Principle #1 - Have a Plan

Having a plan is a fundamental part of personal finance and investing. Financial planning without a plan can be chracterised as good intentions resulting in random investing. The absence of plan will often lead to a loss of focus. Specifically, without the discipline imposed by having a plan (and executing it) there will be delays. Given my view that time is one of the most critical influences on financial planning and investing, delay (or procrastination) is usually a bad thing.

Financial plans come in all shapes and sizes. Some are good and some are bad. Some are simple and some are complex. Even the most simple of plans can be sound. For someone who does not want to spend more than a token amount of time on their personal finances, a simple yet effective plan could be to automatically have a fixed percentage of monthly income paid directly into a life cycle fund. Its a plan and in the right circumstances it could be a very good one.

A plan should be in writing.

My own approach to planning is:

1. keep a balance sheet of assets and liabilities. This should be updated on a regular basis. My earlier post on this stage of the planning process is here;

2. work out what the long term goal is. A common goal is putting aside enough money to maintain a desired standard of living in retirement. An earlier post on evaluating long term goals is here;

3. work out a strategy for getting from the current position to the desired future position. An example is here . A budget should form part of this stage of the process as will an investment strategy;

4. conduct periodic reviews of 1-3 above including each of the assets and liabilities contained in the balance sheet. One of the most important part of a review is to take a good hard look at the assumptions underlying your plan. If the assumptions on which the plan was made have proven to be incorrect then the plan may need to be revised.

A plan will not be static. It will need to be updated from time to time.

One important point to bear in mind is reality. A plan that is overly ambitious has a much greater probability of failure than a more modest plan. My own plan written in January of this year runs for 13 pages. It could easily be reduced to half that length. It is also now six months old and needs to be reviewed.

My earlier post on planning is here .