How Do I Make an Investment Plan?

An investment plan is something that every adult needs. The importance of one cannot be understated – it’s how you can turn a little bit of savings with every paycheck into money that could potentially cover your living expenses for the rest of your life. 

However, investing isn’t just something that can be done arbitrarily. Not only would you run the risk of not hitting your goals, the worst-case scenario is that you may lose everything you ever put into it.

For these reasons, it’s critical to strike a balance between taking action while also being mindful of the potential pitfalls. To do this effectively, here is a step-by-step process for how you can create a solid financial plan.

1) Review Your Current Situation

When it comes to financial management, the first step is always to get a snapshot of where you stand currently. This can be done by conducting a small audit of all the financial statements you have for:

  • Banking
  • Investments
  • Retirement 
  • Etc

Write down how much you have in each account. This will be the basis for your assets.

At the same time, perform the same action for your debts. This includes any:

  • Credit cards
  • Mortgages 
  • Auto loans
  • Student loans
  • Personal loans
  • Etc.

Collectively, this step will reveal how much money you have, how much you owe to other people, and how much you truly have to work with.

2) Determine Your Goals

What’s the most important outcome you want to come from your investment plan? Remember, not everyone has the same goals or needs when it comes to money. You might be investing because you’d like to: 

  • Retire 
  • Make a large purchase
  • Pay off debt
  • Start a business 
  • Etc.

What’s important is that you know your reason and you internalize it. This will help keep you more motivated to stick to the plan and continue making contributions – even when the markets are doing poorly.

3) Define Your Time Horizon

With your specific goal in mind, the next thing to do is to put a timetable behind it. This will be completely unique to the outcome you’d like to happen.

For example, if you want to retire, then you may have years or even decades to work with. However, if you’d like to buy a house, then maybe your time horizon is more short-term as in the next 6 to 12 months.

Assigning a due date also makes you more likely to accomplish your goal. Generally, tasks that are open-ended never get completed while ones with specific milestones are more likely to see traction.

Your starting point will be from the financial review you performed in Step 1. For instance, if you’d like to pay off your mortgage but have large credit card balances or other high-interest debt, then paying these off first would make a lot more sense.

4) Pick the Right Investment Tools

Before you can select your investments, you’ll want to first choose the right types of investment accounts to have. Selecting the right ones can significantly enhance the performance of your overall investment plan. 

For example, if you’re saving for a long-term goal like retirement, then it wouldn’t make sense to use just a regular bank savings account because you most likely wouldn’t get a good rate of return. Instead, you’d have better luck investing more aggressively using a financial institution that specializes in growth funds.

Additionally, you’ll also want to consider potential tax savings that special tax-advantaged retirement plans can offer. These are accounts such as a 401(k) or IRA which can help you avoid paying thousands of dollars in unnecessary taxes. They’ll also allow your investments to grow without having to pay taxes each year on the earnings you’ve made.

5) Choose Your Investments

Once you’ve got the right type of accounts, the next step will be to pick your specific investments. There are many different options to choose from:

  • Stocks
  • Bonds
  • Mutual funds
  • ETFs (exchange-traded funds)
  • Etc.

If you don’t know where to start but would like to have the best chances of growth, a good investment to start with is a simple index fund that follows the S&P 500 benchmark. This is just a collection of the top 500 U.S. large-cap stocks and is effectively like buying the overall market.

Of course, you should screen your investments for only those which are suitable for reaching your goals. For instance, don’t invest in stocks or stock-based funds if your goal is to pay off debt because you’d risk losing money some years if stocks are down.

You’ll also need to consider your tolerance for risk before making any investment selections. Someone who’s saving for retirement but couldn’t stand the thought of their portfolio losing half of its value if the markets crashed would be wise to devote a large percentage of their savings to more conservative assets such as bonds.

6) Regularly Contribute

There’s an old saying that goes, “Knowledge without action is futile.” This couldn’t be any more true when it comes to your investment plan. You can talk about it all you want, but until you actually start putting money into one, you won’t see any results.

Whether your goals are short or long-term, most financial platforms give users the ability to set up regular automatic contributions. This can be anything from a few bucks per week to several thousands of dollars each month.

If a 401(k) is part of your investment plan, then you’ll want to check if your employer offers matching contributions. Matching contributions are when companies incentivize their employees to save for the future by matching their savings – sometimes dollar for dollar (up to a pre-set limit).

The trick to contributing regularly to your investment plan is to cut the waste from your spending habits. This is best accomplished using a helpful budgeting app such as Buxfer and monitoring your purchases. Get in the habit of regularly reviewing your transactions and determine if each one is something that’s really necessary or if the money could have been better used going toward your investment plan.

7) Monitor Your Performance

Finally, making an investment plan is not something you do once and forget about. Your investments should be reviewed periodically to make sure they are on track and bringing you closer to your goals. This can be as often as once per month or as little as once per year depending on the timetable for your goal.

The idea is not to obsess over them but rather to give yourself the opportunity to make any changes that might be necessary. This is also a good opportunity to optimize your plan and add in any new strategies that might enhance the benefits. After all, it’s your financial future and so you’ll have the most to gain from making sure it’s doing everything you want it to do.

Featured image credit: Pexels

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