Five Essential Pillars of Financial Planning

We all have dreams, aspirations, and goals that motivate us to work hard and earn money. The money so earned is then invested in various investment tools to earn the best possible returns. People, most often, make haphazard decisions and put their money into various options without even understanding if it really suits them. For example, few people may follow their colleagues or friends, while many others may follow their relatives, neighbors, etc. while making investment decisions. The result is a highly mismanaged portfolio that leads an investor to a confused state of mind. In such a state, the investor is not sure if the portfolio is suitably structured. This blog helps you make a comparison between the track you should have followed and the track you’re actually following thereby helping you find the gap in the implementation of your investment decisions.

Think of a number that you consider lucky or important for you. It can be any number starting from 1 to 100 or even more. But, what if you realise today that the most important number in your life is actually 27,000. This must be surprising for you, but 27,000 is the most important number in your life since this is the number of days a person lives on an average. Converted into years, it comes to 75 years approx. For better understanding, let us round it off to 80 and divide it into 4 parts (please refer the picture below):

1.  The first phase 0-20 years – where we perform childhood activities like study, play, fun, etc
2.  The second phase 20-40 years – where we go through events like the first job, first house, the first vehicle, marriage, and children.
3.  The third phase 40-60 years – where we progress in a few of the activities and move to the job promotions or job change, additional property, change of vehicle, etc. While a person is going through this phase, his/her children complete the first phase of their life.
4.  The fourth and the last phase 60-80 years – where we go through only one event and that’s retirement.

Kindly note that in the first phase (0-20) and the last phase (60-80) you have NO INCOME. So out of 27,000 days, almost half of the span goes inactive and you are left with 13,500 days to work towards your dreams, aspirations, and goals related to yourself and your family. Let us assume your current age is 40 years. In this case, you are left with just another 20 years or approx. 7,000 days to work towards your goals.

This remaining period (from your current age to retirement age) comes with certain fears in your mind, which may be listed as under along with their respective solutions:

What would happen if I don’t reach 60?
        - Plan for INCOME PROTECTION for your family
What would happen if I cannot work till 60?
        - Plan for INCOME PROTECTION and WEALTH PROTECTION
What would happen if I don’t have a reserve for contingencies/emergencies?
        - Plan for FINANCIAL EMERGENCY
What would happen if I am left with little or no money after 60?
        - Plan for your RETIREMENT
What would happen if I could not save enough for my children’s higher education?
        - Plan for your CHILDREN’S EDUCATION

Now, let’s address all these concerns in brief:

1. What would happen if I don’t reach 60?

If you are the sole bread earner of your family, you need to address this concern on top priority. Your sudden disappearance may leave your family in various financial troubles. As a result, they may start liquidating investments meant for other long-term goals, which you won’t prefer at all. Hence, buy an INCOME PROTECTION PLAN for your family.

2. What would happen if I cannot work till 60?

This situation may arise due to a prolonged or permanent illness or disability that may arise with anyone in the family. It may cause erosion of wealth in the treatment of such illness or disability and liquidating investments that were meant to address various other goals. This requires you buy an INCOME PROTECTION PLAN for yourself and WEALTH PROTECTION PLAN for the entire family.

3. What would happen if I don’t have a reserve for contingencies/emergencies?

This situation may arise due to a job loss or prolonged illness or a national emergency such as a war or Covid-19. Set aside an amount equivalent to 1-2 years of your household expenses in fixed income options so that you are not required to redeem your investments meant for other goals.

4. What would happen if I am left with little or no money after 60?

A phase where you have fulfilled almost all your responsibilities. Think of a situation where you are left with no choice in this phase, but work more to earn to meet out your regular expenses. In this phase, you won’t like to be dependent on anyone to meet your regular expenses. Hence, the next step is your RETIREMENT PLANNING to avoid such a scenario.

5. What would happen if I could not save enough for my children’s higher education?

The best education for children is the dream of every parent and you are not an exception. The last step towards addressing your financial concerns is planning for your CHILDREN’S EDUCATION and you have just two choices to address the same – 1) Save money, earn interest/returns and pay for your children’s education; and, 2) Borrow money, pay interest, and pay for your children’s education. Now think as to which one will you prefer.

The sequence is followed here logically and the concerns/fears listed above ‘must be addressed’ in order. E.g., if a person (here the main earner of a family) doesn’t plan for INCOME PROTECTION for his/her family and leaves suddenly without planning for immediate family expenses, the family may start liquidating investments that were made to address CHILDREN’S EDUCATION or other goals. Similarly, if you don’t plan to protect your regular income and wealth against sudden medical emergencies, it may result in wealth erosion towards the treatment of the illness/disability that has caused you to stay away from work. So don’t ignore the sequence and follow it in order of importance.

Conclusion

Financial planning is a diversified concept and offers no thumb rule. However, there are few pillars (concerns) listed above that are just similar to the foundation of a house named financial planning. Once you address all of these concerns, you will find yourself in a more commanding position to plan for other goals like the purchase of a new vehicle or replacement of your old vehicle, buying a new or a bigger house, planning for distant or overseas vacations and the list goes on. There is no 6^th concern that may leave you sleepless for nights. You may compromise on any other financial aspect, but not with the ones listed above. E.g., you may choose to live in a relatively smaller house or a rented one instead of owning one. Similarly, you may postpone your travel plans or may choose to travel to nearby destinations instead of a distant one. But, as an example, you cannot afford to compromise on your family’s financial status or the quality of your children’s higher education.

Please leave your comments and feel free to ask questions.

- Adarsh Sharma
Founder
7 Eleven Money
Web: https://www.7elevenmoney.com
Whatsapp: +91-7900844844