What Is an Investment?

One of the reasons many people fail, even very woefully, in the game of investing is that they play it without understanding the rules that regulate it. It is an obvious truth that you cannot win a game if you violate its rules. However, you must know the rules before you will be able to avoid violating them. Another reason people fail in investing is that they play the game without understanding what it is all about. This is why it is important to unmask the meaning of the term, ‘investment’. What is an investment? An investment is an income-generating valuable. It is very important that you take note of every word in the definition because they are important in understanding the real meaning of investment.

From the definition above, there are two key features of an investment. Every possession, belonging or property (of yours) must satisfy both conditions before it can qualify to become (or be called) an investment. Otherwise, it will be something other than an investment. The first feature of an investment is that it is a valuable – something that is very useful or important. Hence, any possession, belonging or property (of yours) that has no value is not, and cannot be, an investment. By the standard of this definition, a worthless, useless or insignificant possession, belonging or property is not an investment. Every investment has value that can be quantified monetarily. In other words, every investment has a monetary worth.

The second feature of an investment is that, in addition to being a valuable, it must be income-generating. This means that it must be able to make money for the owner, or at least, help the owner in the money-making process. Every investment has wealth-creating capacity, obligation, responsibility and function. This is an inalienable feature of an investment. Any possession, belonging or property that cannot generate income for the owner, or at least help the owner in generating income, is not, and cannot be, an investment, irrespective of how valuable or precious it may be. In addition, any belonging that cannot play any of these financial roles is not an investment, irrespective of how expensive or costly it may be.

There is another feature of an investment that is very closely related to the second feature described above which you should be very mindful of. This will also help you realise if a valuable is an investment or not. An investment that does not generate money in the strict sense, or help in generating income, saves money. Such an investment saves the owner from some expenses he would have been making in its absence, though it may lack the capacity to attract some money to the pocket of the investor. By so doing, the investment generates money for the owner, though not in the strict sense. In other words, the investment still performs a wealth-creating function for the owner/investor.

As a rule, every valuable, in addition to being something that is very useful and important, must have the capacity to generate income for the owner, or save money for him, before it can qualify to be called an investment. It is very important to emphasize the second feature of an investment (i.e. an investment as being income-generating). The reason for this claim is that most people consider only the first feature in their judgments on what constitutes an investment. They understand an investment simply as a valuable, even if the valuable is income-devouring. Such a misconception usually has serious long-term financial consequences. Such people often make costly financial mistakes that cost them fortunes in life.

Perhaps, one of the causes of this misconception is that it is acceptable in the academic world. In financial studies in conventional educational institutions and academic publications, investments – otherwise called assets – refer to valuables or properties. This is why business organisations regard all their valuables and properties as their assets, even if they do not generate any income for them. This notion of investment is unacceptable among financially literate people because it is not only incorrect, but also misleading and deceptive. This is why some organisations ignorantly consider their liabilities as their assets. This is also why some people also consider their liabilities as their assets/investments.

It is a pity that many people, especially financially ignorant people, consider valuables that consume their incomes, but do not generate any income for them, as investments. Such people record their income-consuming valuables on the list of their investments. People who do so are financial illiterates. This is why they have no future in their finances. What financially literate people describe as income-consuming valuables are considered as investments by financial illiterates. This shows a difference in perception, reasoning and mindset between financially literate people and financially illiterate and ignorant people. This is why financially literate people have future in their finances while financial illiterates do not.

From the definition above, the first thing you should consider in investing is, “How valuable is what you want to acquire with your money as an investment?” The higher the value, all things being equal, the better the investment (though the higher the cost of the acquisition will likely be). The second factor is, “How much can it generate for you?” If it is a valuable but non income-generating, then it is not (and cannot be) an investment, needless to say that it cannot be income-generating if it is not a valuable. Hence, if you cannot answer both questions in the affirmative, then what you are doing cannot be investing and what you are acquiring cannot be an investment. At best, you may be acquiring a liability.

Private Banking Services Vs Retail Banking

Private banking is a much more personalized banking service given to individuals who invest substantial sums, typically over U$S1M. The most noticeable difference between retail and private banking services are that private clients receive customer service on a 1-1 basis via a relationship manager or a private banker. Wealthy individuals with private accounts can expect to meet their bank contact in person, and have direct phone access to a relationship manager. Usually the private banking arm of a bank is separate from the retail banking arm and the service is completely distinct.

A private bank is one that is not incorporated. Private banks are favoured by conservative investors because the directors are personally liable, and more likely to be cautious in managing client funds. Financial institutions like these are sometimes family owned and only cater to the very rich. One of the reasons why wealthy people choose them is their confidentiality – a pledge to maintain client records secret. For some it is a case of not wanting to be targeted by criminals, lawsuits or corrupt governments. Others use this secrecy to shield income from authorities like the IRS and evade tax.

Many of the world’s private banks are found in Switzerland because of the strict bank secrecy laws and sophistication of Swiss financial services. Small banks in countries like Switzerland are also more likely to keep their client records secret because they limit their operations to within the country’s bank secrecy laws.

