Question

Use the graphs of the Financial Planning Life Cycle and/or Robert Kiosaki's Cash Flow Student LoansSavings Investing Retirement Plans 401(k) (Open ended questions) Integrating the graphs and your knowledge of one or more of these concepts, offer a brief argument to a student peer about how they should proceed with their financial lives. (Example-How and why should you save for retirement.)

Answer 1

Financial planning is the process of achieving your life goals by using different investment options with your current resources through proper and disciplined money management. So Financial Planning is not only about money, but it is all about life, about fulfilling your wishes, dreams, aspirations and your success in achieving them.

There are 3 major components in the Financial Planning process:

Current Resources (CR)

Investment Options (IO)

Financial Goals (FG)

Financial Planning: CR + IO = FG

The Financial Pvramid The Financial Pyramid is the most essential part of the Financial Planning process. The Financial Pyramid is the only picture to help you understand the necessary steps to reach Financial Freedom. Wealth Creation Debt Reduction Emergency & Debt Planning Emergency Fund Insurance (protection) Net worth, Cash Flow, Risk Tolerance Goal Protection/Risk Management Foundation of Planning Ideal Foundation Insurance (Savings+Protection) The following process is important in Financial Planning Protection Planning(Insuance) Emergency Cash Flow Planning (Emergency Fund) Debt Reduction Planning (Loan) Investment Planning (Achieving Goal) Investment Risky Foundation

Protection:

The main purpose of insurance is to provide protection against any unseen eventuality or financial replacement.

So one needs adequate Life, Disability, Accidental, Hospitalization and Critical Illness Insurance. Without proper protection, financial plan is at risk, because it is the foundation of the Financial Pyramid.

Emergency Funds:

In financial planning after protection Emergency Fund plays an important role. The purpose of it is to help individuals in their bad time.

Debt Reduction Planning:

Transferring existing high interest loan balance to low interest loan. Lowering the interest rates will in turn reduce EMI amount.

This will automatically increase your Net worth and improve your cash flow, as cash flow is important when it comes to building wealth.

Investment Planning:

Wealth Creation for Retirement, Child’s Education and Marriage, Dream Holiday.

Investment planning

Deciding the investment timeframes

Short Term investments:

Funds are invested for of a time period few days to one year

Medium Term Investment:

In medium term investment, the time period ranges from one year to five years.

Long Term investments:

In a long term investment, funds are invested for more than five years

Risk Profiling

Conservative Investors:

They take only minimal risk and are risk averse by nature

Moderate Investors:

They take moderate risk, they try to balance their risk and return more judiciously than the other two types of investors

Aggressive Investors:

They take high risk on investment in order to obtain high returns

Evaluating the market and the investment landscape

Human Capital And Financial Capital:

An individual’s assets are made up of two primary components, human capital and financial capital, which present unique risk management challenges.

Human capital is commonly defined as the mortality-weighted net present value of an individual’s future expected labor income.

Financial capital includes the tangible and intangible assets outside of human capital owned by an individual or household.

For example, a home, a car, stocks, bonds, a vested retirement portfolio, and money in the bank are all examples of an individual’s financial capital or financial assets.

Personal Assets:

Personal assets are assets an individual consumes/ uses in some form in his or her life.

Such assets may include automobiles, clothes, furniture, and even a personal residence.

In many cases, personal assets are not expected to appreciate in value, and they are often worth more to the individual than their current fair market value.

Investment Assets:

Investment assets are the components of an individual’s wealth that are often the easiest to identify and typically receive the majority of the attention from financial planners and investment professionals.

Investment assets extend beyond relatively tangible investment assets to include less tangible assets (such as an accrued defined benefit such as pension).

Some assets could be considered a “mixed” asset with both personal and investment characteristics.

For example: Real estate, Jewelry, stamps, and artwork

Designing an investment portfolio

Portfolio is a mix of real and financial assets because each financial and real asset has a different combination of risk and return.

The process of blending together broad asset classes so as to get optimum return with minimum risk is called as portfolio construction.

An appropriate mix of assets and financial assets determines overall return and risk exposure.

The right investment portfolio should balance risk, return, liquidity and tax benefits.

The proper goal of portfolio construction would be to generate a portfolio that provides the highest return and lowest risk. Such portfolio would be known as optimal portfolio. The process of finding the optimal portfolio is described as portfolio selection

Rebalancing portfolio

Rebalancing is the ultimate art and science of wealth creation. Rebalancing is the periodic adjustment of portfolio to protect current gain with effective risk management to achieve financial goal.

Rebalancing important because the market may move up and down in different situations, which is quite natural. The main reason for rebalancing is to protect the current equity valuation when the market rise and buy equity when the market fall based on the market conditions.

Rebalancing portfolio on a regular basis maintains the desired return in investment strategy. It is one of the important key for effective risk management.

Financial planning process:

Establish and define the relationship with the client Review the client's situation Collect the client's information Implement the financial planning recommenda tions Analyze and assess the client's financial status Develop the financial planning recommendatio ns and present them to the client