Creating Personal Wealth - Essay Example

?Personal Wealth Project Scope Personal wealth is defined as the total asset value of an individual’s earnings, possessions and investments. Personalwealth can be broadly classified into three categories namely liquid assets, loans or mortgages and personal possessions. In cases where a person owns a company, the assets that appear on the firm’s financial statements should not be mistaken as assets of the individual, but must instead be considered as under the ownership of the company. Creating personal wealth is not necessarily a complex process if one establishes the primary objectives like future personal commitments and desired retirement benefits. Thereafter, it is important to identify suitable financial vehicles that align current and future market factors with the expected outcomes besides evaluating the risk accompanying each investment opportunity. I feel that the easiest way to generate personal wealth that can take care of my retirement needs would be to invest a percentage (say 5%-10%) of my monthly salary in an reputed and long-running pension fund that has a good track record of performance. Otherwise, it is also useful to invest a part of monthly income in long-term certificates of deposit (CDs) that offer a stable return during the investment period. Direct investment in low-risk bonds or equity markets is also possible although this would demand extensive knowledge of the relevant markets. The option of investing in real estate must also be considered. Investing in this sector is relatively simple, straightforward and perhaps most practical n terms of building some personal wealth. While real estate markets do have their own inherent risks (like the recent housing market crash due to the financial crisis in the United States), (include author) argues that the market has the best capability to appreciate over the years and yield good returns over the years. As mentioned earlier, investing personal savings in the financial markets is more risky and requires active involvement of the investor through trading, purchasing options to hedge the risk etc., which require knowledge and experience to generate results besides resulting in further expenditures (broker commissions, minimum margins etc.). The best way to invest in these markets is to obtain the services of a brokerage firm that has a good history of providing positive, stable and cost-effective returns to its customers. Project Resources 1. Bold (2009). The Bold Truth About Investing: Ten Commandments for Building Personal Wealth. New York: Ten Speed Press. Mutual Funds expert, Adam Bold, discusses a ten step approach to personal finance that help both experienced and novice investors understand the financial markets and take effective stock of their investments. This book is focused primarily on investing in mutual funds. 2. Hallman (2009). Private Wealth Management: The Complete Reference for the Personal Financial Planner. Chicago: McGraw Hill. This book discusses various strategies and techniques associated with personal finance that deal with some of the latest challenges facing investors. Chapters on cash flow analysis, interest accumulation, common & alternative investments and asset protection plan shed simple but important insights into some of the areas the beginner investors must understand in order to realize profitable returns. 3. Horan (2008). Private Wealth: Wealth Management in Practice. Chicago: John Wiley. Developed by the CFA institute, this book provides latest information on asset allocation, taxation, lifecycle modeling and investment management for small investors. This book considers various human parameters that allow investors to devise customized investment plans and strategies. 4. Reuvid (2006). Handbook of personal wealth management. New York: Kogan Page. This book targets high net-worth individuals who seek to maximize returns from their wealth and advises them about personal and commercial investment products. Besides discussing many such products available in international markets, the book also discusses numerous strategies on sound wealth management. 5. Solomon (2005). Financial security & personal wealth. San Francisco: Transaction Publishers. The authors of this book recognize the importance of financial security and the role of personal wealth and savings in this context. The book discusses the influence of economic policies on personal returns and suggests various solutions for retirement plans and financial security for senior citizens. Project Outline 1. Understand personal wealth a. Study personal wealth b. Evaluate various financial products c. Understand associated risks 2. Determine personal finance requirements a. Understand financial calculations b. Discounted cash flow techniques c. Evaluate various combinations of investments in personal portfolio 3. Calculate specific projections a. Choose most suitable products b. Create investment portfolio c. Evaluate investment timeline and returns 4. Evaluate results a. Select most promising returns 5. Invest a. Monitor returns and performance Project Abstract Ensuring a steady flow of income during retirement years is an important objective for most people. In fact, saving and investing towards creating personal wealth for retirement benefits in the future is an integral component of a working individual’s regular income (Gitman, 2007). However, saving alone will not provide the returns necessary to fund a steady income during the retirement period. Instead, one needs to identify and invest carefully over a long period of time in order to ensure some tangible benefits in the future (Vitt, 2003). The current project devises a relevant plan to invest in a portfolio of suitable financial products over an individual’s professional career in order to facilitate a steady income stream during retirement. The investment strategies proposed during the course of this project are also aimed at the creation of personal wealth for the investor with the goal of maximizing returns and minimizing risk through investments in appropriate segments. Project: Personal Wealth Intro Paragraph Creating and managing personal wealth are important considerations for an individual who aspires to lead a secured life post retirement. Proper management of personal wealth ensures a steady income to support the individual’s regular needs besides providing additional monetary resources for further investment and wealth creation (Stevens, 2006). However, achieving these goals is not simple or easy to understand from the very outset. Instead, becoming successful at managing personal wealth and a stable retirement plan depends on several steps that the investor