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A Beginner's Guide to Investment Planning

Thanks to compounding interest, you're better off investing as soon as possible. Investment planning is a key component of getting started.

Chris Scott

Contributing Writer at Tally

July 23, 2021

Over the past 140 years, the average 10-year return of U.S. stocks has been 9.2%, according to data provided by Goldman Sachs. While the stock market is not the only investment tool available, it demonstrates just how important it can be to come up with an investment strategy and financial goals. 

Because investments and their earnings compound, the sooner you can begin investing the better off you will likely be in the long run. As financial guru Suze Orman tells CNBC, “I would much rather see you invest a specific amount of money when you are young, a lesser amount of money, than waiting and having to invest five or six times [as much] when you are older.” 

No matter where you are on your financial journey, the right time to start planning for your future is now. That’s why we’re here today to walk you through the importance of investment planning. We cover the basic fundamentals as well as how investment planning works and the things you can do to get started. By the end of this article, you should have a much better idea of how to get started crafting both your short-term and long-term goals. 

What is investment planning? 

Broadly speaking, investment planning is the process of coming up with goals and strategies and building a plan of action to achieve them. Investment planning falls under the umbrella of financial planning. 

Today, there are many different assets that you can use to build an investment portfolio, including: 

  • Cash

  • Equities

  • Stocks

  • Mutual funds 

  • Exchange-traded funds (ETFs)

  • Bonds

  • Real estate

A key component of investment planning is determining your risk tolerance. Your risk tolerance is a measure of how much risk you are comfortable taking with your assets. Typically, the greater the risk, the greater the potential reward — but also the greater chance of loss. For instance, stocks can yield a tremendous amount of earnings during a given year, but the market could also tank and you could lose your entire principal investment. 

Stocks are considered significantly riskier than, say, cash. Your risk tolerance will determine your asset allocation, or how you spread your money across different investments. Though everyone’s situation is unique, many financial advisors believe that diversification is crucial and that you should spread your money across multiple asset classes. 

Working with financial professionals and investment advisors can help you better plan your investments. We’ll touch on that more in a bit. 

Why is investment planning important? 

Investment planning is important because it prepares you for your future. There’s a strong chance that there will come a time when you no longer work and earn a steady income. This could be because you chose to retire or because of something more unexpected, like a layoff or medical emergency. 

No matter the reason, you need to be prepared with enough cash on hand to get you through your current situation or for the rest of your life. This is why investment planning is so critical. Below is a breakdown of a few of the reasons why you need to consider investment planning. 

Prepare for retirement 

One study found that as many as 64% of Americans are not prepared for retirement. Retirement planning is a key component of investment planning. You need to make sure that you have enough cash on hand to cover your expenses and medical bills during retirement. 

If you work with a financial planner, you will sit down and come up with a retirement plan. Your retirement plan will derive heavily from: 

  • How long you expect to work 

  • Your family health history 

  • How many children you have and the expected expenses remaining

  • Your current debts and assets 

  • Your financial life, such as your average monthly spending 

As you move toward retirement, you may want to take on less risk. However, lower risk means reduced returns. The earlier you get started investing, the higher risk you can take. The market tends to grow over time and being in it for the long term allows you to worry less about market volatility. Investing now can allow you to properly prepare for retirement

Better understand your financial situation 

Investment planning also allows you to see just how much money you have readily available and your true net worth. As evidenced by the fact that 64% of Americans are unprepared for retirement, many people overestimate just how financially secure they are. 

An investment plan allows you to properly evaluate your net worth so that you can better manage your income and budget moving forward

Provide a roadmap to your future 

Investing for the first time can be overwhelming. Having a plan helps mitigate that. Knowing exactly which investment products you should be targeting allows you to determine where you should be putting your money. It also provides savings goals that you can target and chase. 

For instance, a Roth IRA is an investment option that allows your earnings to grow tax-free. The maximum amount that you can contribute currently is $6,000 per year. Maxing out your Roth can be a financial goal that is easily measurable. 

How does investment planning work? 

If you would like to develop an investment plan, you should conduct ample research before jumping in. Investing can be very rewarding, but you should not just throw your money anywhere. 

You should strongly consider speaking with a financial services or wealth management company. These include brokerages like Fidelity and Vanguard, along with local advisors who may be in your area.

Your wealth management advisor will better understand your intended investment risk, short-term goals and long-term goals. They can craft a plan for you. You can choose to actively manage your money or allow these firms to do it for you. The firms may charge a fee, but they are professionals and can provide a trust factor that is not found if you are investing on your own for the first time. 

What things do you need to do to start financial planning? 

Before you develop an investment plan, you need to know a few things: 

  • Your current income 

  • Your monthly expenses 

  • Your current net worth 

  • Your current levels of debt

  • Your financial and retirement goals 

  • Your risk tolerance

All of these factors will shape what you invest in. Having cash on hand will also make it easier to begin investing, though it’s not a necessity. You should also look into whether your employer offers a 401(k) or health savings plan. These are investment options that you may not otherwise have access to.  

Another thing you need to do before crafting your long-term investment plan is to reduce your debt. Getting out of debt is a critical step in setting yourself up for financial success. 

Start crafting your investment plan today for a more secure financial future

No matter how old you are, there’s no better time than the present to develop a financial plan. Though a financial plan can encompass many financial elements, one of the most critical parts is investment planning. 

Jumping into an investment is not something that you should do on a whim. You should speak with various investment management advisory services or brokerages to better understand your financial situation. Not only will advisors look at your current financial picture, but they’ll also consider things like your risk tolerance to determine which investment options are right for you.

Before you start investing, work to get your finances in order. You should be aware of your income, expenses and current net worth. Additionally, an important step in setting yourself up for financial success is getting out of debt.

Reducing your debt will allow your financial advisor more flexibility when investment planning. One potential option for reducing your debt is Tally. Tally is an automated credit card payoff app that helps you pay down higher-interest credit card debt with a low interest line of credit. After reducing your debt, you’ll be in a good position to start working toward your investment goals.