Understanding Your Personal Financial Situation
Take a look at what you own
List all your assets. This includes big items like your home, car or boat. It also includes your savings and investments. You’ll find this information in bank and investment statements, retirement savings and other pension papers, and your will.
List your debts
Total up your debts. This includes any student loans, mortgages, car loans, credit cards and other debts. Look for your mortgage records, loan papers and credit card bills.
Take note of what you earn
Figure out your total income, including your salary, investment income and any other income. Look for this information on your tax returns, account statements and pay slips.
Track your expenses
Track how much money you spend every month. This includes basics like food, clothing, utilities, and car costs, as well as extra expenses like eating out, going out, insurance, health, pet bills and money you donate. Look at your bills, receipts and credit card statements. Don’t just estimate – add up bills and receipts for at least a month to get an accurate picture..
Set your financial goals
When setting up your financial goals, it is imperative to be specific and realistic. After doing your homework in setting up your personal financial situation, you may start to write specific and measurable goals. Your goals should also be realistic and based on your current financial situation. Think about how much you can afford to save toward your goals each month. Based on how much you can afford to save, you may have to decide which goals are most important to you.
Your Investing Personality
Your investing personality is all about what kind of investor you are, what risks you prefer to take, and what kind of investments you are comfortable with.
What is your risk tollerace?
With higher-risk investments, there’s a greater chance you could lose some or all of your money. But higher-risk investments also have the potential to grow your money faster. Ask yourself if you’re comfortable taking on more risk if it means greater returns. Or would you be more comfortable making less and knowing your money will be there when you need it?
How long do you plan to invest for?
Your investment time frame is the amount of time it will take you to meet your goals. Your time horizon could be short term, like saving for a vacation in 6 months. Or it could be long term, like saving for retirement in 20 years. Your time horizon is a key factor in choosing investments. For example, if you’re investing for the short term, you may want to choose investments that guarantee your return, so your money is there when you need it. If you’re investing for the long term, you may choose to take more risk with your investments.
What return on your investment are you expecting?
Figure out how much of a return you’ll need to make on your investments to reach your financial goals. Keep in mind that to get a higher return, you often have to take more risk. If meeting your expected return means taking on more risk than you’re comfortable with, you may need to adjust your goals.
Are you planning to withdraw your money soon?
Liquidity is a way to describe how easy it is to get your money back from an investment. Cash and bank accounts are very liquid. You can usually get your money right away and get it easily, but the returns are low. Investments that are less liquid may offer a higher potential return, but also may come with more risk.