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Why financial planning is a must for you!

Most people, when they think of financial planning, think investments.

Some also feel it has to do with mutual funds and insurance. Honestly neither of it is true.Financial planning is all about channelizing "your" financial resources (income and wealth) towards "your" financial goals.

Two sources of income:

As individual/family you have two sources of income.Income generated because of you being 'human capital'. All of us who work for money are human capital. A worker works so s/he earns salary. Similarly an entrepreneur earns profit because s/he uses her/his enterprising skills.

Second source of income is from your financial and real capital.

If you have invested in a fixed deposit, you earn interest. If you have shares and stocks than you get dividend and if you have additional real estate (other than for your self-consumption, like your home) and if you have leased it out than you get rentals.

These financial resources need to be channelized towards your financial goals. You all have financial goals. If individuals/families have no goals in life than there is no need to save.

Financial goals are those responsibilities and dreams in life for which you want to save. All of ushave responsibilities in life.

Typical Indian families share the responsibility of saving for the house, children's education and marriage, parental and siblings' responsibilities and retirement. Of course these are a few common ones and may vary from family to family.

Dreams of all families are varied. Some want a home theatre, a luxury car or a foreign vacation. There could be some who dream of latest interiors and there are others who want to save for gizmos.

Financial planning is to divert your financial resources towards your financial goals.

Create a contingency reserve:

While structuring any kind of financial plan, ensure you first create wealth protection strategies to protect your wealth from perils. You must set aside funds towards creating contingency reserve and purchase of health, disability and life insurances.

Also, you have to protect your assets like house, car, jewellery and other household things. Wealth protection has to be the base of any financial planning activity. If your base is weak the entire building of wealth can collapse anytime.

Focus on wealth accumulation:

After protecting your wealth, you must focus on wealth accumulation. This means saving and investing for your responsibilities and dreams in life.

Depending on your financial goals like buying a house, children's education and marriage, retirement choose various asset classes like debt, equity and property. You may also choose an investment vehicle that suits your requirement, like a mutual fund, portfolio management services etc.

If you start accumulating wealth without protecting it, then your wealth will be susceptible to a variety of risks and you may have to erode your capital/wealth if any untoward incidence takes place.

Wealth Distribution is important too:

Lastly, develop wealth distribution strategies. During your retirement, you will be surviving on the corpus created by you. You will partly live on returns from the corpus and partly on capital. This is the distribution phase of retirement.

Also, after your Life wealth you have created needs to be distributed to your near and dear ones.

Always remember the flow of financial planning…

first wealth protection, next wealth accumulation and, lastly, wealth distribution.

Financial Planning is just not about savings and investment:

Many of us misunderstand financial planning as investment planning and directly jump to savings and investment. Suppose if you do not have a good health protection strategy and if there is major illness or job loss than you will have to bank on all the wealth that you have accumulated till then.

Similarly, imagine you have good wealth protection strategy. You have contingency reserves. However, you did not concentrate on savings/investing. This means you straightaway moved from wealth protection to wealth distribution.

Since you did not follow the flow and did not accumulate wealth, when you reach retirement, there may not be anything to distribute. You may have to depend on your near and dear ones.

Now imagine a situation where you distributed all your wealth to your children during your lifetime and suddenly, after your retirement, and then you suffer from a major illness.

You have not made provisions for a contingency reserve; neither does your health insurance cover the disease. You will have to go to your children and solicit help. This is what happens when you distribute wealth without proper wealth protection.

Any which way you consider it, if you want to create and preserve wealth, then the only way to follow is Wealth Protection-Accumulation-Distribution.

Please Call / Mail me for further details / clarifications.

Prasanna M Kumar @ + 91 96760 28814 or mail me @ prasanna@fincarecapital.com

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