The best investment a person can make is in himself. Financially, he must have some knowledge about his own affairs because he cannot hand over everything to a financial adviser or broker and expect that person to do it all. If he takes the time to learn about money matters, he will receive a rich reward—dividends in understanding that in the long run will improve his financial position.

HOW DOES ONE BEGIN A FINANCIAL PLAN?

The first step he should take in creating a financial plan is to identify his personal and family financial goals. Goals are based on what is most important to an individual. Short-term goals (up to a year) are things that one desires soon (house-hold appliances, a vacation abroad), while long-term goals identify what one wants later on in life (a home, education for children, sufficient retirement income). Take these short- and long-term goals and establish priorities, making sure an emergency fund is listed as the first item. Then estimate the cost of each goal and set a target date to reach it.

The changing life cycle affects financial planning. A person's goals must be updated as his needs and circumstances change. In one's young adult years, short-term goals may include adequate insurance, establishing good credit, and just getting under way. During a person's middle years, the goals shift from immediate personal spending to education for children and planning for retirement. In one's later years, travel may become a primary goal.

When planning for the future, age is a vital factor. Here are some guidelines to use, depending on one's present age:

Age 20 to 40: When a person is young, growth of financial resources should be a primary goal; a relatively high degree of risk is tolerable. Suggestion: Invest in a diversified portfolio of common stocks or in a mutual fund managed for growth of assets, not income. Speculation (in real estate, coins, metals, etc.) is acceptable.

Age 40 to 60: Stocks are still an attractive choice, but now one needs a more balanced approach. Begin to invest in fixed-rate instruments (bonds) and look into bonds that are tax-free (municipals).

Age 60 and over: By now, the majority of an investor's funds should be in income-producing investments to provide safety and maximum current interest.

There is a rule of thumb that may be appropriate here. It is based on the concept that the percentage of one's portfolio in bonds should approximate one's age, the balance going into equities (stocks). For example at age 40 an investor would keep 40 percent in bonds and 60 percent in equities. At age 60 the reverse would be appropriate; 60 percent bonds and 40 percent equities. Of course, this is a very general idea that may not be appropriate for everyone.

When planning investments for one's age bracket, consider the following:

1. Security of principal: This refers to the preservation of one's original capital. Treasury bills are guaranteed by the government, while stocks fluctuate greatly.
2. Return: This means the money one earns on investment (interest, dividends, profit).
3. Liquidity: This deals with the ease of converting investment into cash.
4. Convenience: This refers to the time and energy a person is willing to expend on his investment.
5. Tax status: Depending on one's tax bracket, each investment will bear heavily on one's personal situation. Municipal bonds are tax-free, while certificates of deposit (CDs) are fully taxable.
6. Individual personal circumstances: Included under this category would be a person's age, income, health, individual circumstances, and ability to tolerate risk.

HOW SHOULD ONE DEAL WITH FINANCIAL RISK IN PLANNING FOR THE FUTURE?

The single most important factor in deciding on the best investments for an individual is the level of risk one can afford to take. Thus the first step in formulating an investment plan is a careful self-examination. How much money does a person have to invest? How great will his financial needs be for the foreseeable future? How much of his capital can he realistically afford to risk losing, and how great a degree of risk can he and his family handle psychologically? Each of these factors will have a bearing on the degree of risk a person can tolerate in his investment decisions.

The trade-off is simple: To get larger rewards one has to take greater risks.

A person can achieve a balance by investing in a pyramid fashion: Begin with conservative (safe) investments at the foundation (Treasury obligations, insured money markets, CDs) and then gradually build up, accepting a bit more risk at each step. At the very top, you may have high-risk investments (e.g., coins, gold, real estate), but because of the pyramid, these investments will be small compared with the rest of one's holdings. Also, to minimize loss, one should have at least two different types of investments that perform differently during a specific period of time. For example, when interest rates are low, stocks usually gain while money markets do poorly. Diversify!

Every investor must find a comfortable-zone balance of security and risk. This is one of the cardinal rules of financial planning.

Ironically, the goal is to live in comfort, but the key is not to get too "comfortable." Investors don't want to miss out on profitable opportunities.

Here are some guidelines for handling risk that should make an investor more "comfortable"—in both senses of the word.

