Clearly, women need to be concerned with their financial independence.
But first, just as their male counterparts should, women should
spend some time enhancing their investment knowledge before they
invest their money. A five-step plan can be helpful start on the
road toward financial independence.
Step One: Set Goals. Your financial goals may be as short
term as saving to buy a car or as long term as saving for
retirement. The key is to be realistic and specific--and to start as
soon as possible. Investors should keep three rules in mind when
setting goals:
Be specific. For example, “I want to retire in 20
years with a monthly income of $3,000.”
Be realistic. It takes time and patience to achieve
financial goals.
Be disciplined. Contributing to a regular savings
program is the only way to achieve a secure financial future.
Step Two: Organize Your Finances. You're a woman with goals.
Now determine where your finances stand.
Write down your cash balance at the beginning of the year.
Add your expected income for the year. Check your most recent
income tax return so you are sure to include all sources of
income.
Subtract your estimated savings and investments.
Subtract your annual expenses. Consult your checkbook to make
sure you include all expenses. The amount remaining is your cash
balance at the end of the year. If it is negative, you'll have
to go back and see if you can eliminate some unnecessary
expenses.
List all of your assets. These are the things you own,
including your investments, home, life insurance, etc.
Subtract your liabilities; that is, everything you owe.
Liabilities include your mortgage, charge account balances,
loans, and taxes due. The difference between your assets and
liabilities is your net worth. If you calculate your net worth
annually, you can monitor the growth in your personal wealth.
Step Three: Allocate Your Resources. Once you know how much
money you are able to invest, determine the structure of your
portfolio—that is, how much should be invested in stocks, how much
in bonds, and how much should remain in cash. This apportionment of
investments is known as asset allocation.
Asset allocation for any investor depends on objectives, risk
tolerance and cash needs. Many financial advisors use a rule of
thumb that links the percent of assets you put in bonds and cash to
your age. Under this rule, a woman in her forties would put 40% of
her money into bonds and cash. The remainder would go into stocks.
Your asset allocation mix will change over time, depending on
your individual circumstances and financial objectives.
Step Four: Select Your Investments. Keep in mind that a
portfolio structured with some combination of stocks, bonds and cash
is most likely to be well positioned to achieve the maximum return
with the least amount of risk.
Stocks. Although sometimes volatile over the short
term, stocks are considered to be the best investment for
long-term growth. In fact, no other investment has provided a
higher return over the long term than stocks, according to
Ibbotson Associates of Chicago. Depending on how much money you
have to invest, you can choose individual stocks or buy mutual
funds or unit trusts that invest in stocks. (Before considering
a mutual fund or unit trust, read the product prospectus. The
prospectus, which details investment objectives, risks, charges
and expenses, should be read carefully before investing or
sending money.)
Bonds or “fixed income” investments. Because the
rate of return is fixed, you know precisely what your return
will be when you buy a bond and hold it to maturity. You can
choose different bonds with varying interest payment dates to be
your primary source of investment income, since most bonds pay
interest periodically throughout the year (e.g., January and
July, February and August, etc.).
Step Five: Monitor Your Results. Financial planning is an
ongoing process. Your needs and objectives will change throughout
your life, and you should adjust your investment portfolio to
reflect these changes. At least twice a year, monitor two aspects of
your portfolio:
Asset mix. Be sure you are comfortable with your
combination of stocks, bonds and cash. Perhaps stocks have
performed so well that they now represent more of your portfolio
than you originally intended. You may want to shift your
holdings accordingly.
Performance. Monitor the performance of investments
that fluctuate in value, such as stocks and mutual funds. This
involves calculating the gain or loss in each investment. Keep
in mind your time horizon; if you're investing for the long
term, give the stocks or funds time to grow. Also, check the
performance against a comparable yardstick. For example, if you
own mostly conservative stocks, compare their performance with a
conservative index, such as the Dow Jones Utilities Index.
Understanding investments and establishing a regular investment
program are essential to successful financial planning for all
investors. The best way to achieve your goals is to have a
well-thought-out plan that is reviewed regularly by you and your
financial advisor.
This article was submitted by Tom Kukulski (2003), a financial
advisor. This article is published for general informational purposes and is
not an offer or solicitation to sell or buy any securities or
commodities. Any particular investment should be analyzed based on
its terms and risks as they relate to your circumstances and
objectives.