Not only private banks offer private banking services – in fact some of the biggest providers of private banking and wealth management services like UBS, Credit Suisse and the Barclays are not privately owned. Private clients of these huge banks can take advantage of their in-house trading and research departments, and sometimes choose to have almost all their assets managed by the bank. This way they expect much higher returns than those given by a simple savings account or certificate of deposit.

Types of Private Banking Services

Usually only very affluent clients demand wealth management – where private bankers manage an investment portfolio for a family or an individual. The fee for this service varies from bank to bank and is charged yearly as a percentage of the total amount invested. The return of a portfolio will also depend on the standard of the private banking service. While some will provide excellent returns, others will continue to charge high fees while investing client funds in the bank’s own investment funds, regardless of whether or not this is beneficial to the client.

A popular alternative to wealth management is Self-Directed private banking, where the client manages his own portfolio, at times calling on advice from the bank. The advantages of this type of account are lower fees and greater personal control.

Why is Quality Banking Service Required?

A high interest savings account, free online checking accounts, and a detailed banking guide are all strong incentives to sign up with a particular bank, but if they don’t provide a high standard of banking service in core areas, none of the above will matter. Clients don’t make banking choices based solely on money; good customer care and quality service is just as important, if not more.

Because utilizing an online bank requires access to the internet, a primary service that should be provided is support for the typical browsers used on the internet. If clients are not able to do their personal online banking, then they are not likely to stay with the bank. Banks should ensure that their websites are accessible by the major browsers currently in use, and that updates to the browsers do not disrupt banking services when possible. The two major operating systems, Windows and Macintosh, should also be able to access the money processing online websites.

Good, top banking services is also about good customer service. When clients send emails requesting information or action, a prompt response is expected. Even though money processing on the internet does not involve face-to-face interaction, and even though banks are able to save money on the costs of running an online bank, good service should not be eliminated. A quality banking guide is a good start, but there needs to be a system in place for customer complaints and concerns to be resolved. If responses take too long or are unsatisfactory, then many users will be more likely to change to a traditional bank where they can receive better customer service.

The money processing on the internet industry is still very new and technology is changing rapidly all the time, meaning that every banking service provided should be relevant. An online bank that does not change its design and look over the years to become more responsive and current will not be successful. In addition to aesthetic reasons, not keeping up with technology will mean that the money processing internet services will not be as effective and may not even work.

Staying relevant and up to date is imperative for any online bank to survive. Each banking service mentioned is an important part of being successful in this new industry and with the new generation of bankers there will be little patience for a company that does not make its services clear and easy to use. To stay relevant, online banks should stay current with changes in technology and how the internet is used, while providing a high level of customer service. Doing this will keep clients comfortable with their bank and willing to explore other services available to them.

Role of Merchant Banking Services in Our Economy

Merchant banks found its origin in the early periods in the country of Italy by the Italian merchants. The main function of the merchant banking services include providing financial advice and services to corporate as well as individuals. These banks act as a sort of intermediary between capital issuers and the buyers of the securities. These securities are issued by different companies in the stock markets to raise funds.

The Necessity of Merchant Banking Services

The economy of the country is often afflicted with different unpredictable conditions like inflation, unemployment, stagnation and so forth. The need to sustain a steady growth is necessary for corporations and individuals which is possible only with a long term strategy and financial options. The merchant banking services provide solutions and financial options.

These banks provide advisor services to clients based on a particular fee. They also provide other financial services to mergers and clients. It is the only financial institute that invests its capital in the clients’ company. It acts as an intermediary between those who possess capital and those who need capital.

To help their clients with a number of financial options, the merchant banking services operate in a number of countries all over the world. In this manner the clients have the opportunity to survey the different financial options to ensure better growth.

Functions of the Merchant Banking Services

These banks have a number of functions and some of the most important among them include:

Raise funds: one of the main functions of this banker includes helping the clients’ company to raise funds from the markets. The banks help to manage equity offerings and debt. This function further includes underwriting support, pricing and marketing of the issue, stock exchange listing, allotment and refund, offer document registration and so forth.
Offer advisory services: these banks also offer advisory services to its clients for a proposed fee.
Security distribution: the functions of these banking services also include distribution of different types of securities like fixed deposits, equity shares, mutual fund products, commercial paper and debt instruments.
Aid in projects: these banks also provide aid in the projects undertaken by the clients by helping them to visualise the concept of the project. The feasibility of the project is also analysed by these banks. The clients are also given support to prepare project reports.
Overall financial reconstruction: the merchant banking services provide better financial options and solutions to the clients. They help the clients to raise funds through cheaper resources. With the aid of other financial institutions, these banks also help to revive the sick units of the clients’ companies.
Offer advice on management of risks: another important function performed by these banks includes providing timely advice on risk management. The merchant banker provides advice on different strategies adopted by the clients.
Today the merchant banking services provide a number of other services like loan syndication, credit acceptance, counselling of mergers and acquisitions, management of portfolio and so forth. They also assist companies with short term liquidity funds. In a nutshell, these banking services are indispensable as they support individuals and corporate to expand their business ventures.

