Question

I need to write a response to how I should I should plan to build financial security starting with a job right out of college. I need to include everything seen below. If you can answer in bullet points for each question or a paragraph answering the short parts.

Below is the guide

Include – Why, What, When, and How

a. Financial Goals: Near-term: 1 to 2 yrs; Intermediate-term: 3 – 5 yrs; Long-term: 6 – 15 yrs

b. Savings plan(s)

c. Debt management plan(s)

d. Investment plan(s)

e. Risk tolerance at each life stage

f. Tracking methods to keep you focused and aware of your progress

g. Anticipated support needs

Answer 1

It's important to have financial security while having a job to help shape your future and you must begin with building proper financial goals.

A. Setting short-term, mid-term, and long-term financial goals is an important step toward becoming financially secure.

I.Short-term financial goals take under one/two years to achieve. Examples may include taking a vacation, buying a new refrigerator or paying off a specific debt. So your short term goals must be-

• Making/establishing budget- Budget every month, before the month starts.1.Identify Your Income 2.Estimate your Fixed Expenses 3. Estimate your Common Monthly Expenses 4.Set savings and debt payoff goals 5.Record spending and track progress
• Creating an Emergency Fund- Emergency fund should be set aside specifically to pay for unexpected expenses.Three months of liquidity is a minimum standard. Six months (or more) is better. In a fragile job market, emergency funds are essential.
• Paying Off Credit Cards- Start listing all your debts by interest rate from lowest to highest, then paying only the minimum on all but your highest-rate debt. The interest charges (on credit card accounts) eat up so much of the cash flow that could be used for other objectives.Hence we should be clearing all the credit card debts in short term so that we can focus on our long term goals.

II.Mid-Term Financial Goals

• Getting Life Insurance and Disability Income Insurance-Life term insurance is so important if your spouse or children are dependend on our income. Disability insurance will replace a portion of your income if you become seriously ill or injured to the point where you can’t work
• Live below your means. It’s a simple math equation. If you spend more than your income, there’s debt. If you spend less than your income, there are savings.
• Developing skills to improve your income-It might mean taking on additional training or responsibility at your current job. It might mean finding a mentor, who can provide tips and feedback, or working a part-time job.

III.Long-Term Financial Goals

• Saving for retirement- Estimate your desired annual living expenses during retirement. The budget you created when you started on your short-term financial goals will give you an idea of how much you need. You may need to plan for higher healthcare expenses in retirement.
• Saving for your children’s education- As higher education is becoming quite expensive , we should be saving towards it as two-thirds of all job openings require post-secondary education or training.
• Saving a down payment for a home. For most people, it’s the most significant purchase and investment. The greater the down payment, the more freedom and flexibility that’s provided for the life of the loan.

B. Saving plans- Depositing your hard-earned excess money in saving schemes will help secure it for your future needs.Since most of the schemes make use of compound interest concept for interest calculation, long-term investment can fetch you unbelievable return.Many saving schemes offer one or the other kind of tax benefits-may it be tax deductions, exemption, or both.

1. Recurring deposits(RD)- RD is a term deposit offered by banks.This saving plan means when you can regularly deposit money and want a huge return at the time of maturity. You should determine the term period and number of monthly deposits depending upon your salary.You can deposit any amount that is convenient for you, for a specified period that earns interest as per the rate prevailing on the date of deposit.
2. Employee provident fund- It is a saving scheme where the salaried person makes an equal financial contribution towards provident fund account. It will help deal with any kind of emergencies.
3. Equity-Linked Savings Scheme- Also known as tax saving funds, are a form of mutual funds.Savings have exposure to the equity market with underlying investments in a mix of debt and equity. The equity component offers higher returns and debt provides a cushion against volatility.

There are other saving schemes as well like fixed deposit (FD),Public Provident Funds (PPF) which are quite similar to the above once.

C.Debt management plan(s)

A debt management plan (DMP) is a strategic effort to eliminate unsecured debt such as credit cards and medical bills.

Advantages of a Debt Management Plan- Making regular and timely payments can improve your credit report and credit score over time, It creates a realistic monthly budget with a financial goal.

Your DMP must include-

• Working with creditors to reduce interest payments and waive or reduce penalty fees.
• Liaison to arrive at affordable and acceptable monthly repayment schedule.
• Making monthly status reports on amount paid/received.
• As a creditor ,be prudent, but fair about making concessions on interest rates and penalty fees.

D.Investment plans- Investment Plans are financial products that provide the opportunity to create wealth for future. Investors usually take investment decisions, based on their risk appetite which include low risk, medium risk and high risk.

Low-risk investments – These are instruments which pay fixed income – irrespective of the changes in the business or economy. Bonds, debentures and Fixed Deposit fall under this category.

Medium-risk investments – These are investments which might have a certain percentage of risk but these also pay higher returns to investors willing to invest in them. Debt funds, balanced mutual funds, and index funds fall in this category.

High-risk investments – These are investments where there is no limit to the upside along with the downside of risk-returns. These are stocks of companies, equity mutual funds, even stocks, and derivatives.

Your investment plan must include-

• Stocks – Buying shares of companies is a one time investment plan. It is one of the easiest ways to invest your money in any business. These are part ownership units of the company which each investor buys.You can trade these shares in a marketplace called the Stock market where all trades are done electronically.
• Fixed Deposit – These are the safest investment where you are assured fixed interest at fixed intervals of time. It provides options for investing and flexibility to pay. Fixed Deposit is offered by banks.
• Mutual Funds – These are collective investment vehicles managed by a fund manager which pools people’s money and invests in stocks and bonds of various companies and create a return.

The best approach towards investment is having a mix of all options to diversify risk and not putting all the money under one scheme. You can also invest in property and gold if you have good amount to invest. Options/future/forward are also the ways in which investors try to make money or hedge their investments.

E.Risk tolerance at each life stage

While ageing is an integral part of life, the number also matters because priorities of life change as you age. Since needs and requirements of a person change with advancing age, the requirement of money also changes. This change has a co-relation with investment strategy and risk appetite.

Let’s consider four important stages of life: youth, marriage, parenthood and retirement.

• When you are young and single, you are not burdened by responsibilities and financial dependents. Since age is on your side you can save as much you want and can also afford to take risk.Hence you can take high risk investments.
• But when you get married your responsibilities increase, so also the expenses. At this stage of life not only you will need liquid funds but your risk appetite also goes down a bit. Prefer taking medium risk investments.
• When you become parent, you have more financial dependents. Hence, not only your expenses increase, but your savings also take a hit and your risk appetite decreases even more. Prefer taking low risk investments.
• And finally when you retire, you reap the rewards of investment but you are more cautious with money and become risk-averse.

F. Tracking methods to keep you focused and aware of your progress-Tracking helps you stay focused on what's important to reaching your goal. Some methods are mentioned below-

• Breaking out large tasks into smaller pieces and visualizing them.
• Identifying the most important goal that you need to work on and stay focused on that key goal.
• Try tracking goals daily/weekly- Make a habit of tracking goals through keeping a calender where you can check off that you complete your daily goal
• Celebrate small wins-If you are constantly looking ahead and never taking the time to celebrate your accomplishments, you will most likely loose motivation.
• Stay motivated by being positive as there will be financial stability in future as well.