Personal Finance Planning Essay

Submitted By megansimmons91
Words: 780
Pages: 4

Personal Finance Planning
Finance 527

Megan Simmons
Southern Illinois University Edwardsville

I am currently a 23-year-old still living with my parents and two younger siblings. I am employed by Alton Steel, Inc. as a business analyst. Only two years out of college, my net worth is $60,000. I have no student loans, no rent, and no car payment, placing me in a good situation in terms of investments. I currently do not know what my future holds as my future plans are up in the air.
When determining my personal finance plans, it is important to consider my degree of risk aversion. My personal risk appetite is dependent on two main factors. First, risk capacity, or how much risk it will take to reach my goals. Second, risk tolerance, or how much risk can I afford to take. Other smaller factors include income, age, wealth, time horizon, and risk attitude for my investment plan.
I personally have long-term goals because my current living, career and schooling situations are stable and I have a flexible time horizon. I would consider myself risk neutral because I am indifferent to risk; I am more concerned with the return on my investment than the risk I am taking on. Because of this, I prefer to put my money into investments that are more likely to give me returns, like shares, that have the risk of decreasing prices. Since I have a longer time frame, I have more recovery time if my investment value declines. That being said, as my goal gets closer, the risk balance will change and I will most likely start moving into less volatile assests to protect against market fails. Though risk attitude is subjective, I prefer to take the risk of losing money if there is a possibility of a greater return. My personal opinion is to diversify my investments to keep my risks in line with my risk appetite.
My current salary is $40,000. Based on my salary, and since there is no employer match, I want to make a 6 percent contribution to my 401K, or about $2400 each year, so by the time I am 65 years old, my account will be worth more than $1 mil. Regular contributions made early on are worth it to have a robust retirement savings account.
My age and time horizon help determine my appropriate asset classes. The three asset classes I have chosen to invest in are equities, fixed income and money market. Since equities tend to see higher returns than bonds, I have decided to keep 35 percent of my portfolio in large-firm stocks, 20 percent in small-firm stocks and 20 percent in foreign stocks. Bonds are more stable than stocks and pay regular interest, but have a credit risk and interest rate risk, among other risks, so I have decided to keep only 15 percent in bonds. Lastly, I have decided to keep 10 percent of my portfolio in money market investments like CDs, because they are short-term liquid investments and are moderately safe. Money market asses are less volatile than both stocks and bonds and have a lower potential…