A Beginner’s Guide to Insurance

Having the right kind of insurance is central to sound financial planning. Some of us may have some form of insurance but very few really understand what it is or why one must have it. For most Indians insurance is a form of investment or a superb tax saving avenue. Ask an average person about his/her investments and they will proudly mention an insurance product as part of their core investments. Of the approximately 5% of Indians that are insured the proportion of those adequately insured is much lower. Very few of the insured view insurance as purely that. There is perhaps no other financial product that has witnessed such rampant mis-selling at the hands of agents who are over enthusiastic in selling products linking insurance to investment earning them fat commissions.

What is Insurance?

Insurance is a way of spreading out significant financial risk of a person or business entity to a large group of individuals or business entities in the occurrence of an unfortunate event that is predefined. The cost of being insured is the monthly or annual compensation paid to the insurance company. In the purest form of insurance if the predefined event does not occur until the period specified the money paid as compensation is not retrieved. Insurance is effectively a means of spreading risk among a pool of people who are insured and lighten their financial burden in the event of a shock.

Insured and Insurer

When you seek protection against financial risk and make a contract with an insurance provider you become the insured and the insurance company becomes your insurer.

Sum assured

In Life Insurance this is the amount of money the insurer promises to pay when the insured dies before the predefined time. This does not include bonuses added in case of non-term insurance. In non-life insurance this guaranteed amount may be called as Insurance Cover.

Premium

For the protection against financial risk an insurer provides, the insured must pay compensation. This is known as premium. They may be paid annually, quarterly, monthly or as decided in the contract. Total amount of premiums paid is several times lesser than the insurance cover or it wouldn’t make much sense to seek insurance at all. Factors that determine premium are the cover, number of years for which insurance is sought, age of the insured (individual, vehicle, etc), to name a few.

Nominee

The beneficiary who is specified by the insured to receive the sum assured and other benefits, if any is the nominee. In case of life insurance it must be another person apart from the insured.

Policy Term

The number of years you want protection for is the term of policy. Term is decided by the insured at the time of purchasing the insurance policy.

Rider

Certain insurance policies may offer additional features as add-ons apart from the actual cover. These can be availed by paying extra premiums. If those features were to be bought separately they would be more expensive. For instance you could add on a personal accident rider with your life insurance.

Surrender Value and Paid-up Value

If you want to exit a policy before its term ends you can discontinue it and take back your money. The amount the insurer will pay you in this instance is called the surrender value. The policy ceases to exist. Instead if you just stop paying the premiums mid way but do not withdraw money the amount is called as paid-up. At the term’s end the insurer pays you in proportion of the paid-up value.

Now that you know the terms this is how insurance works in plain words. An insurance company pools premiums from a large group of people who want to insure against a certain kind of loss. With the help of its actuaries the company comes up with statistical analysis of the probability of actual loss happening in a certain number of people and fixes premiums taking into account other factors as mentioned earlier. It works on the fact that not all insured will suffer loss at the same time and many may not suffer the loss at all within the time of contract.

Types of Insurance

Potentially any risk that can be quantified in terms of money can be insured. To protect loved ones from loss of income due to immature death one can have a life insurance policy. To protect yourself and your family against unforeseen medical expenses you can opt for a Mediclaim policy. To protect your vehicle against robbery or damage in accidents you can have a motor insurance policy. To protect your home against theft, damage due to fire, flood and other perils you can choose a home insurance.

Most popular insurance forms in India are life insurance, health insurance and motor insurance. Apart from these there are other forms as well which are discussed in brief in the following paragraphs. The insurance sector is regulated and monitored by IRDA (Insurance Regulatory and Development Authority).

Life Insurance

This form of insurance provides cover against financial risk in the event of premature death of the insured. There are 24 life insurance companies playing in this arena of which Life Insurance Corporation of India is a public sector company. There are several forms of life insurance policies the simplest form of which is term plan. The other complex policies are endowment plan, whole life plan, money back plan, ULIPs and annuities.

General Insurance

All other insurance policies besides Life Insurance fall under General Insurance. There are 24 general insurance companies in India of which 4 namely National Insurance Company Ltd, New India Assurance Company Ltd, Oriental Insurance Company Ltd and United India Insurance Company Ltd are in the public sector domain.

The biggest pie of non-life insurance in terms of premiums underwritten is shared by motor insurance followed by engineering insurance and health insurance. Other forms of insurance offered by companies in India are home insurance, travel insurance, personal accident insurance, and business insurance.

Buying Insurance

There are an umpteen number of policies to choose from. Because we cannot foresee our future and stop unpleasant things from happening, having an insurance cover is a necessity. But you need to choose carefully. Don’t simply go with what the agent tells you. Read policy documents to know what is covered, what features are offered and what events are excluded from being insured.

1. Know your Needs

Determine what asset or incident must be protected against loss/damage. Is it you life, health, vehicle, home? Next determine what kinds of damage or danger exactly would the assets be most probably be exposed to. This will tell you what features you should be looking for in a policy. Of course there will be losses which cannot be foreseen and the cost of dealing with them can be very high. For instance nobody can predict that they’ll never suffer from critical illnesses no matter if they’re perfectly healthy at present.

The biggest mistake while it comes to buying insurance, particularly life insurance is to view it as an investment. Clubbing insurance and investment in a single product is a poor idea. You lose out on both fronts because for the premiums you’re paying more cover could’ve been got in a term plan and if the premiums were invested in better instruments your returns could’ve been several times more.

