Want to create Wealth. But how? – Part 2

In part 1 we saw why health insurance/hospital cover and term insurance form the foundation of the financial planning pyramid.

If you missed reading that blog, please visit :

http://bhushankulkarni2903.blogspot.in/2014/10/want-to-create-wealth-but-how-part-1.html

The topic was interesting but get-together was more of a social gathering than figuring out answers to our personal finances. So we decided to meet the subsequent week for some time exclusively to take the discussion forward.

‘How many of you have most of your savings in fixed deposits and recurring deposits’ asked Prakash. Almost all of us raised hands. To this he made a profound statement. ‘You guys are going to have tough time building wealth’ he said. We were taken aback. Some of our friends were in FDs and RDs for good 8-10 years.

‘While we know that whatever savings we are doing may not be adequate but how can you say we will not be able to create wealth’ asked Kailash.

‘The answer is very simple. Your money (savings in FD and RD) is not earning enough to beat inflation’ said Prakash.

‘But we also have our house. Isn’t that an investment too’ said Sandeep.

Self-occupied house is not, additional house is. Prakash proclaimed.

So according to you what is the right way to create wealth asked Dhananjay who seemed visibly confused hearing all this discussion.

‘Goal based financial planning and adherence to asset allocation based on your risk appetite’ said Prakash. The tone and expressions were such as if he found a Holy Grail and is wanting to share with us.

‘Oh you are talking like a business channel anchor Prakash’, said Swati. Goal based financial planning; asset allocation and risk appetite. These words seem familiar but are difficult to understand and implement.

‘They can be as difficult or as easy as you make it’ came the philosophical salvo from Prakash.

So tell us Prakash do these 3 things assure us of wealth creation? Someone asked from the group.

The probability is much higher told Prakash.

You need to know your risk appetite; invest in different asset classes and stick to it for long time came another big mantra from Prakash.

‘All that is looking good but how do I know my risk appetite’? asked Sharad.

While your previous savings and investment pattern is a good indicator to know your risk appetite, today there are scientific methods to know about them. You need to answer some questions and your financial planner will be in a position to tell you whether you have conservative; balanced or an aggressive risk aptitude.

Once you identify your risk appetite, you may choose to follow these two things.

a.       Decide your asset allocation basis your risk appetite.

b.      Decide your financial goal and start investing towards it in different asset classes.

But how do I know which asset class I can or need to invest? How about the returns? What about the guarantee? Someone had to stop Shraddha from asking more questions in one breathe.

‘Precisely these are the questions we will try and discuss during our subsequent meetings’ said Prakash.

After one hour discussion Prakash left for some work. The group was still discussing the Holy Grail suggestions by him.

Risk appetite; Asset allocation and financial goals

What should we do?

1.      Take help from your financial planner and understand your risk appetite

2.      List down the financial goals that are most important to you in your life and the number of years left to achieve them.