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Think Twice Before Choosing a Financial Planner

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“A financial plan is a road map that helps you to accomplish your financial objectives,” says Damion Brown, investment strategist at Jamaica Money Market Brokers (JMMB) Limited.

The main element in a specific financial plan is a well-specified goal, he stated. Once that goal is established, there are several factors that must be taken into consideration.

PLANNING

You should clearly set out what the financial plan is supposed to achieve. For example, it is to provide funds for retirement or to eventually purchase a home.

RISK

The kinds of risks you are willing to take should also be considered. For example, if you were looking to retire, stocks would be the best financial option. The reason for this is because when plans cover a longer period of time, assets may fluctuate considerably in value but they are likely to provide good long-term returns. Investing in stocks is also more appropriate because you will have more time to recover from any near-term decline in value.

LIQUIDITY NEEDS

Liquidity needs, which speak to whether you may need to access your investments for spending over the life of your investment, will also determine the type of investments you choose.

TYPE OF ASSETS

Your willingness and ability to tolerate risks will also determine the kind of assets that are utilised in the financial plan. Assets that provide higher returns generally display greater fluctuation in value. If you have the necessary resources to absorb losses and are comfortable with fluctuations in the value of your investments, you may choose to acquire assets that are expected to provide high returns but which have a greater variability in the return they provide.

INSTITUTION

Choose one of the more established financial companies. You should consider financial planners that are registered with the Financial Services Commission (FSC) or that work for reputable entities regulated by the FSC or Bank of Jamaica. Appropriate regulations also allow you to feel comfortable that the financial planner is likely to be honest and operate in a structured and professional manner.

FINANCIAL PLANNER

The financial planner must be willing to listen to you and tailor an investment portfolio that meets the specific needs of the investor, and not just recommend a one-size-fits-all financial plan.

QUALIFICATIONS AND EXPERIENCE

It is important for you to look at their qualifications and experience to ensure that the financial planner has suitable educational qualifications related to the investment field, or has suitable experience in the financial industry.

 

Financial Rules of Thumb

Rule-of-THumb

Financial rules of thumb are designed to give you quick guidelines for managing your finances. However, you shouldn’t follow them without giving some thought to your personal circumstances.

It’s especially easy for young people to get into debt with the constant use of hire-purchase agreements and easy access to credit cards, according to Francine Richards, client relations officer at E.W Lewis Investments and Financial Limited.

“Once a person is employed, most financial institutions will give that person a credit card. These individuals see this as free money, therefore their money management starts to go downhill,” she said.

“Hire-purchase and credit card usage allow for the easiest forms of debt – therefore when it comes to hire purchases, it is best to save its use for major purchases, such as buying a car or a house,” she continued.

Richards also advised that instead of relying on hire-purchase, it is always best to save and purchase items by cash.

More common financial rules

Save 10 per cent of your gross income

While this will give you a good start, it is typically the minimum, not the maximum, which you should be saving. Determine how much you will need for your financial goals, and then decide how much to save every year.

Plan on spending 80 per cent of your pre-retirement income during retirement

This may work if you don’t plan on being very active during retirement, but more people expect retirement to include extensive travel and expensive hobbies. On the other hand, if you’ve paid off your mortgage and your children have finished college, you may need less than this. Review your individual situation and desires for retirement to determine how much you will need.

Set the percentage of stocks in your portfolio to 100 minus your age

With increased life expectancies, this can result in your portfolio being a too heavily weighted income investment. Set your asset allocation based on your risk tolerance and time horizon for investing. Even after retirement, stocks may comprise a significant portion of your portfolio.

Keep three to six months of income in an emergency fund

While an emergency fund is a good idea, how much to keep in that fund will depend on your circumstances. You may need a larger reserve if you are the sole wage earner in the family, work at a seasonal job, own your own company, or rely on commissions or bonuses. A smaller reserve may be required if you have more than one source of income, can borrow significant sums quickly, or carry insurance to cover many emergencies.

Pay no more than 20 per cent of your take-home pay toward short-term debt

Once considered a firm rule by lenders, you can obtain loans even if you exceed this amount. However, do not become complacent if you meet this rule of thumb, since a large percentage of your income is still going to pay debt. Try to reduce your debt, or at least reduce the interest rates on that debt.

Keep your mortgage or rent payment to no more than 30 per cent of your gross pay

While you can obtain a mortgage for more than that, staying within this rule will help ensure you have money to devote to other financial goals.

Obtain life insurance equal to six times your annual income

Different individuals require vastly different amounts of insurance, depending on whether one or both spouses work, whether minor children are part of the family, or whether insurance is being obtained for other needs, such as to fund a buy or sell agreement or to help pay estate taxes. Thus, you should determine your precise needs before purchasing insurance.

Note: Most financial rules of thumb should not be followed without first considering your individual circumstances.

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