Fiscal planning is the means of ensuring that one is making the best use of his or her money and help individual to prepare for their future. The planning may involve a range of activities, with strategies ranging from the short-term to the long-term (Garman & Forgue, 2011, p.21). A person may want to create a budget to enable him or start saving towards a future purchase, or they may be more concerned about guaranteeing their future financial security through retirement planning. Financial planning prevents a person from overspending by crafting and sticking to a sensible budget. It can also help people to avoid accumulating debt by exceeding their income. Through financial planning, people may be able to spare a fraction their income as savings. Fiscal planning can be beneficial for anyone, in whichever state. Whether he or she is seeking a solution to a particular financial difficult or expecting to find the best way to capitalize a windfall, creating a plan can help an individual to make the right choice about his or her money.
A worthy financial plan can help a person to spend within their means and make the best use of personal income. It can also help them enjoy a safe financial future. A proper personal financial plan considers personal objectives, circumstances and risk tolerance. It is a guide in helping choose the right types of investments that may meet an individual’s goals and needs. Instituting a relationship with a trustworthy fiscal advisor is critical to achieving the desired goals. The advisor helps in profiling and individuals current financial status and develops an all-inclusive plan customized that person. The fact that Sam’s motive for saving and investing is to be able to pay college fees for his children means that he need an assurance that, at the time when they will be joining college, he must have the fees. This requires him to go for an investment with a guaranteed return. That investment should also be predictable and affordable. He should also ensure that his investment of choice should have a better return than interests that the bank offers for the savings accounts. To invest in bonds is to loan your savings to the issuing institutions or corporations. The bond regularly pays interest, and when the bond matures, the issuer pays the face value. When an investor buy bonds, he purchases stakes in that company. When the business thrives, the bonds will appreciate in value and provide substantial returns. If the company goes becomes bankrupt, an investor may lose it all. That is the reason many people consider bonds to be safer.
As good as bonds investing may sound, they have their disadvantages. Bonds are not as liquid as stocks. The investors’ money is locked away and cannot be accessed until the bond matures. Though an investor can opt to trade his or her bonds before they mature, the bonds markets are not as liquid as that of stocks and currencies. Lack of liquidity may force the investor to sell the bonds at a lower price that their capital cost and end up making losses. Another option is that of an investor withdrawing their money, but that again comes with penalties Advantages of bonds are that they are predictable in that the investor knows the interest to expect, when to expect and how often he or she will receive the interest without failing. Bonds also has got clear maturity date of the principle value. Bonds are steady than stocks which can fluctuate wildly in within a short period. Bonds are good for retirement plans because they provide regular and predictable income to the investors. The yields paid by bonds usually exceed the bank interest rates on savings accounts. Disadvantages of investing in bonds are the losing money in case the issuing companies or banks go bankrupt. Inaccessibility of money in a low yielding bonds should lending interest rates go up. Bonds are reliable options for investors who need a steady and dependable source of income. Unlike investing in bonds, investing in stocks is to have your investments keep up with inflation. This is achieved by investing in stocks of businesses that are growing with the economy.
Stocks do not hold payment promises like bonds: the investor’s portfolio is only as strong as the company’s they buy. By investing in stocks, the investor have the potential of making more money that other financial instruments. This is because stocks participates directly in the growth and performance of the economy. As a result of the stocks being part of the economic indicators, any potential losses are limited to the amount of the investor’s initial investments unlike some other investments that are leveraged. In this regard investors have limited liability in the operations and running of the company. Stock, in addition offer a great deal, of flexibility because they can be liquidated at their fair market value and be converted back to cash on the stock market. The stocks are tax-efficient because the capital gain from their sale can be offset by the principal losses and that brings down the income subject to taxation. There are risks involved in stock investments.
The value of the shares of companies may radically rise or fall due to many factors, some of them being beyond the control of the company’s management. It is also hard to identify the right stock because there may be limited information available about the particular company, through third party sources. In addition, the entry and exit timing is tricky and hard to predict. A Mutual Fund acts like a trust that joins the monies of numeral investors who share a mutual financial objective. The money collected is thus invested in the financial market instruments such as debentures, and shares and other securities. The investors share the interest earned through these investments to according to their units. One major rule of investing, for all investors, is asset diversification. Diversification comprises the mixing of nest eggs within the portfolio and helps in risk management. For example, by deciding to buy shares in the retail segment and offsetting them with shares in the industrial segment, an investor can minimize the impact of the underperformance of any security on his or her total portfolio (Bali, Brown, & Demirtas, 2013, p.1884). To attain a truly spread portfolio, the investor may have to acquire stocks with diverse capitalizations from different industries and bonds securities with varying maturities from dissimilar issuers. For a small personal investor, it can be quite a costly affair. By investing mutual funds, Johnson will enjoy an immediate benefit of instant diversification and asset distribution without the huge amounts of cash required to create individual portfolio. One limitation, though, is that simply investing one mutual fund might not give him sufficient diversification. When Johnson invests in a mutual fund, he will have chosen a professional money manager.
The manager will use the money that he invests to buy and sell financial instruments that he or she has professionally researched. Accordingly, rather than partaking to research every investment before he decides to buy or sell, Johnson will have a mutual fund's money manager to handle it for him at a relatively low cost that fits his disposable income. When a person buys stakes of stock, he or she gains part ownership in an organization (Busse, Chordia, Jiang & TANG, 2013, p.55). As such, the value of that company’s stock will reflect the profitability experience of the firm. The higher potential rate of return means higher the risk. An example is like in stocks where investors expects a fairly high rate of return there is no guaranteed timeline of settlement, and no stated rate of yield like the ones that are paid by fixed-income securities such as bonds. In the world of stocks, there are disparities in risk and reward. Blue chip stocks are issues of conglomerates with solid establishments in their respective niche and have long histories of good earnings and paying bonuses. In the world of stocks, there are disparities in risk and reward. Blue chip stocks are issues of conglomerates with solid establishments in their respective niche and have long histories of good earnings and paying bonuses.
References
Busse, J., Chordia, T., Jiang, L., & TANG, Y. (2013). How Does Size Affect Mutual Fund Performance? Evidence from Mutual Fund Trades.Garman, E. T., & Forgue, R. (2011). Personal finance. Cengage Learning.Bali, T. G., Brown, S. J., & Demirtas, K. O. (2013). Do Hedge Funds Outperform Stocks and Bonds? Management Science, 59(8), 1887-1903.