must take in order to achieve these objectives. Personal Wealth Management The first and foremost step in this scenario is to attain some wealth education that provides some important insights into the various investment domains available for the person. Such education also encompasses an understanding of the benefits and risks associated with each investment domain and ways in which the investor can minimize risk and maximize returns through effective portfolio management and diversification (McGill, 2010). Financial education also allows an investor to establish the return targets post retirement and calculate the savings and investment strategies necessary to realize these returns (McGill, 2010). It is important that the investor begin saving and assigning some part of the income into the identified investment avenues besides maintaining a constant oversight on the performance of these investments to take corrective action when necessary. Investors can also avail the services of professional wealth management firms and private banks who will recommend the best investment options besides managing the entire performance of the investor’s portfolio for a requisite fee (Gaudio, 2005). These companies also provide various customized products to such investors that align closely with their retirement objectives and expectations. However, the investor must be careful to select the most suitable firm that has a proven track record of positive growth and returns. There is also the need to check the performance of the wealth management firm to ensure that funds are not invested in highly risky assets which may not align with the long-term incentive of stable growth (Bold, 2009). Project: Future Need & Retirement Intro Paragraph Planning for personal wealth management and retirement is very important that must ideally begin at an early stage of an individual’s career. Investment strategies should be devised to suit the specific needs and preferences of the investor besides taking note of any tax incentives and savings available through such investments (Hallman, 2009). Upon implementing a strategy, it is important to review the performance of the portfolio and its alignment with the goals of the strategy on a periodic basis (Horan, 2008). In this context, seeking the assistance and expertise of a qualified investment manager or an established wealth management firm could prove essential and beneficial. Determining the total amount required upon retirement is dependent on the intended age of retirement, the total life expectancy in years, the preferred lifestyle post-retirement and the required rate of return on the investments within the interim period. In many cases, employer contributions to the pension fund and social security provided by the government will often constitute a part of the investment strategy (Reuvid, 2006). The most important aspect of retirement planning is establishing the annual savings necessary to invest and achieve the objectives of the retirement plan. Maintaining and improving the current standard of living are other considerations that also play a significant role in determining these parameters (Solomon, 2005). Some of the crucial considerations required for shaping a retirement-driven investment strategy are discussed below: Invest in instruments with higher returns A broad time horizon to retirement provides the opportunity to achieve significant growth during this period. While investments capable of providing higher returns over the long term do exist, one must ensure that the investment decisions are consistent with the associated risk premium that the investor is willing to take (Gitman, 2007). The retirement plan must also include the effects of inflation into account when calculating the returns and desired total amount. Thus, a combination of return objectives, duration and risk tolerance play an important role in shaping the basic outline of an investment plan. Savings Creating personal wealth depends upon setting aside a portion of the monthly income as savings, thereby requiring a reduction in expenditures as far as possible. The investor should try to lead a modest lifestyle and refrain from spending overtly on unnecessary luxuries that may hamper the availability of any savings for investment. Typically, investment managers recommend at least 10-15% of annual earnings to be saved for investment into personal funds (Vitt, 2003). Less expenditure during retirement Retirement planners generally estimate that nearly 70-80% of an individual pre-retirement income is necessary to maintain the same living standards upon retirement (Stevens, 2006). These estimates may however vary on an individual basis and may be calculated by the investment manager depending on personal goals and preferences of the investor. Changes to the lifestyle post retirement must also be considered to establish a realistic estimate of the funds needed in a post-retirement period. For example, retirees tend to spend less on eating outside or buying formal clothes and prefer to spend more on holidays and sightseeing (McGill, 2010). Even during the retirement period, the income needs shift and vary between the initial and later stages of retirement (McGill, 2010). All these factors must be analyzed and incorporated into the retirement plan. Retirement age It is advisable to retire as later as possible. The benefits of doing so are many. Apart from having contributed further income towards the retirement plan, the salary is also much higher during this phase of a person’s career. Most retirement and pension benefits are based on the final salary of the individual as well as the total years of service, both of which will be higher in the current scenario (Gaudio, 2005). These factors ensure a higher income during retirement and are important when preparing a retirement plan. References Bold (2009). The Bold Truth About Investing: Ten Commandments for Building Personal Wealth. New York: Ten Speed Press. Gaudio (2005), Your Retirement Benefits. New York: John Wiley. Gitman (2007), Personal Financial Planning. New York: Cengage. Hallman (2009). Private Wealth Management: The Complete Reference for the Personal Financial Planner. Chicago: McGraw Hill. Horan (2008). Private Wealth: Wealth Management in Practice. Chicago: John Wiley. McGill (2010), Fundamentals of Private Pensions. Oxford University Press. Reuvid (2006). Handbook of personal wealth management. New York: Kogan Page. Solomon (2005). Financial security & personal wealth. San Francisco: Transaction Publishers. Stevens (2006), After Taxes: Managing Personal Wealth. Chicago: Dundurn Press. Vitt (2003), Encyclopedia of Retirement and Finance. Greenwood Publishing. Read More