1. Don't invest in any instrument in which one can lose more that one can potentially gain. This factor is sometimes referred to as risk-reward balance.
2. Diversify one's holdings. Spread investment dollars among a variety of instruments, thereby minimizing the potential risk.
3. When investments fail to perform up to expectations (the period to hold them is based upon one's objectives), sell them. "Cutting one's losses" is the only sure way to prevent minor setbacks from turning into financial nightmares. A rule of thumb is to sell when the value declines by 10 percent of your original cost.
4. Institute a "stop order." Most small market investors have not heard of a "stop order," yet it can "cut one's losses" automatically. When an investor purchases a stock, he gives his broker instructions to sell that stock if it should decline by, say, 10 percent of its original purchase price. The moment the predetermined level is reached, the stock will be sold.
5. Don't discount risk altogether. The rewards may justify "taking a chance." Remember the turtle. It makes progress only when it sticks its neck out.

HOW CAN COMPUTERS HELP WITH FINANCIAL PLANNING?

Financial planning and computers are an ideal match. A person inputs the information; the computer crunches the numbers, makes the projections, and helps keep him on track.

There are software programs designed for personal financial planning and investment. These programs can help one devise a household budget, monitor expenditures in numerous categories, keep meticulous records, and plan for the future. Some programs make year-to-year projections of one's income, expenses, and retirement benefits from now to age 125, and virtually all the programs will import pertinent data into tax-preparation software. Whether an individual prepares his own tax returns or has them done by a professional, having good records is a real boon when that April 15 deadline looms.

If one finds visual data useful, these programs will delight by producing spreadsheets, charts, and graphs. Most programs can even print out checks.

Computer programs make it especially easy to track one's investments. One can enter as many accounts and portfolios as desired, including stocks, mutual funds, bonds, individual retirement accounts (IRAs), and so on. With a link to the Internet, these programs allow an investor to calculate his current net worth with the touch of a key.

HOW DOES ONE CHOOSE A FINANCIAL PLANNER?

Once a person has developed an overall plan, he may want to "go it on his own" or he may use a financial professional, one who shares his sense of values and objectives. Financial planners are paid for their work in one of three ways: fee only, commission only, or fee plus commission. As investors will quickly discover, financial planners do not all charge the same level of fees. Think about how one selects a physician, a school for one's children, a home for one's family. With one's future quality of life hanging in the balance, forgo the "bargain" and choose the best-qualified person available—one whose personal style is compatible. What happens with money in one's life is as intimate as sex—and as central to one's well-being. So choose an adviser one can trust and like.

When considering an individual as one's financial professional, make certain to inquire about his or her education, degrees, certificates, and specializations, if any. However, there are many types of experts, each with a special service and fee schedule. In certain cases, an individual may have more than one title. The following list explains the most frequently encountered titles:

Accredited Estate Planner (AEP): Title awarded by the National Association of Estate Planners to professionals who pass an exam and meet educational requirements.

Chartered Financial Analyst (CFA): Awarded by the Association for Investment Management and Research to securities analysts, money managers, and investment advisers who complete a course and pass an exam.

Certified Financial Planner (CFP): Licensed and certified by the Certified Financial Planner Board after meeting educational, examination, and experience requirements.

Chartered Life Underwriter (CLU): Also awarded by the American College to insurance and financial service professional.

Certified Public Accountant (CPA): Licensed by the state after completing educational courses and passing a uniform national examination administered by the American Institute of Certified Public Accountants.

Registered Investment Adviser (RIA): Indicates registration with the Securities and Exchange Commission; no examination required. (Stockbrokers are exempt from registering as RIAs since they're regulated by the National Association of Securities Dealers [NASD]. They must pass an NASD exam.)

Registered Financial Consultant (RFC): Awarded by the International Association of Registered Financial Consultants to professionals who meet educational and experience requirements and who have earned a securities or insurance license or a certification such as CPA.

When a person has decided on the type of financial professional he wants, he should visit a few and ask them for information on how other clients' investments have performed under their guidance and carefully try to assess how well the planners have been able to achieve for their clients the objectives he is seeking. But it is most important to for him to ask himself whether he would be comfortable with this person handling his financial affairs.

An investor owes it to himself to read (newspapers, magazines, annual reports), learn (seminars, courses), ask (brokers, financial planners), and make certain that he can apply the knowledge gained so that when opportunity does knock, he is not in the backyard looking for four-leaf clovers.

And that is the point. A person must act now so that he can build a firm financial future for himself and his family. Remember that the flowers of all tomorrows are in the seeds of today. The information in this encyclopedia can be the first building block in the creation of a secure and comfortable financial future that only the reader can initiate. There is a saying that sums up financial planning in ten two-letter words: If it is to be, It is up to me.