This is the story of Mr. Arora. A small business owner, Mr. Arora lives in Delhi with his family of four. Like most people in their middle age, Mr. Arora believes that he’s taken care of his family’s financial health by investing in the stock market. He’s read up about investing and spreads his savings across stocks as well as mutual funds.
Having started his systematic investments, Mr. Arora sits happily with the belief that his family’s finances are taken care of. But what Mr. Arora doesn’t realize is that investing is just one of the many aspects of wealth management that he needs to focus on.
Managing wealth encompasses various parts of one’s finances. When all of them are put together, they lead to financial well-being. Let’s understand what wealth management means and how it goes beyond mere investing.
What is Wealth Management?
Wealth management is more than just investments; it is a holistic view of one’s financial life. Managing one’s wealth from more than one perspective requires an understanding of different financial aspects, services, and products.
Wealth management begins when all of these are taken care of. Investing is merely just one part of it. Many people tend to believe that wealth management is for the rich. Wealth management is often considered to be a service that rich people avail. But that is a thing of the past. Today, wealth management is of as much importance to the middle class as it is to the rich. Maybe, even more.
You might think that you don’t have a lot of wealth but even then, whatever you have needs to be managed, protected and built further. The amount of wealth you have doesn't matter. What matters is how well you’re able to manage it. Good management of your wealth will lead you to hold onto what you have and build upon it as well.
What does wealth management include?
For most of us and middle-class people like Mr. Arora, wealth management would comprise the following few things:
- Saving
- Insurance
- Investments
- Asset allocation
- Goal setting
One can’t and one shouldn’t spend everything that they earn. Saving some of what you make is the first step towards managing and building wealth. If you don’t save, you won’t have any money to buy insurance or to invest. There is no thumb rule on how much you should save, but 10% of your monthly income is a good place to start.
The second part of wealth management is insurance. This includes life insurance as well as health insurance. Both types of insurance are equally important and ideally, should be bought before you begin your investment journey. Life insurance is important because it can help your dependents in case of your untimely demise. Medical insurance is critical because it can save you from losing your accumulated wealth in case of a medical emergency.
Remember: insurance should be treated as an expense and your aim shouldn’t be to earn any returns out of your insurance policies.
Once insurance is taken care of, it’s time to start investing. Enough has been said about investing and why it is important. Investing helps you grow your money. But investing shouldn’t be done without giving thought to the other two aspects of wealth management--asset allocation and goal setting.
Investments can be made in different types of assets like equity, debt, and gold. The asset you choose to primarily allocate your investments in would depend on the type of risks you can take and your investment objectives. This is where goal setting comes in.
Long-term goals allow you to take higher risks, which means you can invest more in equities. On the other hand, short-term goals require your investments to be relatively safer. Hence, for short-term goals, you can allocate a higher amount to debt instruments. Setting goals will help you achieve optimal asset allocation and eventually, meet your investment objectives.
This is how wealth management goes beyond investing. For someone like Mr. Arora, the other aspects of wealth management are as important as investing.
