How to get rich fast: Take the first step; here is how
Financial planning focuses on five major stages, that is, managing your cash flows and debt, risk assessment and management, planning for investment, tax panning and finally retirement and estate planning. If you can manage your cash flow smartly, are aware about your inherent risks and create a surplus, then that surplus can then be invested in the best asset allocation mix.
The terms, financial planning and wealth management, are often misconstrued to be the same. But in reality, they are not. Making a financial plan is your first step to generate wealth. A comprehensive financial plan helps you analyse your risk appetite, fix the gaps and identify measurable financial goals. Whereas wealth management only arises after you create investible surplus that needs professional expertise for growing and preserving it. Let’s understand the key differences in detail: -
1. Financial planning is designing strategies and execution for achieving financial goals, whereas wealth management is focusing on growing and preserving money. The latter involves strategies for both short term and long term.
2. Having a financial plan is a must whether or not you have money/wealth. While wealth management comes into the picture once you execute your financial plan and have investible surplus that requires expertise to preserve and grow.
3. Financial planning focuses on five major stages, that is, managing your cash flows and debt, risk assessment and management, planning for investment, tax panning and finally retirement and estate planning. If you can manage your cash flow smartly, are aware about your inherent risks and create a surplus, then that surplus can then be invested in the best asset allocation mix. Successful execution will make you wealthy and then the whole process of wealth management, that is, preserving and growing this wealth comes into picture.
4. A financial planner will suggest the best asset allocation based on your risk profiling, whereas the wealth manager’s job is to execute the asset allocation based on your risk assessment. This means a financial planner will only suggest, but a wealth manager’s role is to suggest and also make sure that all strategies get executed successfully.
Many a times, people get caught in financial mess due to wrong financial decisions or not following a sound financial plan. So you need to have a clear roadmap of all your financial goals, irrespective of what your income is and you need to set measurable specific goals. One example of a specific measurable financial goal is say, “You have to generate a corpus of Rs 50 lakh for your child’s education by 2025”. Now as compared to this, a goal that is not measured would be like, “You want to amass sufficient money for your child’s education when he turns 18”.
The role of financial planning is to give you clarity with respect to all your financial goals. It doesn’t matter how much money you already have. Rather, a financial plan helps you create wealth. In fact, every wealthy person needs a sound financial plan to grow their wealth, so that they can enjoy their money. Wealth management involves continuously identifying opportunities and investment avenues to grow your net worth.
We can divide this in to three stages - education, accumulation and retirement phase. The education phase is when you do financial planning for optimum utilisation of your money. This involves decision making, such as, how much should be your savings, how to spend, how much loan to take, etc.
In the second phase of accumulation, you will implement strategies to create wealth. Wealth management is not required in the first and second stages.
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In the third phase, that is, retirement phase, if you have created wealth already, then you need to focus on wealth management. Otherwise your financial planning will revolve around where to invest money and how to distribute your assets amongst the family members. In short, focus will be on estate planning. So, focus on having the sound financial plan first and then to create wealth to enjoy your money.
(The writer is chief gardener at Money Plant Consultancy)
Source: DNA Money