Be wary of agents who want to talk you into buying unnecessary policies like child life insurance, credit card insurance, unemployment insurance and so on. Instead of buying separate insurance for specific assets or incidents look for policies that cover a host of possible events under the same cover. Whenever possible choose riders that make sense instead of buying them separately. Unless there is a fair chance of an event happening you do not need insurance for it. For instance unless you are very prone to accidents and disability due to your nature of work or other reasons you do not need an Accident Insurance policy. A good Life Insurance policy with accidental death rider or waiver of premium rider or a disability income rider will do the job.

2. Understand Product Features and Charges

The worst way of choosing an insurance product or insurer is to blindly follow the recommendation of an agent or a friend. The good way to do it is to shop around for products that suit your need and filter out the ones offering lower premiums for similar terms like age, amount of cover, etc. All details you need about the product features and charges will be provided on the company’s website. Many insurance policies can now be bought online. Buying online is smarter because premiums are lower due to elimination of agent fees. If buying offline in case of life insurance, tell the agent that you’re interested only in term insurance.

Before you sign on the contract make sure you have understood what items are covered and what items are exempted from the cover. It would be so devastating to learn in the event of damage or loss that the item you hoped to cover with the insurance was actually excluded. So many people rush to their insurers after being treated for diseases only to realize that the particular disease was excluded. Understand details like when the cover begins and ends and how claims can be filed and losses be reported.

Don’t choose an insurance company because your neighbourhood friend is their agent and never let them coax you into buying from them. Insurance premiums run for years and it means a sizeable amount of money. Apart from the premiums charged look for the service provided. When you are faced with a peril you want the claims collection processed to be complicated with non-cooperating staff in the insurance company’s office. Seek answers from people who have had previous experience with the company for questions like how customer friendly and responsive the company is when it comes to handling claims.

3. Evaluate and Upgrade in Time

As you walk from one life stage to another or when the asset insured changes your policies must be reviewed. Perhaps your cover will need to be increased (or decreased) or you’ll need to top it up with a rider. Some instances when you need to review your cover are when you getting married, when you have children, when your income increases your decreases substantially, when you’re buying a house/car and when you’re responsible for your ageing parents.

40+ Home Insurance Savings Tips

Your dwelling is often your most precious asset that you need to protect. We created a list of all savings opportunities associated with Home insurance. This list is the most complete perspective on home insurance savings tips. Numerous insurance brokers contributed to this list. So, let’s start!

1. Change your content coverage: Renting a Condo? You can often lower your content coverage. No need to insure your belongings to up to $250,000 if you only have a laptop and some IKEA furniture!

2. Renovations: Renovating your house can result in lower home insurance premiums, as home insurance premiums for older, poorly maintained dwellings are usually higher. Additionally, renovating only parts of your dwelling (e.g. the roof) can lead to insurance savings.

3. Pool: Adding a swimming pool to your house will likely lead to an increase in your insurance rates since your liability ( e.g. the risk of someone drowning) and the value of your house have increased.

4. Pipes: Insurers prefer copper or plastic plumbing – maybe it is a good idea to upgrade your galvanized / lead pipes during your next renovation cycle.

5. Shop around: Search, Compare, and switch insurance companies. There are many insurance providers and their price offerings for the same policies can be very different, therefore use multiple online tools and talk to several brokers since each will cover a limited number of insurance companies.

6. Wiring: Some wiring types are more expensive or cheaper than others to insure. Make sure you have approved wiring types, and by all means avoid aluminum wirings which can be really expensive to insure. Not all insurers will cover houses with aluminum wirings, and those that would, will require a full electrical inspection of the house.

7. Home Insurance deductibles: Like auto insurance, you can also choose higher home insurance deductibles to reduce your insurance premiums.

8. Bundle: Do you need Home and Auto Insurance? Most companies will offer you a discount if you bundle them together.

9. New Home: Check if insurer has a new home discount, some insurers will have them.

10. Claims-free discount: Some companies recognize the fact that you have not submitted any claims and reward it with a claim-free discount.

11. Mortgage-free home: When you complete paying down your house in full, some insurers will reward you with lower premiums.

12. Professional Membership: Are you a member of a professional organization (e.g. Certified Management Accountants of Canada or The Air Canada Pilots Association)? Then some insurance companies offer you a discount.

13. Seniors: Many companies offer special pricing to seniors.

14. Annual vs. monthly payments: In comparison to monthly payments, annual payments save insurers administrative costs (e.g. sending bills) and therefore they reward you lower premiums.

15. Annual review: Review your policies and coverage every year, since new discounts could apply to your new life situation if it has changed.

16. Alumni: Graduates from certain Canadian universities ( e.g University of Toronto, McGill University) might be eligible for a discount at certain Insurance providers.

17. Employee / Union members: Some companies offer discounts to union members ( e.g. IBM Canada or Research in Motion)

18. Mortgage insurance: Getting mortgage insurance when you have enough coverage in Life insurance is not always necessary: mortgage insurance is another name for a Life/Critical Illness / Disability insurance associated with your home only but you pay extra for a convenience of getting insurance directly when lending the money. For example a Term Life policy large enough to pay off your home is usually cheaper.

