By FPA member Christine Parker, CFP®
Last Updated: June 1, 2010
Financial planning is important to many working women because they want to maintain a healthy life-style in retirement.
Listed below are eight basic gardening principles for growing a healthy garden which help illustrate sound savings and investing principles for growing a healthy retirement too.
Prepare your garden landscape: Before planting the first seed, pre-planning and preparation are needed to grow a healthy garden.
Similarly, before investing the first retirement dollar, you need to put your financial house in order and create a financial plan for retirement. Initially, organize your records, prepare a current spending plan and a future retirement spending plan, define your financial goals and objectives and calculate how much saving is needed to maintain a health life-style in retirement.
My Garden: Your garden is unique and may include a variety of plants, herbs, flowers, fruit or vegetables. Think of these as your main garden "asset classes."
In investment planning, the main investment "asset classes" include: cash (cash equivalents), fixed income (bonds and certificates of deposits) and equities (company stocks). Decide what percentage of money to invest in each investment asset class — this is your asset allocation model. Your custom asset allocation model is designed based upon your overall financial goals and objectives, time horizon and tolerance for risk. Some retirement plans offer online tools to help you determine your asset allocation strategy.
Diversify your garden: If you decided to grow a herb garden, most likely you would not plant just basil. You would diversify your garden by planting a variety of herbs such as basil, thyme and oregano.
In the same way, carefully diversify your money by investing into different investments within each asset class. The SEC's Beginners' Guide to Asset Allocation, Diversification and Rebalancing says, "the practice of spreading money among different investments to reduce risk is known as diversification."
There are literally thousands of investments that could fill each asset class, but don't fret, most retirement plans narrow the choices down to a few mutual funds or exchange-traded funds (ETFs) to help you create a diversified investment portfolio based upon your overall asset allocation model.
Each mutual fund or ETF is simply a group of individual investments combined together into a basket of sorts. A good gardener, would never blindly plant a seed without knowing what was going to grow and you should never blindly invest either. Take a closer look at what you really own — for that, look inside the fund's prospectus for the investment philosophy and strategy, list of current holdings and operating expenses, among other important information.
Risky business: Some garden vegetables are easy to grow with minimum risk while others that are more prone to climate, disease, pests, drought and natural disasters have greater risk.
Accordingly, all savings and investing strategies have some level of inherent risk. There are many different types of risks that can affect your investments and derail you from achieving your financial goals and objectives. Learning more about them will help you be better prepared to make informed financial decisions.
Good companions: Certain types of plants grow well near each other and some don't.
Another reason diversification is important is that some investments are positively correlated (move in a parallel relationship) and others are negatively correlated (move in an opposite relationship). As the value of one investment decreases the value of another may increase. Diversifying among non-correlated investments actually makes good companions because it helps smooth out the ups and downs of investing.
Hardiness zone: Tropical flowers require the appropriate temperature and sunlight to blossom.
Identifying the ideal geographic locations for your investments is important too. Decide if you want to invest only in the United States or diversify by adding a mix of international investments. Consider developed countries or emerging markets.
Gardening essentials: All healthy gardens need the proper amount of water and sunlight to grow.
To help ensure a healthy retirement, you will need to save and invest regularly during your work years. Plan to save between 10 to 20 percent of your gross income for retirement.
Soil cultivation: Each year, soil is cultivated to prepare for the annual planting season in hopes of growing a healthy garden.
At least annually, you should rebalance your retirement investment portfolio to your current strategic asset allocation model and re-evaluate your financial plan to see if you are on track to meet your financial goals and objectives for a healthy retirement.
FPA member Christine Parker, CFP®, is President of Parker Financial, LLC; the first woman-owned fee only registered investment advisory firm in Charles County, Md. Parker is a personal finance writer and author of 2-LIVEWELL, a financial planning blog for women of Southern Maryland. Parker specializes in helping women business owners and executives plan well to live well at every major milestone.