difference between a low and high time preference is crucial for your financial plan. Individuals with a low time preference usually have a much longer term outlook where their finances are concerned. In other words, those with a low time preference are willing to delay immediate gratification and rewards in the short and even the medium term in favour of achieving much greater returns in the longer term.
Having a low time preference often coincides with an investment mentality and is usually much less stressful since you are not particularly interested in living in the current moment – instead the emphasis is placed on satisfying your distant future needs and wants. For example, you might be willing to forgo buying a brand new sports car today in favour of saving and investing more funds towards your long-term portfolio so that the return on your investment is much larger.
Having a high time preference is the exact opposite approach. Individuals who have a high time preference are more concerned with satisfying their immediate gratification and needs in the short-term. This approach corresponds with more of a trader mind-set in that the immediate gains are of greater importance.
Higher time preferences are usually more stressful since you will most likely have to play a much more active role in managing your financial position. For example, if you decided to purchase the sports car today by financing it through monthly payments, you are required to pay the capital balance as well as the interest rate on a depreciating asset. In this scenario you will forgo the potential return on investment you could have earned if you had invested that same capital into your long-term financial portfolio. The only way to still realise the potential return on investment, while purchasing the sports car, is by increasing your disposal income and deploying that income into your long-term portfolio.
Take control of your finances with our Financial Planning Course.