Why Financial Planning Is Important
Kathy, in my opinion, has major responsibilities and needs to have an investment plan. She first needs to understand why an investment plan is important and how it can help in handling her financial responsibilities. Investing is important because it allows for an individual to grow his or her savings and benefit from greater financial rewards in future. Firstly, Kathy would need to assessment of many different investment options to choose the right vehicles for her assets such as stocks, bonds, and mutual funds. This essay aims to highlight the investment opportunities that Kathy can utilize to ensure she benefits of better financial plans in the future.
Investment can be described as the activity of buying an asset to generate returns from it over a period of time while also taking care of risk and volatility (Chandra, 2017). For instance, if one decides to buy an asset today and keep for many years with the expectation that it will increase in its value that is a basic idea of investment. When doing investment one should be focused on beating the inflation rate with the widest possible margin (Chandra, 2017).
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When making an investment plan one should be aware of his or her financial position and what are their responsibilities. In this regard one has to identify his or her financial goals throughout their lifetime or within the next few years. After identifying the financial goals one will need to prioritize on these financial goals (Chandra, 2017). For instance, Kathy needs to remember that she has a student loan she needs to repay. She also has childcare credit cards and a mortgage that she needs to repay. Therefore, she will need to have a plan that is reliable and will start paying off soon.
Investment planning is important because it allows one to derive maximum benefit from their investments. These benefits can only be enjoyed if one makes the right investment options (Sialm, Starks, & Zhang, 2015). Kathy has to assess her requirements, needs and goals before making an investment plan. She will also need to consider her personal circumstances as well as general market conditions prior to making the investment.
Before investing it is necessary to have first saved some money. Once an individual has some money on the savings, it is good to realize that the value may start to erode due to inflation ( Sialm, Starks, & Zhang, 2015). Therefore rather than maintaining the savings it is useful to grow the money by investing it in a higher return asset. Without investing there is risk of losing the value that one might have saved. Investments can be made in stocks, bonds and other types of security investments. Indirect financial investments can be done through third party or mediators in financial plans related to pension funds, mutual funds, commercial banks and insurance companies.
Suggestions Of How Kathy Can Start Retirement Planning
Kathy, similar to other young investors, might not priorities on have a retirement plan, but it is necessary and will benefit her in the future. One of the reasons behind this thinking is that people think that funding a 401(K) plan may be difficult especially when one is struggling to pay off student loans and other financial responsibility. In Kathy case the childcare, credit card, and the mortgage could be what is hindering her in funding the 401(k) plan that is being offered by her employer.
It is commendable that Kathy has started saving despite having major financial bills to handle. Without savings one might not be able to make investment or retirement plans. Kathy should now consider joining the 401(k) plan at work if it matches her contributions. Such plans are good because the contributions are taken from the salary before the employer withholds income tax. These will mean that Kathy will be able to reduce the tax bill and her money will go to her work and responsibilities.
Next step will involve opening an individual retirement account. This will make Kathy to enjoy more investment choices than she may have with a 401(k) plan alone. She might consider the traditional or Roth individual retirement accounts. Roth account has a major advantage because when funding it the investor will use money that has already been taxed. However, when withdrawing the money it will not be taxed. Saving can be done in small amounts and it will eventually add up.
One should also be aggressive in saving and investing to. It is important to make more savings and investments. Currently Kathy can make an average saving of $3150 if she could increase this amount to about $5000 dollars annually it means she would be in a good track for the future and that would reduce her income tax burden even more. It is also advisable for her to have an emergency fund because it will help her to stop relying on credit cards or the retirement savings for some unexpected expenses.
Suggested Investment Strategy
Having an investment strategy is important because it will provide for a guide throughout the investment process. It will make the investor identify the investments that may perform poorly over time or that which are not in line with her investment goals. For Kathy I suggest that she should consider investing in stock and mutual funds. Stocks are acclaimed for being one of the most effective and efficient ways that an individual and families accumulate capital build wealth and grow their passive income. Stock is simply having legal ownership in a business. Stocks are available as common stocks or preferred stocks. They can be interchangeably referred to as securities. While a common stock is entitled to its proportionate share of a company’s profits or loss, the shareholders who invest in preferred stock receive a specific dividend at some predetermined time. the preferred stock is advantageous because is a company goes bankrupt the shareholders who have preferred stock will be paid before those who invest in common stock.
Investing in mutual funds would be beneficial for Kathy because of various reasons. Firstly the mutual fund is where a company pools money from various investors and invests the money in securities such as stocks, bonds and short term debts (Bruno, Ahmed, Shapiro, & Street, 2016). The investor buys shares in mutual funds and each share represents an investor’s ownership in the fund and the income it generates. Kathy will benefit by investing in mutual funds in that she will have a finds manager do research for her. The manger will select securities and monitor its performance. Mutual fiends allows for diversification because it will allow investing in a wide range of companies and industries. Mutual funds are also available in various forms such as money market funds, bond funds, stocks funds and target date funds (Bruno, Ahmed, Shapiro, & Street, 2016).
Risks And Rewards Of Investments Strategy
Investing in stocks can expose onto various risks; one might have control on some risk or lose it on some. For instance, after the terrorist attack in 2001, most companies in the stock market were impacted and they lost significant percentages in market index. It is advisable to increase the investor’s position in good solid companies. Inflation is the other factor that destroys value and creates recessions. For those who invest in fixed incomes it may make them to lose the value of their income stream. For mutual funds, the higher potential returns that a mutual fund gives the higher the risk it will have. It is reported that stock are more risky that bonds, so an equity fund tends t be riskier that a fixed income fund. In some cases the fund might be unable to sell the investments that have are declining in value because they might not find buyers. One of the advantages of mutual funds is that if a company goes bankrupt the investor might be covered by one or two investor protection funds.
How to Minimize Risks
Kathy can minimize risks related to the investment strategy by diversifying. It would be good if she diversifies her investment portfolio across investment products of different types and economic sectors (Merton, 2014). It is reported that diversification reduces overall risk by spreading it over a variety of products. For instance, she can invest 25 percent of her capital on stock, 25 percent on real estate, 25 percent on certificate of deposit and the other on treasury bonds or real estate. Therefore one company fails then she will not lose all her investment money. She can also take advantage of investment products guaranteed by the federal government such as money market accounts and certificate of deposit.
Suggested Learning Resources
https://www.investor.gov/investing-basics/investment-products/mutual-funds
https://www.scribd.com/document/94297945/Importance-of-Investment-Planning
http://www.financialexpress.com/industry/banking-finance/financial-planning-importance-saving-investing/323230/
References
Bruno, S., Ahmed, S., Shapiro, A., & Street, A. (2016). Risk neutral and risk adverse approaches to multistage renewable investment planning under uncertainty. European Journal of Operational Research , 250 (3), 979-989.
Chandra, P. (2017). Investment analysis and portfolio management . McGraw-Hill Education.
Sialm, C., Starks, L. T., & Zhang, H. (2015). Defined contribution pension plans: Sticky or discerning money?. The Journal of Finance , 70 (2), 805-838.
Merton, R. C. (2014). The crisis in retirement planning. Harvard Business Review , 92 (7/8), 43- 50.
