When you think of the different phases of your life and the corresponding lifestyle, you are bound to view it through the lens of wealth. How much of it do you have? How can you grow your wealth? How can you keep your wealth? Generally, the wealth created by you during your lifetime will dictate the quality of your life – from accommodation to eating habits and recreational activities; most things hinge upon the wealth in your possession.
It is not just important to create wealth. In fact, as you pass through different stages of the financial lifecycle – wealth accumulation, wealth management, wealth preservation, and wealth distribution, wealth takes on a different meaning. Thus, it is imperative that wealth is optimally managed in each of these cycles.
This is the first phase in the lifecycle of wealth management. An individual needs to accumulate wealth before it can be managed optimally and there are several proven ways of accomplishing this target. What are the imperatives in this part of the wealth management lifecycle? Having a strong income base is the first step towards wealth accumulation. Individuals must ensure at least one or two steady sources of income if they wish to accumulate wealth in a sustainable manner. This can include anything from a well-paying occupation to a prosperous business.
Once the wealth begins to flow in, it is essential to divide it into segments – what you spend and what you save. The wealth saved must then be invested in appropriate avenues based on your risk profile and life goals. If you are young and capable of withstanding high risk, the equity markets and equity mutual funds are strong avenues for high returns investment.
While the wealth accumulation phase is likely to continue throughout your life, depending on your career and investments, it is now important to focus on managing the accumulated wealth appropriately. What are the points to consider while formulating a seamless wealth management structure?
Life goals come at the forefront of the equation. Each of you would have certain goals in life – these could range from buying a house and creating an education fund for your children to taking a long vacation or starting another business. Each of these goals requires a major outflow of wealth. To accomplish your life goals and create a robust investment portfolio, you must create an asset allocation strategy that takes into consideration the time frame of your goals, your return requirements, and your risk profile. Based on these parameters, you can invest the accumulated wealth in short, mid, and long-term wealth management avenues. Generally, if you have a long-term investment horizon, you should look to grow your wealth through investments in equity and equity-related products. Due to the long-term horizon, you are better positioned to withstand equity market volatility and benefit from its growth potential.
You have already worked incredibly hard to create and sustain a strong channel of wealth accumulation. You have also structured your wealth in a way that is best suited to support your life goals. Now comes the time to preserve your wealth. Indeed, wealth preservation is as important as growing your wealth. To adequately manage this part of the financial lifecycle, it might be wise to allocate a part of your corpus in investments that are secure and can still offer you good returns. This is akin to your safety net in unprecedented circumstances, like the ongoing COVID-19 pandemic which has wreaked havoc across the globe.
An ideal investment choice could be structured products that can potentially generate good returns with relatively lower risk than equities. In this phase, you can also consider investing in products like Real Estate Investment Trusts (REITs) that can give you exposure to real estate investments while mitigating the risks related to the asset class. While longer-term investments ensure wealth preservation for the future, you must also create an emergency fund by investing in very low-risk, and highly liquid instruments. This fund will go a long way in keeping you solvent in times of crisis.
The last part of the financial lifecycle is wealth distribution. So far, you have accumulated, managed, and preserved your hard-earned wealth. It is now time to hand over the reins and ensure that the wealth is available for posterity. This phase includes bequeathing your assets to the future generation while also securing resources for your personal agenda like retirement travelling or philanthropy. Also termed legacy planning, this phase involves creating a will or a trust that can disperse your wealth and assets as per your requests. This step ensures the proper transfer of everything, from your property to other investments to your family beneficiaries in the event of disability or death.
You can also quantify the route of wealth distribution, from one-time settlements to yearly endowments. Further, you don’t need to do this yourself – there are qualified legacy planners who can ensure a seamless transition to this phase of your financial lifecycle.
The bottom line is that proactive planning and execution can go a long way in helping you protect and enjoy your wealth.