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Lesson 1: How to make a financial plan

Presented by J.P. Morgan Asset Management

With the coronavirus pandemic and inflation causing ongoing economic uncertainty, there’s never been a more important time to get your finances in shape.

We don’t deny that getting a grip on one’s long-term finances can seem like an overwhelming task.

In conducting the Saver to Investor Survey in 2021, J.P. Morgan Asset Management discovered that of the many people who depend solely on cash savings, almost half lack a financial plan.

While saving in general is a good start, fully relying on cash could prove costly in the future, particularly in today’s environment of persistently low interest rates.

Interestingly, the survey, which questioned over 5,000 people across 10 European countries, revealed that more than three-quarters of women who currently invest do have a financial plan, and 85% of men investors have at least a rough plan. This is important, as achieving financial independence requires a plan.

Likewise, investors tend to be much more confident about their financial futures. This makes sense, as it’s widely believed that feeling financially secure is at the heart of overall well-being. The picture is much the opposite for those committed to cash: for example, only 33% of women and men non-investors are confident about their financial position.

Below, our five-step strategy provides a straightforward approach to nailing down a financial plan – and getting started with investing while you’re at it.

Take a long-term look at your financial goals

Are your primary goals far in the future, such as saving for a comfortable retirement? Or are they more immediate, like paying down student debt or saving for a wedding? It’s helpful to separate your goals into long- and short-term categories: how soon you’d like to access your funds will influence the kind of savings or investment vehicle you’ll choose. If you have a partner, don’t forget to include them in the conversation.

Understand how you feel about financial risk

We all have our own comfort levels when it comes to taking risks. The survey showed that women tend to veer towards the cautious, as less than half of female investors described themselves as comfortable with risk-taking; that number dropped to 31% for our exclusive savers. Men had a bigger appetite for risk: 59% of men who invest considered themselves comfortable with risk, as did 39% of non-investors.

Investors are more comfortable with taking risk to increase opportunity

Source: J.P. Morgan Asset Management Saver to Investor Survey, January 2021.

Getting a feel for your risk tolerance, how long you can invest for, and how much you can afford to lose will help you to decide which investments are right for you. For example, investing in a portfolio that is heavily weighted towards company stocks may be riskier in the short term compared to the relative safety of bonds, but over the longer term the equity portfolio could provide better protection against inflation.

Make a budget

This will let you determine how much of your income you can afford to invest. The ultimate goal here is financial security, so it’s important to consider your present as well as your future. First, make sure you have a cushion, such as a “rainy-day fund” that could keep you afloat for three to six months and insulate against the unforeseen. Next, make sure all your outgoings are covered. This should include not only the big expenses like mortgage payments and credit card debt, but also common extras, like clothing or a Friday takeaway. Once your current costs are accounted for, think about your budget for investing. Do you want to set aside a percentage of your monthly income, or would you rather invest an established amount each month?

Don’t try to time the market—invest regularly

Don’t wait for a better time to invest. It’s a common misbelief that investing requires keeping a close eye on market movements and knowing when to strike and retreat. Our survey found that around three-quarters of women, both investors and non-investors, believed this to be true, and the figures were only slightly lower for men. Investing regularly – playing the long game, if you will – means you can benefit from market ups and downs.

Choose the investments that speak to you

Finally, build a portfolio you believe in. Invest in women-led companies, or make efforts to protect the environment, which our survey found to be a powerful attraction: over 60% of respondents mentioned the fight against climate change as something they’d think about when putting together a portfolio. There is lots of opportunity to make your money work for you while making a constructive difference.

Take the steps from saver to investor

Many experts expect that the current economic environment characterised by low interest rates will last for a good while to come. Cash savings alone are unlikely to lead to growth. This is a critical point to consider when crafting your financial plan, and one that appears to be on the radar for savers: more than 60% of the survey respondents said they would consider investing in the future.

With investment, your capital is at risk.

This article should not be read as personal financial advice. Individual investors should make their own decisions or seek independent advice.

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