The Three Components of Financial Planning
2 min readA financial plan has different levels and its purpose is to ensure the security/safety and growth of the person. There are three levels in the financial plans. These are the safe and secure plan, the comfortable plan and the rich plan. The meaning and relevance is evident from the terminologies.
The Safe and secure plan has three components:
the protection component
the savings component
the growth component
The protection component consists of the basic car and home insurance, liability umbrella, disability and health insurance. This also includes life insurance. In case the person has a family, all these should make sure the family is able to do whatever they want to do regardless of whoever dies or gets disabled. The person should focus on strategy and not products. For instance, if a person wants to buy life insurance, he should focus on how he is interacting with the insurance company and things like that, rather than on the product. Almost all the insurance companies offer the same products. So, wasting a lot of time choosing between the different insurance companies is not necessary.
The second component in the safe and secure plan is the growth component. This necessitates putting away three to six months of expenses in a very safe and secure account. This is very important to ensure that the family will continue to live, if a person stops to earn. A lot of families suffer when the person earning the income becomes disabled or dies. Keeping away money that can cover the family expenses for sometime is the solution for these problems. Benefits offered by the hiring company should also be looked up. This can take different forms. Retirement plans should also be considered since we have to consider it as a saving plan. It is a great accumulator of money as there is some discipline in that you can’t spend the money.
The third component of the safe and secure financial plan is the growth component. This is where the real wealth gets built. This might start with putting a little bit of money in stock account or mutual funds depending on the financial capacity of the person. This component is also the transition from the safe and secure plan to the comfortable plan.
