As a driver, I swear by GPS to take me to unfamiliar destinations. Unfortunately, I don’t have a GPS to get to my desired financial destinations. Neither do you. We all have to GPS our way through life. How to do that? It’s a long story, but the basic fact is that you need to be proactive. You are not going to reach cherished goals by lying on the beach all day.
The first step in being proactive in personal financial planning is to set goals – clear and concrete goals, like I need $20,000 in 4 years as down-payment for a car, or 30 years from now, I want to retire with the means to spend a future-equivalent of $3,000 a month , rising by 3% a year to keep up with cost of living. Something like that (we will worry about working out the math later). Being proactive also involves exploring different ways to reach your goals. This can be as simple as saving say $500 a month to something more complicated like how to designed a portfolio of stocks and bonds that is suitable to your risk tolerance at varying stages of your life.
Once you have the broad plan laid out (e.g., an asset allocation plan), the next step is to find financial products suitable for your plans. Again, this can be simple or elaborate depending on the nature of your plans. Example of simple is exploring which bank offers the “best” savings deposit for you to grow your money in order to buy a car in 4 years. Example of elaborate is how to design a life-cycle asset allocation plan that makes sense to you. Finally, step back once in a while to check whether you are on track to your goals. If yes, swell. If not, probe and carefully consider what remedial actions you need to take. So here are the 4 key steps in financial planning: (a) set goals, (b) explore options, (c) implement goals, and (d) keep track. This is what it means to be proactive in financial planning means.