Sunday, February 10, 2019

The 4 Ps of personal financial planning

Someone's sitting in the shade today because someone planted a tree a long time ago.
Warren Buffet
Personal financial planning is a very important aspect of every individual’s personal life. Simply put, it is just the process of developing a roadmap for your financial well being – now, tomorrow and well into the future. When it is done well enough, it helps you in achieving your goals and your dreams, but more importantly it helps you navigate life’s ups and downs by overcoming the financial barriers that are an inevitable part of everyone’s life journey. This aspect of personal financial planning is rarely visible in public though. What is starkly visible however - mostly amongst your friends, neighbors and families - are the financial difficulties that arise in their lives due to lack of adequate financial planning and the discipline to stick to the plan in cases where a plan may even exist. These are the people who due to their own laziness or indiscipline or both land themselves in financial quicksand and then cover themselves with debt of all kinds - credit cards, personal loans, business loans, overdrafts and even loans from friends and families - to try and get out of it. If such people are lucky to have the benefit of good financial advice they do come out of their financial distress over a period of time. Else they continue sinking deeper into the financial hole which they have dug for themselves with each passing day.

The irony is that personal financial planning is not a difficult process at all. It is very easy and to make it even simpler to remember and etched into your memory I have codified it into a pyramid named the “The 4 Ps of personal financial planning” as shown below.

Provision: This is the first P of personal financial planning and is at the bottom of the pyramid. It is mostly applicable in your early years when you are young and preparing for a career although it can be applied all throughout your lifetime. It calls for making an investment in yourself i.e. educating yourself with the knowledge and the skills that will enable you to make your mark in society. It is equivalent to planting a seed that will grow into a tree someday. This is the stage in your life when you are in the red, when you have no personal wealth unless you are blessed with an inheritance. Hence the best thing to do at this stage is to build large provisions of knowledge and skills that will enable you get a job and earn an income. As you increase your knowledge and skills and grow in your career your income will grow and after providing for your expenses it will enable you to start building a nest egg, which will be the start of your wealth creation process.

Prevention: The second P of personal financial planning lays emphasis on preventing any illness that may come in the way of your ability to earn regular income. In this phase you invest in your health and hence you need to focus on best health practices – such as a healthy diet and regular exercise – but also supplement it with a good health insurance plan just in case some illness were to afflict you, god forbid. A good health plan not only pays for the cost of your hospital stay but also gives you cash for out of pocket expenses when you are ill. Most importantly it ensures that for a small fixed amount every year, your growing nest egg is prevented from being dented by a significantly large medical bill. 

Protection: The third P of personal financial planning is applicable when you have got married and started planning for a family. At this phase in your life you find that you have dependents, whose financial well being depends on you. This creates an additional financial obligation on you but most people do not realize it and those that do are inevitably late. Financial wizards have created a solution for this problem too and it is called life insurance. In this phase you invest in your peace of mind which ensures that for a small amount every year your life remains protected and that in the event of your untimely demise your dependents can continue to enjoy the financial well being that you had planned for them. Life Insurance products are often sold bundled together with investment plans in the name of endowment policies, ULIPs, etc. It is a best practice to always separate insurance from investments so that each product can work for you for the specific purpose for which it is designed. 

Profusion: The final P of personal financial planning is the one that focuses on multiplying your nest egg. In this stage you invest for your future. The future is not only uncertain but it is paved with ups and downs. The future also holds the key to your goals, your aspirations and your dreams. Realizing this fact early on in life will compel you to plan for the future by investing your nest egg in such a way such that your goals may be achieved without undue stress on your finances. There are multiple investment products available for multiplying your nest egg, ranging from fixed income products such as fixed deposits and bonds to equity products such as stocks, futures and options. Mutual funds are a convenient way of investing in these products since they not only reduce the ticket size abut also provide useful combinations of these products bundled together in a single fund. 

What to Do

If you have incorporated one or more of the above elements into your personal financial plan, you are already ahead of your peers. If not, it is better late than never that you start as soon as possible. Assess where you stand today and then if you need help, engage the services of a Registered Investment Adviser (RIA) to help you navigate the complex world of investments and select the ones that are best suited for realizing your financial goals. Your Investment Adviser will understand your financial goals, assess your risk profile, calculate the optimal asset allocation mix for your needs and then create a financial plan for you that is aligned with your needs. A regular review of this plan with your adviser will ensure that you stay on top of the financial markets and in control of your own financial dreams!

Happy Investing.

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