19. Drop earthquake protection: In many regions, earthquakes are not likely – you could decide not to take earthquake coverage which could lower your premiums. For example, in BC earthquake coverage can account for as much as one-third of a policy’s premium.

20. Wood stove: Choosing to use a wood stove means higher premiums – Insurance companies often decide to inspect the houses with such installations before insuring them. A decision to get rid of it means a lower risk and thus lower insurance premiums.

21. Heating: Insurers like forced-air gas furnaces or electric heat installations. If you have an oil-heated home, you might be paying more than your peers who have alternative heating sources.

22. Bicycle: You are buying a new bicycle and thinking about getting extra protection in case it is stolen when you leave it on the street e.g. when doing your groceries? Your Home insurance might be covering it already.

23. Stop smoking: Some insurers increase their premiums for the homes with smokers as there is an increased risk of fire.

24. Clean claim history: Keep a clean claim record without placing small claims, sometimes it makes sense to simply repair a small damage rather than claim it: you should consider both aspects: your deductibles and potential raise in premiums.

25. Rebuilding vs. market costs: Consider your rebuilding costs when choosing an insurance coverage, not the market price of your house (market price can be significantly higher than real rebuilding costs).

26. Welcome discount: Some insurers offer a so called welcome discount.

27. Avoid living in dangerous locations: Nature effects some locations more than others: avoid flood-, or earthquake-endangered areas when choosing a house.

28. Neighbourhood: Moving to a more secure neighbourhood with lower criminal rate will often considered in your insurance premiums.

29. Centrally-connected alarm: Installing an alarm connected to a central monitoring system will be recognized by some insurers in premiums.

30. Monitoring: Having your residence / apartment / condo monitored 24 hour can mean an insurance discount. e.g. via a security guard.

31. Hydrants and fire-station: Proximity to a water hydrant and/or fire-station can decrease your premiums as well.

32. Loyalty: Staying with one insurer longer can sometimes result in a long-term policy holder discount.

33. Water damages: Avoid buying a house which may have water damage or has a history of water damage; a check with the insurance company can help to find it out before you buy the house.

34. Decrease liability risk: Use meaningful ways to reduce your liability risk (e.g. fencing off a pool) and it can result in your liability insurance premiums going down.

35. Direct insurers: Have you always dealt with insurance brokers / agents? Getting a policy from a direct insurer (i.e. insurers working via call-center or online) often can be cheaper (but not always) since they do not pay an agent/broker commission for each policy sold.

36. Plumbing insulation: Insulating your pipes will prevent them from freezing in winter and reduce or even avoid insurance claims.

37. Dependent students: Dependent students living in their own apartment can be covered by their parents’ home insurance policy at no additional charge.

38. Retirees: Those who are retired can often get an additional discount – since they spend more time at home than somebody who works during the day and thus can prevent accidents like a fire much easier.

39. Leverage inflation: Many insurers increase your dwelling limit every year by considering the inflation of the house rebuilding costs. Make sure this adjustment is in line with reality and that you are not overpaying.

40. Credit score: Most companies use your credit score when calculating home insurance premiums. Having a good credit score can help you to get lower insurance rates.

41. Stability of residence: Some insurers may offer a stability of residence discount if you have lived at the same dwelling for a certain number of years.

Investing Without Financial Plan and Goals

In times of plenty, we seek safe haven for surplus cash that will generate passive income for the future. In times of need, some of us take desperate steps to increase our money supply to meet the demands of the day. Both actions necessitate investment decisions, decisions that many of us are oftentimes not qualified nor experienced to make wisely without help. Thus, begs the need to know the answers to the four “wives” (why, when, where, who) and one “husband” (how) questions with respect to investing and financial planning. This article will discuss the two most important pre-requisites to making wise investments.

As a licenced financial planner and a business and financial advisor to small and medium companies, I am often asked to give investment tips or advice. Whether I am a fantastic investment guru or tipster or not is immaterial as I would always avoid answering such questions without knowing and understanding the financial background, status and financial goals of the questioner. This article is not intended to be a primer in investing or financial planning as one can select a book on the subject in any good high street or online bookstore. Rather, I would like to share what I consider to be the top two amongst the many pre-requisites an investor should consider before making an investment decision.

1. Have a Financial Plan with SMART goals

Planning in general is an activity we engage in all the time – planning for a holiday, planning for a wedding, or planning for any other event or planning to achieve a particular objective. However, how many of us really get involved in developing a truly comprehensive personal financial plan and implement the same? If not, why not?

The Certified Financial Planner Board of Standards, Inc (CFPBSI) defines financial planning as “the process of meeting your life goals through the proper management of your finances”. Life goals are goals dear to us that we would like see come to pass, especially during our lifetime. Such goals can be as simple as saving to buy a car or for a cruise around the world, or a bit more challenging in investing to mitigate the effects of inflation in planning for retirement.

