Your game plan
‘Plan your life, live your plan.’ Yes, it’s a cliché. But when it comes to investing your money, it makes a lot of sense to have a plan.
Putting a plan together involves developing strategies and choosing the right investments.
What to do before you make an investment plan
Be clear about your current finances
The starting point is getting an accurate picture of your current financial situation. Use the MoneySmart budget planner to get a snapshot of your income and expenses and the asset stocktake calculator to work out what you own and what you owe.
Confirm your goals
Goals will become the backbone of your investment plan. Write them down, with a timeframe for each goal. See our section on goals and risk tolerance for more information.
Understand how much risk you want to take to achieve those goals by reading our article on risk and return. Your plan will be the pathway you take to achieve your goals. The course you take will be shaped by where you are now and where you want to get to.
Short-term investment goals (1-3 years)
Here are some strategies that someone with a short-term goal could consider:
Once you know how much you can afford to save, set up a direct payment to a high interest savings account – either from your pay or from your account after each pay day.
Pay off credit cards and personal loans first to free up additional cash to save
Save a fixed amount each pay period – do a budget to ensure your money is going towards the important things
Work out how long it will take to meet your savings targets.
Medium-term investment goals (4-6 years)
David has just bought a new car for the first time in his life. Over the last 20 years he’s bought a few cars that have ended up costing him a lot of money. David has decided he will buy a new car every 5 years, about when the new car warranty expires. He expects the changeover cost to be $25,000.
David has decided to:
invest in a managed fund that allows him to get started with just $1,000
choose a balanced portfolio, as he wants better returns than a bank savings account, without being too aggressive
contribute $100 to the fund each week.
Because he has planned carefully, David knows that in about 5 years’ time his investment will be enough to buy a new car. There will also be enough to pay any capital gains tax he incurs as a result of the investment. If markets are down at the time, he will wait until they pick up before buying the car.
Long-term investment goals (7+ years)
If you’re considering topping up your super, ask how long you have until retirement. If it’s more than 10 years, a growth investment option could provide for a better outcome.
Making extra supernnuation contributions can be a great way to invest over the long term.
High and middle-income earners can benefit from making contributions out of pre-tax earnings – this is known as salary sacrifice.
Lower-income earners can benefit from making after-tax contributions that attract government co-contributions.
A balanced or growth option will grow your money faster over the long term, provided you can handle your balance taking a dive every now and then.
If you are saving for a pre-retirement goal you will need to invest outside super – a balanced or growth option in a low-cost managed fund would be a suitable investment.
A good financial plan will outline your needs and goals and set out the best strategies for achieving them. Once you’ve developed your investment plan, your next challenge will be to choose your investments.
Please contact us on 03 9553 0271 if you seek assistance on this topic.
Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at www.moneysmart.gov.au/investing/invest-smarter/develop-an-investing-plan
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