Have you ever wondered why so many of us struggle financially?
We often find ourselves worrying about how to make ends meet. And we do so more than our parents ever did, even though our salaries are much, much larger than theirs! The short answer is as life becomes more complex it grows more expensive because of the inexorable march of inflation.
BOTTOMLINE:
We all need to learn to manage our money intelligently. Unfortunately, this crucial life skill is absent from our school curriculum. That is where financial planning for adults comes in. In my opinion, an early definition of financial planning from the Certified Financial Planner Board of Standards’ website is illuminating: “Financial planning is the process of meeting your life goals through the proper management of your finances.”
REREAD THAT 17-WORD DEFINITION
Itis obvious the responsibility for selecting our own key life goals falls squarely on our shoulders. We must choose what is important to us. The responsibility for our financial well-being is our own. Our employer does not owe us a living; our government does not owe us a living; and the world, most certainly, does not owe us a living.
The only people who still believe some external agency should take care of our future selves, particularly once we stop working, are closet communists and naive socialists who do not understand how our cold, cruel world works.
So far, I’ve painted a sombre picture, but it isn’t all bad news. Proactive, intelligent adults who take personal responsibility for their own and their family’s long-term economic well-being can harness the many tools of financial planning to craft solutions for the three dove-tailing elements of a complete personal financial plan:
• 1. Wealth Protection
•2. Wealth Accumulation
• 3. Wealth Distribution
When I teach these lessons to my financial planning clients and to my workshop, seminar and conference attendees, I remind them that the legacy of the late, great Steve Jobs has resulted in many of us today using Apple iPads as key tools for personal productivity, communication and entertainment. Thinking of the iPad’s name, then dropping the ‘i’ gives us an easy way to remember those three elements.
Using the acronym P-A-D for Protection-Accumulation-Distribution is a quick way for a person to tick off a mental checklist of what has been done well thus far and what needs to be accomplished to ensure nothing falls through the cracks.
The key instruments for Wealth Protection are life insurance and general insurance. However, there is a facet of Wealth Accumulation — diversification — which leaches out to also provide some Wealth Protection by sternly prohibiting us from putting all our precious, fragile eggs in one basket!
Wealth Accumulation may be accomplished through saving, investing and speculating. As far as my clients are concerned though, I only advocate and facilitate the first two endeavours. As mentioned, ensuring sufficient diversification comes into play when deciding on the specific assets and the selected asset classes to use when building our wealth portfolios is a wise way to optimally grow long-term riches.
Wealth distribution, most notably from one generation to the next, is achieved through the judicious use of wills and trusts.
If you are like most of my clients and students, the element that most interests you is Wealth Accumulation. If that is true for you, I suggest you mull over these three most common financial goals shared by most adults: Funding…
• 1. A golden retirement for you and your spouse so you will be comfortable in old age;
• 2. Your children’s tertiary education to ensure they expand their horizons and maximise their opportunities to work anywhere they like; and,
• 3. General wealth accumulation initiatives to build excess wealth to help you and your family deal with the vagaries of life and the uncertainties of tomorrow. The goal of this new column is to guide you and your loved ones in understanding the sometimes arcane, always valuable principles of financial planning. Happy learning!
© 2015 Rajen Devadason
The writer, Rajen Devadason, CFP, is a Securities Commission-licensed financial planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com. Connect with him on LinkedIn at www.linkedin.com/in/rajendevadason, follow him on Twitter @RajenDevadason or email him at rajen@RajenDevadason.com.