In goal setting, it is imperative that we be rational and do not set goals that will be too difficult to achieve in the timeframe required else we can be truly discouraged and discard the plan altogether. Thus, it is good to follow the SMART principle, taught in Management 101, which states that our goals should be Specific (say, save to buy our particular dream car), Measurable (say, save $50,000 to buy a car), Achievable (say, plan to buy a car costing a sum we can afford), Realistic (as in planning to buy a car and not a trip to the moon although it can come true for some), and Timely (say, achievable within a reasonable time period).

Knowing our SMART financial goals will enable us to plan how to achieve them. If we are not sure how to develop a financial plan that is workable for us, we can seek the services of a financial planner. A point to note is to ensure that we consult a financial planner that is adequately qualified (say, having the CFPBSI’s Certified Financial Planner certification that is recognized worldwide) and experienced (and perhaps licenced to practice as a financial planner by the appropriate authorities to ensure accountability and ethical behavior).

2. Understand your personal financial risk profile

Prior to making any investment decisions, it is necessary that we understand ourselves in relation to our individual financial risk profile. All of us take risks in our daily lives and these could include crossing a busy street, or taking a flight somewhere, or even getting married considering the increasing number of separations/divorces. It is important to note that different people have different thresholds in the level of risk they are willing to take for any number of reasons.

Assuming a risk that we are not prepared or capable to cope with may result in adverse consequences and detrimental to our health. Similarly, the level of financial risk we are willing to assume or can tolerate should be carefully evaluated and such an exercise will normally be based on a set of criteria relevant to each individual. In addition, the risk profile of an individual can change as his or her personal status changes and it is generally accepted that a younger person can assume a higher financial risk compared to a person nearing retirement as the former has time to accumulate or recoup losses due to investment decisions not realizing their desired potential.

Thus, it is wise to understand our financial risk appetite and risk profile so that the investment decisions we make will commensurate with our risk profile. Investment opportunities abound in the marketplace for all risk profile types, whether one is considered a conservative or can take high risk.

In summary, the above are what I consider the two essential pre-requisites to investing and the others mainly pertain to details in understanding investing, investment strategies, and investment opportunities that can be found in any good investment text books or articles, advice from investment professionals or financial planners, or perhaps can be the subject of a follow-up article by this writer. A last piece of advice is to re-emphasise the fact that we should not make any investment decisions that can adversely impact our financial well-being until we have a sound financial plan, and if professional advice is required, do always consult a qualified and licenced financial planner to help develop one’s personal financial plan. Always remember this well-known adage – FAILING TO PLAN IS PLANNING TO FAIL.

Financial Planning – A Road Map to a Secure Financial Future

Would you leave on a trip to a new destination without a map? What if your destination is a successful financial future? Without a map, would you know how to get there?

Financial planning provides a road map for your financial life. It can make the journey less stressful, more fun, and more successful. And, you can start right now – even if only a few steps at a time.

In today’s uncertain economy, financial planning has become increasingly important. With an overwhelming number of options for saving and investing, managing your finances can be difficult. Creating a financial plan helps you see the big picture and set long and short-term life goals, a crucial step in mapping out your financial future. When you have a strategy and a financial plan, it’s easier to make financial decisions and stay on track to meet your goals. Working with a CFP CM professional can secure your financial wellbeing and give you peace of mind and help you reach financial planning success.

Some people decide to do their own financial planning, but you may want to seek help from a Certified Financial Planner CM professional if you:

Want to better manage your finances, but aren’t sure where to start.
Don’t have time to do your own financial planning.
Want a professional opinion about the plan you’ve developed.
Don’t have sufficient expertise in certain areas such as investments, insurance, taxes or retirement planning.
Have an immediate need or unexpected life event.

Destination: Setting Goals
Financial planning starts with setting goals. After all, you need to know where you want to go before you can decide how to get there. Your goals can be short-term – for example, paying a credit card debt in six months; medium-term – such as saving for a down payment on a house in two years; or long-term – such as sending your kids to college in 15 years or your retirement. Write your goals on paper, including rupee terms and dates. Keep the list in sight so you can refer to it for motivation as you keep working toward your goals.

Starting Point: Where Are You Now?
Next, get a realistic picture of where you are financially. List everything you owe (liabilities) and the value of everything you own (assets). Also, track your monthly income and expenses in a notebook or on a budget form. Even if it’s not a pretty picture now, that’s OK. You’ve faced your financial situation, and financial planning will help you improve the picture.

Avoiding Potholes: Insurance, Debt, Job Loss, Taxes and Estate Planning
Financial potholes will inevitably come your way – stock market downturns, recessions, losing a job, wrecking the car, paying for an illness. You may not be able to avoid these potholes, but you can minimize their financial impact. Here are a few suggestions:

• Have adequate insurance. Insurance prevents financial catastrophes, so don’t put off getting it. Insure what you cannot comfortably afford to replace. For most people, that means having the following insurance: auto, renters or homeowners, liability, health, disability and life insurance (if someone depends on you financially). Take advantage of insurance offered to you at your job and supplements it with insurance you buy on your own. Shop for the best price, but make sure you buy from a reputable, financially sound insurance company.

• Control debt. Having a lot of debt puts you at financial risk. If you’re spending more than you earn, start using a budget to plug spending leaks, and make paying off your credit cards a top priority.

• Job loss. You can’t control the economy or a company layoff, but you can control how much time you invest in keeping your skills sharp and in meeting people who may help you find a job in the future.

