Best Financial Tips: How to create Wealth and Secure your Financial Future:
a practical guide – themedideas Facts and Figures Part 1
Part 1 – Introduction to Financial Planning
This is the Part 1 of the practical guide for investment to improve financial awareness and understanding amongst the common people who are not that conversant with financial matters. Therefore, more often than not they lose out on the opportunities that they could have benefited from if they knew a bit more about investment. On the other hand they often become the victims of financial manipulation by the system and few unscrupulous people working in the financial sector. People have no choice but to improve their understanding regarding finance and investment if they want to create Wealth and Secure their Financial Future.
Part 1 – Introduction to Financial Planning
You might have heard or read about the possibility of sovereign default in Greece lately. They have borrowed to live beyond their means for so many years without effectively using that money to improve productivity and competitiveness. Their sovereign debt is greater than 150% of their Gross Domestic Product (GDP) and they are still running a 5% deficit annual budget. Therefore, their debt would increase further. As they have to borrow more to pay the increasing debt, the interest they have to pay on the debt increases further. That increases the debt and they borrow more to pay the increasing debt resulting in a debt spiral. For the time being the European Union, the European Central Bank and International Monetary Fund (IMF) have come to the rescue. Eventually, at some point it might be apparent that it is no longer sustainable and Greece defaults. There are other countries with similar problems notably Italy, Portugal, Ireland, Spain etc.
Do you want to be in a similar situation like Greece when you would have to pay off $150,000 of debt, your annual income is $100,000, your annual expenses are $105,000, and you have to borrow $5,000 at 20% interest (if you borrow from the market) annually? I expect your answer would be “No”.
Financial management of a person is not much different from that of a country. The Government gets income from various sources such as taxes, investments etc like a person does through work, investments etc. The Government has assets such as public sector companies, natural resources etc like a person possesses property, land, gold etc. The Government keeps reserve such as gold, foreign currencies etc to deal with financial emergencies like a person keeping gold, cash, other savings etc. The Government could seek help from other countries/IMF in case of financial difficulties like a person seeking help from friends/relatives. The Government has expenses such as paying salaries to the Government employees, running the Government etc like a person has expenses in relation to food, accommodation etc. So much of similarities, however, there are several major differences too. The Government is run by people who do not usually suffer directly from the financial problems of the country and could escape if there is a change in the people running the Government, but a person suffers directly from the financial problems he or she faces and has nowhere to escape (except bankruptcy in worst circumstances). The Government has a lot of leeway and could modify policies on taxes, issuing bonds, expenditure etc to deal with the situation (sometimes kicking the can further down the road to buy time during its tenure), but a person does not have that much of options except reducing expenditure. The greatest difference is that the Government always earns from taxes, investments etc but a person does not earn while studying and after retirement. The Government does not retire ever. Therefore, it would not require a pension or regular income after retirement that a person does. This is the most important issue that needs to be understood why prudent financial planning is necessary.
Pension or regular income after retirement is not the only reason why people should have an organised financial plan. Money is required for various other things in life such as own education and career building; buying food, domestic appliances, gifts etc; renting or buying a house; paying life insurance premium, medical insurance premium/expenses; buying a car; paying for children’s education and marriage, pleasure, social visits; travelling to work; providing emergency loans to friends and relatives etc. Without money the life could really be “funny”!
One of the famous Indian cricketers has repeatedly said that a batsman should accumulate as many runs as possible when he is in his top form. The same rule applies to accumulating wealth. Build wealth as much as you can when you can earn a lot.
“The future financial empire could only be built
on the edifice of present investment made
on the basis of past experience”
Mr Sudipta Paul
And if you have to work for a monthly income, howsoever high, you cannot be classified as super rich.
Remember the saying:
‘If you can count what you own, you are not wealthy’
1. Insurance lessons you MUST learn, N Sriram.10 March, 2005, www.rediffmail.com
© Dr Sudipta Paul, themedideas.com, 2013