|Identifying the risk, benefit factors for building a winning financial plan|
|February 05, 2015 Jerry Purvis|
A number of factors go into building your financial plan, but the place it always starts is determining your risk.
“Risk management is the phase where you determine what happens if the worst happens,” said Tim Gandre, financial representative with Northwestern Mutual. “If you can’t go to work, what does your financial situation look like? You need to have disability and income protection through your work. And having a personal supplemental plan on top of that will also help out.”
Gandre said a person’s biggest asset is the ability to work. Multiplying salary by the number of years a person is expected to work reveals a number far greater than any mortgage or car payment.
Risk management is the anchor of any financial plan because it helps determine how the family will pay off debts with only one income.
The next step is wealth accumulation and reaching your financial goals.
“This is where you determine what your retirement will look like and what it will take to get there,” Gandre said. “You want to know the best vehicles to get there as far as investment allocation goes. A lot of that is related to your tolerance to risk. There are so many options out there; people should seek professional help with investments.”
He said every person has different goals and how much risk they’re willing to take with investing. That makes the process a bit less age dependent and more goal oriented. As a result, a customized plan is necessary.
Another topic that must be addressed is the amount of debt a person is willing to carry. Some financial advisors believe the only debt a person should have is the mortgage. But each person’s individual situation is often more complicated.
“I want to look at all forms of debt and the amount of interest each of them charge,” Gandre said. “Maybe the best way is to attack the high interest debt first. That’s usually the credit cards. It should be a goal for everyone to get rid of credit card debt as soon as possible because the interest rate is extremely high.”
He added a person’s investment portfolio and the interest it generates will also help determine which debts should be retired first. But it depends on how aggressive a person wants to be in tackling debt. That includes student loan debt.
“Most people are lacking in education about understanding savings concepts and the miracle of compounding interest,” Gandre said. “If you begin saving just a few years earlier than your first planned, it can make a huge difference in the amount of money it generates. So I’d advise everyone to start saving on a regular basis, even if it’s a small amount. Most people don’t miss that money if they pay themselves first.”
He said people should get into the habit of getting a financial checkup on an annual basis. That way, they can determine any changes and make the necessary adjustments to keep their financial ship on course toward a bright future.