Reaching proposed goal
Reaching proposed goal
Key of financial success is based on four basic principles:
I. Development of a Financial Plan
1. Planning is not an easy discipline, but is extremely necessary when you have little resources. You certainly has had to organize in your agenda those days plenty of activities so as to make them profitable. You have to do the same with money: you have to financially organize yourself. Financial planning is the tool that will help you reaching your goal. It is a powerful and flexible tool, and you may imagine it as a layout in a map. It helps us know where we are and where we want to go. No need to say that, if we don't know where to go, we are likely to end up in a place where we did not want to be. Financial plans work fine, provided that they are simple, realistic, and estimated on our own incomes and expenses. They are periodically reviewed to reflect changes in market conditions and objectives. To formulate a financial plan, you have to answer the following question:
What for do I want to save?
Make you own list and then think about your most important goals (buying a car, travelling, education, contingencies, having a capital for after your retirement, etc.). If you want to know which is your attitude before financial planning, answer this test.
2. Elaborate a budget with your incomes and expenses. Let me tell you that it's not easy to know how we spend our money. Don't forget to include expenses, such as, transportation, cigarettes, ice creams, soft drinks, gifts, movies, magazines and comics, CDs, cassettes, and impulsive purchases, just to name a few items. Amazing! Isn't it? You will now find a table in which you may elaborate your annual and monthly income and expense plan.l.
3. Make an informed decision whether you will spend or save. In order to make the decision, you must bear in mind importance of your savings goals and whether expenses are necessary or unnecessary.
4. Chose proper instruments, namely, such that best replicate desired characteristics of your objectives: term, liquid assets, level of risk, and other characteristics of the instruments. The Cases and Experts' Opinions section contains examples of decisions in this sense. To develop a financial plan, it is necessary to obtain information, make decisions, acting, and evaluating.
II. Regular Investments
Your investment tends to have a less volatile long term performance when you make regular investments. There will be times in which you will take opportunities and others in which the market will not be specially attractive for investments, allowing in the long term to offset fluctuations and obtaining more stable returns. Regular investments allow to order your expense plan. If you don't invest regularly, perhaps, you will never know what you are doing with your money.
III. Diversifying Investments
Every investment has an associated risk, but if one of the instruments is doing well, this doesn't mean that all of the instruments will be doing well. On the contrary, if one instrument is having a bad performance, not all the instruments will go so wrong. In sum, instrument risks are offset and instrument portfolio or group tends to have a less fluctuating performance. This is why we should not keep all the eggs in the same basket. It makes sense! Doesn't it?
IV. Start Early
Time is the best ally of your businesses. In time, capital may increase through appreciation of the investment, growth caused by interests of dividends, or new deposits in your accounts. If interests are not withdrawn, they generate, in turn, more interests. This is known and compound interest. In order to picture the power of compound interest, check the following examples: amounts to be obtained by savings scheduled for different levels of monthly savings and different time horizons are simulated in the following table. Different actual interest rates were used for this simulation. Securities are expressed in Unidades of Fomento (UFs), that consider inflation through their adjustability in accordance with Consumer Price Index (CPI), and allows figures to be compared to current figures in terms of purchase power.
b) Let's suppose 6% interest rate (adjusted by inflation)
c) Let's suppose 8% interest rate (adjusted by inflation)
Do you think that 2 UF (approx. 31,000 pesos) are too much money for you?
They might be, however, it corresponds to approximately the amount spent by a person who smokes one cigarette box or drinks two cups of coffee per day in one month.
Remember that, to reach your goals, you need to develop a plan, invest regularly, diversifying your investments, and start early.