• Taxes. Computer software can help you find deductions on your tax return. However, if your financial situation is complex, you may benefit from working with a tax or financial professional who can suggest tax strategies and make sure you are getting all of the credits and deductions due to you.

• Estate planning. Every adult should have these four basic documents: will, general durable power of attorney, medical power of attorney and a living will (also called a medical directive). A financial planner can guide you and refer you to an estate planning attorney to draft these documents.

Financial Planning Helps You Make Your Money Count For The People You Love

One of the biggest mistakes I’ve seen people make when it comes to financial planning is to ignore it completely or put it off for so long that the big benefits of financial planning expire worthless. The earlier you start planning the more bang you’ll get for your buck, however, financial planning is valuable at any age.

Most people put off thinking about planning because of misconceptions about what the process involves or how it can benefit them. As part of its public education efforts, Certified Financial Planner Board of Standards Inc. (CFP Board) surveyed CFP® professionals about mistakes people make when approaching financial planning. The survey showed the public’s most frequent mistakes included:

· Failing to set measurable financial goals.

· Making a financial decision without understanding its effect on other financial issues.

· Confusing financial planning with investing.

· Neglecting to re-evaluate their plan periodically.

· Thinking that planning is only for the wealthy.

· Thinking that planning is for when they get older.

· Thinking that financial planning is the same as retirement planning.

· Waiting until a money crisis to begin planning.

· Expecting unrealistic returns on investments.

· Thinking that using a planner means losing control.

· Believing that financial planning is primarily tax planning.

Make Your Money Count with A Plan

To avoid making the mistakes listed above, realize that what matters most to you is the focus of your planning. The results you get from working with a planner are as much your responsibility as they are those of the planner. To achieve the best ROI from your financial planning engagement, consider the following advice.

Start planning as soon as you can: Don’t delay your financial planning. People who save or invest small amounts of money early, and often, tend to do better than those who wait until later in life. Similarly, by developing good financial planning habits, such as saving, budgeting, investing and regularly reviewing your finances early in life, you will be better prepared to meet life changes and handle emergencies.

Be realistic in your expectations:Financial planning is a common sense approach to managing your finances to reach your life goals. It cannot change your situation overnight; it is a lifelong process. Remember that events beyond your control, such as inflation or changes in the stock market or interest rates, will affect your financial planning results.

Set measurable financial goals: Set specific targets of the results you want to achieve and when you want to achieve them. For example, instead of saying you want to be “comfortable” when you retire or that you want your children or grandchildren to attend “good” schools, quantify what “comfortable” and “good” mean so that you’ll know when you’ve reached your goals.

Realize that you are in charge:When working with a financial planner, be sure you understand the financial planning process and what the planner should be doing to help you make your money count. The planner needs all relevant information on your financial situation and your purpose (what matters most to you). Always ask questions about the recommendations offered to you and play an active role in decision-making. Being in charge means your financial planner doesn’t take all the responsibility for every decision.

Understand the effect of each financial decision and the big picture: Each financial decision you make can affect several other areas of your life. For example, an investment decision may have tax consequences that are harmful to your estate plans. Or a decision about your child’s education may affect when and how you meet your retirement goals. Remember that all of your financial decisions are will impact the big picture of your overall plan. This is where the skills of a professional financial planner can make a big difference.

Re-evaluate your financial situation periodically: Financial planning is a dynamic process. Your financial goals may change over the years due to changes in your lifestyle or circumstances, such as an inheritance, marriage, birth, house purchase or change of job status. Revisit and revise your financial plan as time goes by to reflect these changes so that you can stay on track with your long-term goals.

Successful planning offers many rewards in addition to helping you Make Your Money Count and achieving what matters most to you. When CFP® professionals were surveyed about the most significant benefit of financial planning in their own lives, the top answer was “peace of mind.” Over my career, many clients have told me that their purpose for financial planning is the same – peace of mind. When you invest the time and money to work with a competent and trustworthy planner, you are far more likely to go to bed at night knowing you did everything possible to make your money count for the people you love.

The Power of Financial Planning

“Someone’s sitting in the shade today because someone planted a tree a long time ago.” (Warren Buffet)

As a financial life planner, my underlying assumption is that planning is a “good” thing. Planning is widely acknowledged to be a pre-requisite for business success. However, Benjamin Franklin’s advice that “by failing to prepare, you are preparing to fail” frequently falls on deaf ears in the personal environment.

This is usually, in my experience, because people feel they have neither the time nor the skills for personal financial planning; nor do they want to spend money on hiring a professional financial planner. And a few people I have met have such confidence in their ability to make and retain significant fortunes that personal financial planning is deemed unnecessary, even spineless.

So this article is about why financial life planning is important. I will share with you some of the current approaches to planning, show you how to plan in practice and highlight the outcomes.

To plan, or not to plan?

I am passionate about planning because it leads to success. I recall my first sales job in financial services, cold calling to make appointments to sell insurance. I had an excellent manager who made me plan my target market, pitch, call strategy, everything. The first call I made was spot on, leading to an appointment in minutes. I knew it was going to work, my manager knew, my colleagues knew. And it did.

