While proper financial planning is a subject in itself, in my experience, to increase levels of financial safety and security, a person needs to avoid a few basic mistakes. Financial planning today has become one of the most important aspects of life as we know it. Every single person from high ranking officials like CEOs, COOs to housewives all know that it is critical to plan their finances for a better life not just for them but for their loved ones. Till about couple of decades ago, life was simple, needs and wants were few, all one needed was to get a job to raise a family and most of the needs (both short as well as long term) were met through the salary one earned and maybe a paltry / low amount of savings in fewer and simple financial products. However, today the world has changed tremendously. Needs and wants have increased and the costs associated with them are continuing to increase year after year resulting in people beginning to understand the importance of planning for the future. This has brought to the forefront the need to start making sacrifices during the early phases of one’s professional career to work towards building that corpus for a secure and comfortable retirement many years down the line. Economic cycles are becoming shorter and with inflation here to stay, financial instruments are getting more complex. The need for proper financial planning for one’s future to safeguard from financial worries is becoming more and more important as time goes by.
A typical financial planning has four stages:
1. Wealth Accumulation
This is the most crucial phase of the financial life cycle, as we see financial discipline comes with a regular habit and not with a casual approach towards savings. One has to be aware of financial discipline and shall keep a check on earnings and expenditure so that a space could be made to save something out of regular earnings.
These small earnings in the initial phase will plant a seed of wealth creation in the longer term which can germinate into a huge tree which will provide you shade as well as fruits at a later stage of life. This huge tree will not only give you comfort but also safegaurd your family and loved once from many forthcoming events.
2. Growth of wealth accumulated
Growth of wealth is as important as accumulation of wealth is, if your accumulated wealth is not growing at a pace better than the prevailing inflation rates then your purchasing power is surely going down the drain despite accumulating wealth at the right time you might not be able to accomplish in future for what you have accumulated this for.
So what do we need to do? One should be cognizant of this fact that choice of right investments instruments and products is very important. This also has a set of rules that one should not miss to follow, however one thing which is most important is asset allocation i.e distribution of wealth among various assets like debt, equity and bank deposits, which will not only assure growth of assets but also safeguard your investments during volatile times and mitigate the risk of single asset poor performance.
3. Protection of Assets created and wealth generated.
Now once you are done with accumulation of wealth and also when it is growing at a steady pace then what risk is there to them? No, there is a risk! Risk of loss of life of breadwinner, risk of damage to real assets under circumstances of natural calamity, risk of theft of physical assets and so on and so forth. Protection of assets and life by having adequate insurance and hedge against various risks of fluctuation in market and currency is advisable.
4. Distribution of Assets and Wealth
What you have created, made and protected in the above three stages of life is very important to you and you know the hardship you have gone through while doing so and of course you do not want your legal heirs to ruin your vision and assets you have created which is such a great effort. So this 4th stage comes to your rescue and guides you on how you can distribute your wealth by organizing a trust, will or a succession plan. So that coming generation could cherish the assets you have left for them and respect you for organising it so well.