Financial Planning before Investing- Why is It Important?

When we talk about investment, it appears as if there is an unspoken law that we must worry about money. As a matter of fact, when we go to the financial markets, we are searching for ways to make our money worthwhile, whether it is our years of savings, an inheritance that has been passed down through the family, a lottery victory, or just a portion of our pay. Whenever we are consumed with money, we lose sight of everything else that is truly essential in our lives.

Investing is a lot more than just a moneymaking endeavor. Investing involves taking into consideration the emotions and, most importantly, the personal aspects of each of us. One of the most serious issues facing investors throughout the world has everything to do with our own actions. Our emotional side might cause us to make poor investment decisions, such as investing without considering what we want to accomplish with the money we are investing. 

We lose sight of our investing time horizon, our risk profile, and the assets that are suited for us -both financially and fiscally - and are seduced by the latest fads or by advice from others, and we end up losing our path. And this trend continues when we are already invested: we try to do market timing, we get out of the market in moments of volatility, for fear of losing more money or we stay on standby waiting for there to be a certain peace of mind that tells us if the time has come to enter or not.

What causes us to make these mistakes?

All of the foregoing leads to us making poor investment decisions that cause us to lose money, and as a result, we come to believe that there are no good investment funds, profitable pension plans, or that investing is only for the wealthy, when, in reality, what has happened is that we have gone about the process in the wrong direction. We have devoted our time and resources thinking about the specific product, without pausing to consider why we are investing.

What are my objectives? What do I want to accomplish with the money that I intend to put into this venture? When will I require the funds that I want to monetize? The first step we must do before investing is to determine the answers to these questions. Because our response maybe "I want to purchase a house," but our neighbor's response may be "I want to secure my retirement" or "I want to pay for my children's college education." 

In order to comprehend this concept, we must recognize that what is beneficial for other individuals may not be healthy for ourselves. Therefore, prior to entering the financial markets, we must do a financial planning exercise that will assist us in placing money within the context of our critically important project.

Financial planning should include both a global and a personal strategy!

The need of defining "what I want to invest for" before determining "how much I want to invest" is always essential. Knowing what our goals are will assist us in locating them in time and in our lives, which will assist us in setting our investment time horizon -the length of time we intend to leave the money invested-, which is one of the most important considerations when determining which assets, we intend to invest in.

In addition, if time is of the essence, the cost of our aims must be considered. Our starting point, as well as the amount of money we can set aside each month for investment, may be determined with the assistance of a financial counselor after a thorough analysis of our financial and asset status is completed. All of this will assist us in determining the rate of return we should expect from the financial markets, as well as the investment plan that will best assist us in achieving our objectives while taking into consideration our investor profile.

Know your risk levels!

Knowing our level of aversion to risk and the kind of assets we would be comfortable with is critical to being able to deal with times of uncertainty and market declines and avoid making rash judgments based on our emotions in difficult situations. Because, although financial planning is vital at all times, it becomes much more critical during times of instability. What is the explanation behind this? 

If our investments are the outcome of a thorough financial planning process, we can be assured that we will be investing in products that are truly tailored to our requirements and aspirations. And if our circumstances or objectives change, we can redefine our personal and financial plan and refocus our investing strategy as many times as we need to for as long as we need it to be effective.

Make a Customized Plan!

To be successful with our investments, we must constantly place ourselves at the heart of the financial planning process that we undertake. Only with a comprehensive and customized plan will we be able to understand all of the scenarios and analyze the consequences of each one of them, as well as answer questions that take into consideration the fiscal aspect, such as "Am I interested in investing in an investment fund from a fiscal point of view?" and "When am I interested in rescuing my pension plan?"

Among the questions are some that go farther and take into consideration additional issues, such as "and if in the future I am unable to generate money, how will I be able to offset the effect of the unexpected?" and "Is it easy for me to provide a living contribution to my children?"

And the fact is that, as Belén Alarcón reminds us, “money is not an end in itself, but rather it is the means that help us achieve what is important to us”. That is why it is critical to developing a financial and personal strategy that will assist us in achieving our goals.


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