So why should we plan our lives and money? In my view, for four reasons:

1. To develop a practical framework for running household finances

2. To achieve profound goals as fast as possible

3. To ensure long term financial security

4. To deal with life’s setbacks

Lets look at each of these in turn.

1. Financial framework

Many people today lack a financial framework or system. When it comes to expenses, the core of financial planning, we often enter a fantasy world. Even if families can give a reasonably accurate set of current financial statements (assets, liabilities, income, expenditure and estate), they are rarely able to project what those statements will look like ten years, or even five years into the future.

Financial planners will usually tell you that clients come to them for these reasons:

‘We are not fully in control of our finances’
‘I don’t understand money; all I feel around money is fear and anxiety’
‘We don’t know where we are now or where we will be in the future’
‘We seem unable to live the lifestyle we aspire to’
When families do achieve clarity it usually provides great relief, even if the picture does not look good. They at least know where they stand and can take appropriate action.

2. Goals

Unfortunately, we live in an era where wealth is frequently generated for its own sake, rather than as the means to live a fulfilled life. Money is used to make more money – it becomes a proxy for the ego, and financial decisions are often made to protect or massage our egos, not to support the achievement of our deepest life goals.

Life and money are deeply intertwined. Identification of clear life goals is essential to provide direction, and enables sound financial decisions to be made. So when asked to comment on an investment someone is considering, I always pose another question: “Will investing in this product enable you to achieve your goals more quickly and efficiently?” Very often the answer is that it won’t.

3. Long-term security

The impact of increasing longevity on family finances is profoundly important. The keys to addressing this are the Three Drivers of Financial Freedom: savings, compound interest and asset allocation. While saving implies a reduction in spending, and potentially the hijacking of those important and immediate life goals, financial life planning can help to resolve these difficult conflicts between the short and long term.

4. Dealing with the unexpected

Life will have kicked you in the teeth in the past and it will do so again in the future. Accept it, and plan for it. Life can throw a huge range of fastballs at us, from the irritating yet not too serious car breakdown to the death of a close family member. Put in place contingency plans centred around a Security Fund and insurance. No one likes insurance (though I have yet to meet a widow who complained her husband was over insured).

Freedom

What you are really going to achieve from well-formulated goals and a structured, considered life and financial plan to achieve those goals can be clearly expressed in one word – freedom.

Freedom is a central theme of my work, so what exactly is it? True freedom comes from defining and setting boundaries and living a life dedicated to achieving your goals within those boundaries. Greater freedom comes from personal growth, the means by which we can expand our boundaries.

Lianne’s story illustrates this perfectly. A mother of two on a modest salary, Lianne had gone through a difficult divorce and when she first came to me for help, she was consoling herself with a compulsive spending habit.

However, her goals were to love, support and educate her children and to be a really good mother to them to compensate for the breakdown of the marriage. I worked with her to plan her boundaries. We established her life goals, tackled her spending and developed an annual spending plan.

One Monday morning she called me to talk about her weekend. She had taken the girls to London to see a concert and had done so without any feelings of guilt or anxiety over money. It had been in her plan. She had achieved her goal of bringing happiness and fun to her children. Within her boundaries she had achieved real freedom, to be there in the moment with her children, simply to be.

It’s the process that matters

Plans rarely survive contact with reality, to misquote Moltke. Reality for many of us can cause a change of direction. However, the process of planning is as much a benefit as the plan itself, often more so.

There are a number of planning processes around, often developed by professional bodies such as the Financial Planning Association or the Kinder Institute in the US or the Institute of Financial Planning in the UK. My own process is a six-stage process for called FUTURE:

Foundation: a full inventory and analysis of your life, including assumptions and an analysis of your risk profile
Utopia: establishing what you want to have, to do, to be
Transformation: identifying and dealing with the obstructions on the road to utopia
Utilisation of resources: establishing the best option for your existing resources
Roadmap: creating the plan to get you from where you are now to where you want to be
Execution: implementing and living the plan
Having developed a plan it is important that you continue to monitor and renew the plan each year. Planning is dynamic, a habit, not just a couple of sheets of paper to be drawn up then relegated to the bottom draw and forgotten.

The fruits of the process

We all in the financial community trust our processes, because we know they bring results, results that are more than just a written plan.

Initially you will develop a personal inventory of your life. This will include a detailed set of accurate financial statements comprising a schedule of assets, liabilities, income and expenditure, as well as data about yourself and the environments you inhabit.

Self-understanding builds on this base and by the time you are well into the process you should be able to articulate your deepest and most profound goals. In doing so, you will find yourself energised, focused and far sighted.

Finally, you will learn about money. If you are working with a coach or adviser you will have a raft of financial principles and products explained to you. If you are alone on this journey you will need to educate yourself, and there are plenty of resources out there to help.

What is the alternative to planning? Well, you can wing it; with a good deal of chutzpah, a hefty dose of confidence, a wing and a prayer and a bit of carpe diem you might well achieve great things, and get a real thrill and sense of achievement when you do. However, I do believe in the importance of living in the moment. The present is where we can really ‘be’. Crucially, financial life planning will actually help you to achieve this state by removing regrets for the past and fears of the future.