Well, we shall begin the journey of financial planning. First off, we need a master plan - a main strategy to see out how we want to perform financially now and in future. I’d call this a 3-prong strategy. It’s nice and dandy to go about saying stuff, making claims and all, but until we get a strategy down pat, we’re never going to get any substantial results.
The 3-prong strategy uses a time-based concept as its backbone. It’s an aggregate strategy, and is the most basic skeleton strategy for anyone to use. You hear stuff about technical analysis, portfolio building etc right? This 3-prong strategy isn’t anything about it. In fact its more of a layman’s strategy, and its main purpose is to give you some form of structure to building money. The 3 prongs are:
1) Long-term money building
2) Medium-term money building
3) Short-term money building
There you go! =) Simple as that. Many people miss out on this though, because they either prefer to go safe all the way and think long term, how they want to earn money fast and focus short term. By using all 3 prongs, we are able to provide balance to our money building which will yield steady results.
How it works is like this -->
We need to plan our time horizons. How we define long term, medium term and short term. Then we need to know how much of our money to put into the individual prongs. By “money” I mean our entire fortune. Haha yeah well, still in college, I’d reckon that most of us only possess a tiny kitty of a fortune, but dawg, we gonna grow that kitty into something solid eh =)
1) Long-term money building
Risk = Low
Returns = Decent
Target (Appreciation per year) = 4%
Long term would be somewhere farther in future, and is more for the proverbial “rainy day”. Thus you’ll want to keep this prong safe from risks while getting a decent return, while at the same time, making sure inflation is not eating away at this prong. In Singapore, for the year 2006, we had a very comfortable inflation rate of 1.0%. That’s a wonderful number, so for now inflation is not a big worry. However, for our long-term prong, we must err on the side of caution. Hence I always assume inflation to be 3% at least, and thus my long-term prong must beat the 4% level for returns in order for it to be meaningful.
2) Medium-term money building
Risk = Medium
Returns = Good
Target = 7% - 8%
Medium term would be somewhere in the foreseeable future, a period of a couple of years, give or take. This prong can be a little bit more adventurous, as you want a good return on your money to make it have some substantial impact in your life in a few years’ time, right? This is the backbone of your personal money pool, and a 7% rate of return would be a comfortable number to most of us. We shan’t take big risks on this though, as we have to protect our money in this prong as well and limit risk.
3) Short-term money building
Risk = High
Returns = High
Target = Up to you. For me, I'm aiming for a 25% return.
Well, this is the most exciting prong you have. Making big decisions, playing your timing right, making losses, making gains. All part of the high-risk game. Returns are potentially good, but we have to be realistic and understand potential for losses are high too. It’s up to you to set your target levels. The higher your target level the more the risks you need to take. I’ll go for at least 25%, for the fun and for the returns. =)
I think everyone would have a strategy for himself or herself, depending on her risk appetite and how serious he or she is in building up money. There’s no hard and fast rule to strategizing and as long as you take a look at it and feel happy about it, then it’s good. If not, then alter your strategy accordingly.
My next post will outline my strategy for you guys to take a reference =) stay tuned!
Cheers!
Spalsh
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