Introduction This is a very interesting article by the Chinese Professor Zhang Keke that argues for the benefits of financial planning. Soderberg & Partners hope this article is helpful for you. Enjoy your read! Research and analysis of personal medium and long - term financial planning ZHANG Keke Guangdong University of Finance published in the magazine of Technological Development of Enterprise Abstract: This article probes medium and long - term financing plan from the basic aspect and makes a full exposition on its theory foundation and the principles. Based on it, it has put forward some basic skills about medium and long- term financial planning. Keywords: medium and long- term investment; personal finance management; basic skills 1. the importance of personal medium and long - term financial planning Some international authoritative professional organizations define personal financial planning as “behavior to make up for the gap between life status and expected target by financial planning and set up a proper procedure to use financial resources to achieve personal life goals.” Simply speaking, “financial planning is people plan their wealth in a long-term and carry on the plans specifically to achieve a happy life and enhance the life quality.” Generally, to do a good personally financial planning, we should consider many elements, like risks, rate of return, liquidity, cash flow, investment period, the tax burden and other relevant factors. Investment period would be one of the most important elements because the longer the investment is the higher rate of return on investment is. Doctor Li Zhilin, the director of business and economic development research institute in East China Normal University said, “If a person deposit 14,000 Yuan every year and invest on insurances and real estate with average 20% yearly rate of return on investment, 40 years later, the person could have 102.81 million Yuan. This is one of the three secret reasons for Li Jiacheng (a famous business man in Hong Kong) becomes a zillionaire.” Making money is just the first tool to get rich and amass a fortune while financial planning could also create wealth sometime medium and long-term financial planning could create even greater amount of wealth. Time is a vital element of financial planning as compound interest could be effective only after a long time. It is just temporary to make money by chance because luck is not eternal for a person and you could easily lose all the money for bad luck too. 2. basic rules of personal medium and long - term financial planning a) the sooner, the better to invest and do financial planning Invest first and then seize the chance rather than wait for the chance to invest. Delay is always the reason of fails in financial planning. We should start as soon as possible to do financial planning as we could have enough time for compound interest to play a sound effect. We could see clearly from the compound interest formulas that return on assets and investment period are the main elements to influence future wealth rather than the amount of seed money. It’s absolutely wrong to do financial planning after making money. Accordingly, it’s very important to control your time to make money. If you want to do financial planning only after you have a lot of money, then only very high rate of return on investment could make up for the loss of delay. Take insurance for an example. For the same kind of insurance with the same benefits, the premier for a one-year-old baby would be at half cost of that for a 30-year-old adult. And for the adult, it’s not the money that would be lost but also the health protection for the 30 years. So if you know how to meet the demands for every phase of your life by medium and long – term financial planning, you could not only achieve economic benefits but also get family financial safety as soon as possible. b) it should be long-term More than a decade ago, an analyst from Merrill Lynch said: "According to statistics, in 55% of the past days, the stock market is rising while in 45% of the time it is reducing. Unfortunately, we do not know when it will rise. Therefore if you do not know whether tomorrow it is rising or reducing, the smartest way is to guess tomorrow it will be rising. The more you guess, you corrector it will be. Since it is smart that you guess the stock market will be rising, the best Investment strategy is to buy stocks as many as possible and hold the stocks as long as possible. This strategy seems so stupid but it is the best way of financial planning. Some people did an empirical study. In the past, if you invest in Taiwan’s stock market by holding investment portfolio, the longer you hold it, the less probable to lose money. According to the statistics, the possibility to lose is 45% if you hold the stocks for one day, it is 40% if you hold the stocks for one month, it is 34% if you hold the stocks for one year and 1% if you hold the stocks for 5 years. If you hold the stocks for more than 10 years, if is definitely to get lost. As a result, long-term hold is an important means to reduce lost. Lian Zhan, the former president of Chinese Kuomintang Chairman owns property of the estimated total value of nearly 6 billion Yuan to be one of richest officials in Taiwan. But he doesn’t become rich by saving salaries and living frugally but by a correct way of financial planning. Lian Zhan's mother changed her philosophy to invest about 40 years ago. She didn’t deposit all the money in the bank like most women but invest in many ways. Lian Zhan once said that their family's financial means is "inaction", that is, to be a long-term holder after buying the stocks and real estate stocks. In several decades, the Lian family just kept investing but rarely traded for short-term profits. So the long-term investment got the average yield to reach more than 20% and even created a fiscal myth of doubling the family's assets every 5 years. Therefore we could say long-term is gold and short-term is silver. We can’t expect to get very wealthy in one or two years but we could expect to choose the right investment objectives and do the financial planning in a correct way. c) overcome the misunderstandings in financial planning The purpose of financial planning is to manage wealth and increases the standard of living. Therefore the ultimate goal of financial planning is not to make as much money as possible but should be making proper amount of money. The higher the earnings you expect, the greater the potential risks and losses will be. It will easily lead to financial chaos if you insist to pursuing higher returns without considering anything else. The basic idea of financial planning should be: insurance firstly, emergency preparation secondly, paying back loans thirdly and the finally to invest and consume rather than by the contrary turn which is very ill-conceived. It is very risky both for the person but for the family to seek high benefits without financial safety protection. So investment is not simply speculation and we should expect to achieve high yield in short term. So the key point for medium and long-term investment should be achieving the desired standard of living by financial planning on the basis of financial security. 3. basic skills of personal medium and long - term financial planning a) keep accounts Our income could possibly just from the salaries while expenses could be food, clothing, housing, transportation, education, insurance, taxes, investment, health care, etc. We only get salary once or twice in a month but spend money every day. We could see clearly how we spend money by keeping accounts and then based on the accounts we will consume properly and have more power to save money. Generally speaking, if it becomes our habit to keep accounts, we could control costs, reduce unnecessary consumptions and gradually increase wealth. There are two points for accounting: keeping accounts every day and classify them to keep the integrity and accuracy of the records at the same time to facilitate the analysis in future. Bill Gates keeps daily accounts. He gets rich because he regards money seriously. If you respect money, you could get rich or else money wouldn’t be staying with you for long. b) build the financial planning database It is very necessary for the medium and long-term financial planning to keep financial files in case that any lose of the documents and information maybe cause troubles or even economic losses. The financial planning database could starts with establishing savings files, receipts files and other files. c) diversity in investing Nowadays, many big financial organizations bring out their financial planning products. When the investors face the diverse options, portfolio diversification could make profits more stably. For the personal investor, asset allocation could be up to the level of wealth, the motive of investment, the investment period goals, risk appetite, taxes and so on. And we should adjust the asset allocation from time to time according to the new prices to control risks and maximize return on investment. Generally we should consider these three elements. Firstly, the family or the person’s attitudes towards risks will decide on the options of investment tools. Family status of accumulated assets, expected future income, family burdens will decide on the family’s risk tolerance. Only if we consider the risks, we could make better choices of investment tools which are proper for ourselves. Secondly, the family or the person’s financial goals could decide on the investment period. Thirdly, the conditions of the investment market will influent the investment choices. Market uncertainty breeds more investment opportunities. 4. conclusions We could clearly notice the importance of financial planning. The medium and long-term financial planning could not only preserve and increase the wealth but also enable us to have a life with an entire comprehensive plan to easily achieve financial freedom and life dignity. Therefore, through this article, I hope that more customers could build the awareness of the medium and long-term investment and take actions as soon as possible to choose the right products and investment portfolio and achieve financial freedom so that wealth could create wealth for you.
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