As a Financial Advisor I believe there are seven financial pillars which are fundamental to your financial planning, future wealth creation and wealth preservation. These pillars can be identified as follows:
This provides you with your day-to-day funds and is derived from your employment.
Savings: This is designed to provide for your short and medium terms needs.
Investment: This is fundamental long-term wealth creator.
Property: This could be your home and or investment properties.
Pension: This is your provision for your retirement.
Inheritance: This is typically derived from your family.
Protection: This is a key part of any plan for your wealth creation and management.
So lets walk through the Pillars
We start off by looking at income as the first pillar. Income is a fundamental building block in all of your financial development and it is a key driver for your future wealth. All of the other financial pillars are built from income, and it is income that allows you to lay the foundations for the growth in all other areas of your finances.
It is important therefore to carefully manage and plan your income to ensure that the other pillars can be developed and planned thus building wealth for your future.
If we look at income as an asset in its own right there are some interesting figures that may put the importance of this pillar in to perspective.
If we take a 35-year old earning €40,000 per annum from now until age 65, that person will earn over €2,000,000 during that period.
If you take a 40-year old earning €80,000 between now and age 65, that person would earn over €3,000,000 during that period.
You can see that this represents a substantial asset over your life and in most cases this will be the biggest asset that an individual will ever own. This highlights the need for this to be managed carefully and effectively to achieve financial growth, security and future wealth.
The next pillar that we can identify is savings. Savings are typically created through effective management of your income.
Income provides you with a regular source of funds coming in to the household. Effective management and budgeting of this income is designed to provide you with an excess that can be used to build other pillars.
In this case, the first excess created through careful planning of income, can be used to build savings and provisions for future needs.
Typically, this is done by way of regular contributions into a savings plan. This can be done through a bank deposit type savings plan or through a savings plan that may offer you the potential to invest in other asset classes.
Through investing over a long period of time you can take advantage of the effects of compound interest which will help build a store of wealth that is designed to cover a future need.
Savings is one of the pillars that would provide for your short-term and medium-term goals. It is important to recognize that building a savings fund needs discipline and planning to be effective.
Once the savings pillar has been set up and is starting to grow you may find that you have sufficient funds to cover your short to medium term needs and as such you can start looking at the longer term investment horizon. Investment is therefore next pillar that we can look to build. When looking at investing, it is important to develop a detailed plan to ensure that it fits your needs. The key ingredients in any investment plan are:
Timeframe: the amount of time you’re invested for or you’re putting money aside for.
Liquidity: how easily accessible is this money?
Risk profile: What is the exposure to the ups and downs that you are willing to accept?
Asset classes: the types of investments that your money is going into.
Diversity: the spread of asset classes that you are invested in.
Only through the careful analysis of each of these headings can an appropriate investment plan be put in place.
Property investment usually follows when an individual has laid down the foundations of effective income planning and savings. This may involve both your home and investment properties. It is important to identify that property is a long-term investment and carries with it higher risk particularly in the short term. Property, by its nature is a very illiquid asset and so by purchasing property, whether it is your home or for investment involves putting money away for the long-term. Once this money is invested it can be very hard to get back out. In most cases the only way to get the money back is to sell the property or to re-mortgage.
This could cause problems if markets turn against you where you have all or a large part of your wealth tied up in properties. Careful financial modeling and the financial effects of investing in property must be carried out before any decision should be made to purchase. The use of a financial advisor should help you with this modeling and analysis.
The next pillar that we can identify for development is pension or retirement planning. This is a long-term plan that is designed to protect you in the future when your earning potential is diminished. Retirement planning should be implemented as soon as possible and typically should start when you first start earning an income. Pensions are designed to provide a pot of money to allow you have the comfortable retirement that most people desire.
It is important that you provide for your own retirement and you should not simply rely on the State to provide you with all of the funds in retirement. Without personal provision it is unlikely that you will enjoy the type of retirement that most people desire. The key to building an adequate pension is to start early to maximize the effects of compound interest and growth in financial markets. There are generous tax reliefs available on pension contributions so you should take advantage of these reliefs to help build towards your retirement goal. Pension and retirement planning can be a hugely complex area so careful planning and expertise is needed to ensure an appropriate strategy and plan can be put in place. Consulting with a Financial Advisor is highly recommended
Inheritance can be identified as another financial pillar that may arise at some stage in our financial lives and can form a valuable part of our overall financial holdings. Inheritance however, is not available to everybody because there won’t always be an inheritance passed on from the previous generation.
Inheritance can provide you a lump sum that you could receive at a point in your life. However, as the timing of this is unknown and so very little planning can be done in this area. It is important too that you do not rely on this money but rather see it as another pillar that may provide you with a boost at some stage in your life.
Although there is very little planning that can be done to maximize the inheritance as it is not in your control however one area that can certainly be looked at and managed is the tax planning of the inheritance. There is a need for everyone to tax plan inheritance through a carefully thought out Will to protect the family wealth as much as possible and ensure that the revenue don’t swallow up most of the inheritance through taxes.
The management of this can not only provide an appropriate tax efficient plan but can help to avoid possible in-fighting in the family. You should engage your tax advisor to make sure that you’re as tax efficient as possible both in receipt and in giving of inheritance.
Protecting your Pillars
While building your pillars it is important to protect each of them as you go. Essentially you don’t want to build your pillars only to see them crumble through some unforeseen or unpredictable event. Therefore you should protect each of your pillars at all stages.
The pillars that you are building are for you and your family throughout your life and in to the next generation. Through careful planning you should be aiming to create inter-generational wealth for your family. By putting the appropriate protections in place you can ensure that these assets can become multi-generational assets.
Assets can be protected through a number of different ways.
Income protection plans are designed to protect your income in the event you are ill and unable to work for a long period of time.
Family protection that would pay out a lump sum in the event of your death and provide for your family and those who you’ve left behind.
Property protection so that if something happens to you and you pass away, the property you own and the mortgages attached is covered and it is not left to your family with a big loan attached.
Protection against inheritance tax through a number of different protection policies that you can put in place to reduce the possible inheritance tax implications on passing on assets.
The key is to Take Control Of Your Future. You should identify the pillars of wealth, take control of the planning and protection of these to ensure your future wealth, growth, and the growth of your family.