3 Useful Saving Thinking to Have A Good Financial Planning
Financial planning is essential as everyone has specific needs at different times. Whether it’s for retirement, travel, or health care, saving is non-negligible. Today I’m going to share with you three ideas for saving that I believe will help you improve your financial planning skills.
Most of us think of money as income-expenditure = investment or savings. This is a huge mistake and you actually may end up with no money left to save! So the right approach is income-investment or savings = expenditure. Only in this way, you are able to develop a rigid saving habit.
Let me tell you a story that I heard from Warren Buffett. I bet you know Mozart, the famous composer and one of the greatest musicians of all time, but do you know how Mozart died? He led an unhappy life and died young. Why is that? Because he did two things, Mozart didn’t know how to live within his means, he was extravagant with his money, and that was the first thing. Second, he was filled with jealousy and complaints. He had a miserable life, so he dies at a young age.
The second saving thinking is to clarify needs and wants. Do not blindly follow the trend! If you don’t have the ability, please be patient in not following others. Even Mozart didn’t make it through his salary, which was approximately 400 times that of the ordinary person at that time, so we have to remember to live within our means.
Third, learn asset allocation. Saving is a good habit, but putting all your money in the bank is not the most profitable. Anyone who understands finance knows that the interest you get from the bank is not keeping up with the rate of inflation. So smart people choose to invest their money. Investing is a way to increase the value of your assets. There are a variety of asset classes: stocks, bonds, cash, real estate, hedge funds, commodities, and virtual currencies.
Our goal in asset allocation is to balance the risks and get the highest return in the shortest time with the smallest cost. This is the fundamental purpose of asset allocation. Scholars have found that in long-term investment, asset allocation (as high as 94%) is the biggest source of income contribution, while stock selection and trading timing only account for 4% and 2% respectively.
There is always a risk in investing. So how do you control risk? The simplest way is not to put all your eggs in one basket! It’s important to diversify your asset because there are no permanent winners in an asset class. No asset class that has the best year in a row. However, it is also important to note that if you spread your risk too much, it’s not a good thing. This is because you’re taking a very little risk but you’re not maximizing the growth of your assets, so having some degree of risk is good for your asset growth.
