Basics of Financial Planning

Before making any investment decisions—even whether to invest!—you need to have a solid idea of where your finances currently stand. It shouldn’t take you long to figure up your annual pre-tax income, but your financial standing is more than just numbers, and it’s more than just how much you make.

Figuring Up Your Assets

Your gross, pre-tax income is the most important aspect of investment planning, but there’s no hard and fast guide to what percentage to invest where. The first thing you should do is figure up a monthly budget (depending on how often you get paid). Subtract any expenditures—mortgage or rent, grocery costs, gas, your phone bill, all of it—and multiply what you’re left with by 12 for your annual income after expenditures. Next, subtract the sum of your debts (or the payments you’ll make towards your debts). The number you’re left with is your net worth, how much “disposable” income you make in a year.

Building Investment Capital

Your net worth may not be enough to consider investing, but the point of financial planning is to increase your net worth by minimizing expenses. Now that you’ve figured up a budget, look at where your money is going and think of ways to minimize your spending. Shop around, take the bus; these things add up. In the case of debt, there are loan consolidation services which will convert your existing debts to a single loan, usually at a lower rate of interest than you’re currently paying.

Once you’ve drawn up a plan of action for minimizing your expenses, set a goal for yourself. Do you want to have $10,000 to invest in a year? Plan for it, stick to the plan, and start researching brokers immediately. It’s best to invest through a traditional brokerage firm for the benefit of the guidance and advice your broker will give you starting out.

Knowing Why You’re Investing

Whatever amount you decide to save, make sure you have a reason for saving up and wanting to invest. Are you looking to take a chance on higher-risk investments like stocks and make a return quick, or are you building a retirement fund that will have time to mature safely? Even if you don’t know anything about the investment options available to you, arming yourself with a reason for investing and expectations of your returns will help your broker choose a plan that’s best for you.