Tuesday, September 14, 2010

Overview of Financial planning and Wealth management

Hello students - This week onwards, for the next ten weeks, we will explore the various facets of wealth management - remember that Wealth management is for managing your own wealth - aimed at making you financially independent - where one does not need to work to maintain your lifestyle - as we go through the classes every week, my blog also will follow with one update every week.

My plan to cover Wealth management in the next ten sessions is as follows:

Session 1 - Overview of financial planning and Wealth management

Session 2 and 3 - Equity, Debt and Mutual funds

Session 4 -Insurance, Derivatives and Bullion

Session 5 -Real Estate, Private Equity and Venture capital

Session 6 -Macro Economics

Session 7 -Tax planning, Retirement planning and Estate planning

Session 8 - Wealth management industry in India

Session 9 and Session 10 - executive interaction and Wrap up

The first session aims at making you realize that each of us, irrespective of our backgrounds, can become financially independent - all that we need to do is create a personal long term financial cash flow plan and a focus on getting good % returns on our savings.

My presentation and the excel sheet that I use for this session can be downloaded from



Robert Kiyosaki in his book “Rich dad, Poor Dad” has defined Assets as any item that produces an income and Liabilities as any item that produces an expense. In order to reach financial independence, you need to amass assets and keep liabilities to the minimum possible. For example -a car for personal use and a house where you stay will be classified as a liability as it creates a cash outflow - and the same car used as a taxi or a the same house given for a rental will be classified as an asset as it creates a cash inflow.

You need to invest in more and more assets, which over time will create bigger and bigger cash inflows - and over time, this cash inflow from assets will take care of your living expenses and you will be financially independent.

Each one of us have three areas where we must focus in order to become financially independent:

Salary - our cash Inflow

Expenses - our cash outflow

Savings - the net of cash Inflows minus outflows

As future professionals, most of you will be focused on the salary - being aware of what you make in your job, what your peers are making in their jobs and as most professionals, we believe that for reaching financial independence, you need to get a high salary. That’s not fully true.

Then there are people amongst you, who will go one step further and have a reasonably accurate measure of what the expenses are - hence know what the net savings would be - the belief is that controlling expenses and having a good salary will make you financially independent -that too is not fully true.

Both these are reasonable approaches - but not good enough to ensure financial independence - the only sure shot way to reach financial independence is to focus on the % returns from your savings - focus on investing in areas where you get better % returns. For example a Fixed deposit that gives 8% returns is not good enough as inflation in India is also 8% (also interest in FD is taxed) - so FD is not an investment that will take you to financial independence but most of us do not see FD in this way as it is a safe (and if I may add - lazy) place to park our savings.

So a clear focus on savings and the % return is needed to reach financial independence - We must have our money working hard for us - so that we do not have to work hard and have time to do things that we always wanted to do.

In this session, we have jointly prepared a 50 year (long term) cash flow plan - for a young MBA who will be shortly married - we have made some reasonable assumptions of their income, expenses, life time expenses (things like children’s education, parent’s health, holidays etc), inflation and returns from investments. This data is given in the excel sheet and anyone can customize this sheet and make a personal financial plan.

I urge each one of you to make a personal financial plan - make reasonable assumptions as you see fit - and over the next few years, revise the plan regularly - and you will be on your way to reach financial independence. The earlier we start, the faster we will reach this stage - hence it makes sense to start it now - even though you are not earning as of now.

In the next few sessions, we will address the various options that we have in India for investments. If we can be smart and get about 25-30% returns on our investment (at this stage of life -when you are starting your careers) - you will reach financial independence in about 12 -15 years.

I know many people, who have been able to achieve this. And we will jointly explore the various options available for us as we go through this exciting journey of Wealth management.

I want you to realize that it is not necessary to do extraordinary things to get extraordinary results - you just need to plan well and be focused and consistent over time.