Getting Started

Getting Started
Getting started
Emergency fund Creating a Financial Plan Risk and return Portfolio Design and Construction Rebalancing

For many people, reading financial material or carrying on a financial discussion is a baffling and humbling experience. Jargon flies, everyone but you seems to know what's being talked about, and you don't know how to distinguish good information from noise.

The purpose of this article is to provide good information to get started, simplified enough that the average person is able to handle their finances on their own and at minimal cost. You need not understand everything from the word go and you need not do everything immediately. Work at your own pace and within your own comfort zone, but do work at it.

Although a great deal of information is available, sorting through it is a major task. Let us consider the various stages in order, with links to the appropriate finiki sections or Financial Webring Forum threads.

Finally, and above all, remember the words of Ralph Waldo Emerson: "Life is a journey, not a destination."

Are you ready to invest?

Main article: Emergency fund

Investing starts with a sound financial lifestyle. The first step to decide if you are able to invest. Investing should only commence after you have saved a minimum of six months of living expenses (preferably more). You should budget a certain portion of your income for investing.

Main article: Creating a Financial Plan

A financial plan makes recommendations in a number of areas. Financial planning is not about amassing a pile of money. The initial and most important step is identifying objectives (in a family, agreeing on shared objectives), e.g. buying a house, retiring early, ensuring that children get an excellent education, and so on. Determining what the objectives are is primary. Since what usually requires money in the modern world, financial planning then proceeds methodically to lay out how.

Here is the one minute version:

• Spend less than you earn.
• Save and invest a percentage of every paycheque, not what is left after expenses.
• Don't put all your eggs in one basket.
• Watch the pennies and the dollars will look after themselves.

Create an investment plan

Main article: Investment Policy Statement

Define the objectives of your investment. Is it for retirement? A new home? Vacation? When will you need the funds? In retirement, or for an upcoming purchase? You will need to define clear objectives, which are documented in an investment plan. In some cases, a more comprehensive Investment Policy Statement (IPS) is appropriate.

Developing a financial plan starts with assessing your current position. These steps are covered in Financial Planning; in particular in Creating a Financial Plan and the Financial Webring Forum thread Financial Planning.

If you need assistance, a financial adviser may be enlisted.

At the end of the process, you will have an investment plan (or Investment Policy Statement).

Set your level of acceptable risk

Main article: Risk and return

Diversifying your portfolio is the only way to mitigate risk. It is a compromise of investing horizon (how long until the funds are needed) and acceptable loss. Diversification is determined by setting the ratio of equities (stocks) to fixed income (bonds, GICs), and is known as asset allocation. This demonstrates another first principle of investing:

Create a portfolio

Main article: Portfolio Design and Construction

Once the IPS is created, the investment plan must be implemented. This falls under Investment Management, in particular Portfolio Design and Construction, as the outlines of the required portfolio are determined. Note that it is only after the portfolio has been designed that security selection - i.e. purchasing components - takes place. Many investors make the mistake of starting at this point. There are asset classes and investment styles to consider at this point. The goal is to create a diversified portfolio.

Maintain your portfolio

Main article: Rebalancing

Once you have your created your portfolio you should continue to monitor it's progress against your objectives. For this reason, it's important to rebalance once a year.

What comes later?

Investing is usually done to meet a particular goal, often retirement. This is covered in Retirement Planning. Once the goal of retirement is reached, Retirement Living examines some of the lifestyle choices. You should also give consideration to your estate plan.

See also

• Further Reading
• Reference Material is available for further reading and clarification where needed.