The Path to Your Financial Goals
By Saghir A. Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
By definition, achieving your financial goals requires the accumulation of financial assets. How quickly you accumulate the needed assets depends on three things—how much you earn, how much you save, and how well you invest.
How much you earn
Sure, we all want to enjoy our work. But within that parameter, why not choose a job that will pay more? Your income is going to drive all your other financial decisions, so investigate your options.
Are you sure you’re being paid a competitive wage with competitive benefits? Even if you aren’t interested in changing jobs now, pay attention to what is going on in your field.
Do you have an outside interest or hobby that can be turned into a paying job? This could be a good way to supplement your current salary. It may also turn into a part-time job or business after retirement.
Can you get some additional education or training to help secure a promotion or qualify for another job? Read which jobs are expected to have the highest growth rates and/or highest salaries over the next few years. If you don’t enjoy your current job, you have even more incentive to implement these suggestions.
How much you save
You should be saving a minimum of 10% of your gross income. But don’t just rely on that rule of thumb. Calculate how much you need to meet your financial goals and then determine how much you should be saving on an annual basis. If you can’t seem to save that much, consider these tips:
Invest all unexpected income
Instead of spending money from tax refunds, bonuses, and inheritances, invest the money immediately. You may also want to put any salary increases into savings, possibly in your 401(k) plan.
Save regularly so it becomes a habit
One of the best ways to save regularly is to make saving automatic. If you have to remember to write a check every month, it’s easy to forget or not get around to doing it. It’s usually easier to have the money automatically deducted from your bank account and deposited directly in an investment account. Another good alternative is to sign up for a company’s 401(k) plan, having funds withdrawn every paycheck. (Keep in mind that an automatic investing plan, such as dollar cost averaging, does not assure a profit or protect against a loss in a declining market because such a strategy involves periodic investments, you should consider your financial ability and willingness to continue purchases through periods of low-price levels.)
How well you invest. To ensure that your savings grow, you need to invest them wisely. Consider these tips:
Set an asset allocation strategy for the long term
The most basic investment decision you’ll make is how to allocate your portfolio among the various investment categories, such as cash, bonds, and stocks. You want to ensure your portfolio is diversified among a variety of investments. That’s why, when one category is declining, hopefully other categories will be increasing or not decreasing as much. To decide how to allocate your portfolio, you’ll first need to come to terms with your risk tolerance. Factors like your time horizon for investing and return expectations will also impact your decision.
Thoroughly review each investment in your portfolio
Decide whether you should continue to own each based on your financial goals and asset allocation strategy. Also make sure your investments are adding diversification benefits to your portfolio.
Maintain reasonable return expectations
The higher your expected return on your investments, the less you need to save every year. However, if your assumed rate of return is significantly higher than your actual return, you won’t reach your goals. Thus, it’s important to use reasonable return expectations. Assess your progress every year so you can make adjustments along the way. If your return is lower than expected, you may need to increase your savings or change investment allocations.
Review your portfolio at least annually
Your portfolio won’t stay within your desirable allocation by itself. Since different investments earn different rates of return, over time your allocation will get out of line. You need to review your portfolio periodically and make adjustments to rebalance it.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
