Many people thinks that financial planning means various investment options and returns they are giving. But in this process of investments and returns we normally forget the prudent and methodical way of building your personal financial plan.
Following are the stages of making financial pyramid:
STAGE I: Risk Management
A strong pyramid gets its strength from its base. Risk management builds the base of one’s financial pyramid. A strong or perfect financial plan should concentrate on managing the unexpected risks or emergencies of life. Most common emergencies or risks in one’s life are job loss, health related or risk of life. If you have not made arrangements for managing these risks then you have to spend your accumulated wealth during these emergencies. But we accumulate wealth to achieve our financial goals. So one has to ensure that they have a healthy emergency fund. adequate life insurance cover and medical insurance cover. And during this process one should consider his past financial decisions like past insurance policies, liquid or illiquid assets one hold.
STAGE II: Wealth Protection and Wealth Builder
This stage must concentrate on building a road map for converting our dreams into reality. The investments should always be directly proportionate to your goals. We have to make a balance between the risk and reward of the investment choice being made by us. Balancing the risk and reward would require us to define a well-diversified portfolio. You should avoid over exposure to single asset class. One has to be realistic while setting the goals and relevant expected returns from the investments being made to achieve the goals. It is generally opt for a monthly investments. It induces the required financial discipline in your life.
STAGE III: Wealth Multiplier
This is the stage where one can take higher risks when it comes to making investments ideally. This is so because as you reach this stage your uncertain events are managed , monthly savings are being made towards achieving their goals and yet have additional surplus. High risk investments, higher the probability of incurring losses. As these high risk investments are made only after taking care of risk management and goals, any potential loss in such investments would not impact your ability to achieve your goals.