IMPORTANCE OF FINANCIAL KNOWLEDGE - PART 3

There are 3 financial phases in one’s life.  An analogy can be made with the Education system.  We have the Basic (Secondary School) Education, Graduation and Post-Graduation as the 3 levels of Education.  Similarly, we too have stages in handling Finance. 

 

They are Wealth Creation, Wealth Management and Wealth Preservation.  Just like how one cannot spend more than required number of Years in any of the 3 education levels, one must not spend more than required in any levels of Finance Management.  

 

Wealth Creation is the first level or Phase of one’s life.  Here the focus and priority are to create Wealth.  This should start in a young age.  In this phase, the ability to take risk is higher.  Here the Investment Profile should be aggressive.  One should seek high growth Investment Opportunities to create Wealth.  Since the risk that will be taken is high for a high growth Investment Option, it is obvious that the Risk-to-Reward ratio will be higher.  Most of the people spend a greater number of years in this Phase due to lack of knowledge and assessment of their priorities.  

 

Taking the example of the Education levels, can one spend more years in the School learning the Basics (Secondary School)?  The Basic Education provides the foundation to understand and excel in bachelor’s degree Courses.  Similarly, Wealth Creation forms the Basis and Foundation to excel in the next phase of Finance Management, which is Wealth Management.  

 

Wealth Management is the second phase, where the Focus is only on Managing the Wealth that is Created.  That does not mean that the Wealth Creation process will stop.  Only the Focus and priority is shifted from Creation to Management.  In this Phase, the ability to take risk should be Moderate.  The Investment profile should also be moderate.  One should cut down the risk and focus more on managing the Wealth by diversifying the Investments.  In this phase the Risk-to-Reward will be slightly lower.  Since the appetite to take risk is cut down, there will be more discipline on the Investments.  This minimizes the chance of a failed Investment. 

 

Many people do not get excited in this phase of Finance Management.  They feel the creation of Wealth diminishes in this Phase.  It is not true.  Most of the Ultra Net worth have made and continue to make more money in this phase than any other phase.  It is always difficult to make the first Million/Crore.  The rest of the Millions/Crores are made by the first one.  

 

The Final Stage is the Wealth Preservation.  Here the Focus in more on preserving the Wealth.  The ability to take risk is close to Nil.  The returns will drop as well.  But the Wealth that was created and Managed so far, will be preserved and kept intact.  The returns will be minimal and, in some cases, very negligible.  This is subject to the type of Investment.  It has happened in many cases that people who have Investments in Real Estate have made more money in this phase just by Preserving it.   

 

Age of a person is not necessarily the only factor that determines the phase in which one should be.  The Priorities and Goals are equally influential factors.   

 

For those who are in middle-income category and are employed, the above levels might sound irrelevant.  Ironically, even though must fall in these 3 stages eventually.  Each one might spend varied number of years in each stage but they cannot escape the process.  

 

We will look into how the middle-income and Salaried people can adopt these 3 stages in the coming issues.  

 

(To be continued...)

 

(The above article was written for publication in Jul. 2019 issue of PRINCE'S VOICE - A Community eMagazine.)