What Is Financial Planning ?
Ultimately financial planning is about planning of assets that generate residual income to achieve financial freedom. The ultimate desired result is sustainable and continuous income, the means is building, managing and protecting the assets that generate such income. The GOAL is continuous income, the MEANS is assets planning.
There are four types of assets that generate income in general :
- Human assets, i.e. your skills, your labour, your knowledge, your capabilities, etc.
- Paper assets, i.e. stocks, bonds, etc.
- Real estates, and
- Businesses
The key to effective assets planning is to find the most effective combination of the four in every stage of your financial life. You must then know :-
- The strengths and the weaknesses of each class of asset,
- How their strengths complement each other's weaknesses
- Your financial position in deploying a strategy
- "When we talk about assets, we are referring to assets and liabilities in terms of financial only. We use Robert Kiyosaki's definition of assets and liabilities: assets put money into your pocket and liabilities take money away from you pocket. So having a big house and a big car that you have to maintain but not generating income are liabilities even though they are probably assets in terms of quality of life. So children are, strictly financial, liabilities even though they are God-given blessing to our life and are our most precious assets (not in financial terms), and that we are more than happy to have such financial liabilities in exchange for their existence."
Why We Need Financial Planning ?
In the beginning, our main assets that generate income are human assets, i.e. our time, skills and knowledge. We protect these assets, e.g. our body and brain, with life insurance. We increase the income generating capability of these assets with better knowledge and refined skills through training and experience.
With the income, we slowly build our financial assets, e.g. businesses, real estates and stocks. After many years, even if we do not want to retire, we must be ready for the fact that one day our body will slowly lose its functional capabilities to earn. We will stop working. We will need to pay medical bills, healthcare expenses and will want to leave behind a financial legacy for our children and charity organizations that are in need.
Thus, before the happening of all these inevitable natural events, we need to move our income generating pattern, from mainly consisting of human assets to financial assets. These financial assets will still give you a sustainable and continuous monthly income, keep growing and without depleting its original principal.
When your main assets that generate income move away from human assets, life insurance (that protects your human assets and its income) becomes less important. But insurance for your financial assets, e.g. business, etc. becomes more important.
