The Four Pools for Your Financial Planning Process

The COVID-19 pandemic has swiped the whole world, creating a severe disturbance in our lifestyle. This unexpected outbreak caused millions of families to suffer from sudden financial stress – from additional household epidemic prevention expenses, large medical bills, sharp cut-offs in incomes, or even layoff.

It is even more important now to build a healthy personal and household financial planning scheme to form reliable protection, especially in unpleasant incidents and periods. However, it is never easy. The complexity in the financial world impedes a lot of people to inspect and improve their financial status.

Here, I introduce a four-pool model to understand the basic idea and method of individual asset allocation and budgeting. Hopefully, this can help you begin learning to get a better situation for your finances. One can also consider seeking direct professional advice from expert financial service provider like Rani Jarkas for the better understanding of the same.

The four waterfall pools for your personal and household asset allocation include:

#1 Cash Pool

The cash pool is the most important aspect that builds the foundation of your financial planning. If you are under great financial stress with heavy debts, it is the first step to reduce debts and create positive cash flow by saving.

A study says that till 2019, the total debt amount of American household is 14.15 trillion dollars, which means each American takes on 42.9 thousand dollars of debt. Also, the personal saving rate is just above 7.6%. These statistics indicate the hidden danger in the financial condition of a large number of American households.

Earn more and spend less is the two-way solution for you to start growing your bank account. It does not matter if you can expand your income source or enhance your current earning capability. You will need to learn to spend smart as overspending is always harmful to your saving schedule. My suggestion is to review your current financial status and understand your essential spending to be well-positioned for the following steps.

This cash pool also serves as protection when facing emergencies to fulfill short-term spending, such as buying a new laptop or paying for some advanced courses. A recommendation is to have cash or cash equivalent (which means it has high credit quality and is highly liquid) that can support 3-6 months of unemployment, covering all your basic spending needs or even keep your original lifestyle. I believe many of us have realized the importance of this during this year’s COVID-19 pandemic.

#2 Insurance Pool

When you have built your cash pool, it is time to prepare your protection pads. Here, I mean your insurance plan, including accident insurance, medical insurance (especially critical illness insurance), property insurance, life insurance, and such. This pool can serve as your parachute and landing cushion in extreme situations, pulling you out of the potentially difficult time. For example, many patients die from their original chronic diseases that worsen when they get affected by COVID-19. This severe illness usually costs a large amount of money and creates dramatic financial difficulties for the family. Stay covered with relevant medical insurance, it is a great relief to pay for the medical bills.

If you are the sole bread earner in the household, equip yourself with life insurance, medical insurance, and accident insurance.

Keep in mind to limit the insurance premiums within a suitable range, for example, below 8% of the household income per year. This will be a safety net of your family, not a considerable burden.

#3 Short and Medium Term Target Pool

Now since you have to safeguard yourself and your family with sufficient safety net, the fun part – which may also be the thrilling part meanwhile – start to raise the curtain and make its presence.

This short and medium-term target pool focuses on enhancing your returns and helping you achieve your important goals, such as buying a new property or paying for your children’s education.

You can invest in some financial investment products with moderate risks like government bonds, bond funds, and some banks’ special saving products that can generate slightly higher returns than normal current deposits in this pool.

I would also like to call this pool a training ground for your investment life. You can step into the diverse financial markets and experience the flow and fluctuation within. It is a beginning for you to explore and learn more about investment, building your investment philosophy and habits.

You can also hire a personal financial planner to guide you, or have a financial advisor manage your assets. But even if you hire a professional to help you with your investment, you have to understand your risk tolerance, goals, and needs to achieve a satisfactory result.

#4 Long Term/Contingent Target Pool

Congratulations! You can finally meet with your ‘golden goose’ now. This pool sets you up for your long-term aspirational targets, such as a wish to travel around the world after retirement.

Ideally, this pool has money that you won’t need for at least three years. Therefore, you can have a much longer investment horizon and tolerate a much higher risk level in this pool. But it doesn’t mean that you don’t need to quantify the risk limits. You should think about the maximum acceptable probability of not achieving the goals or even losing money.

Potential investment tools can include equities, derivatives, commodities, hedge funds, private equity, REITs, etc. However, due to the high minimum investment threshold, such as hedge fund, private equity, and private real estate, you may need to save more to expand this pool for your golden goose to lay eggs.

Of course, in addition to building these four waterfall pools as planned, you can have tactical asset allocation for some special cases, which means you may deliberate short-term deviations from your overall strategic asset allocation.

It’s never easy to manage your finances and create long-lasting, effective financial planning rules. But it is always worth making efforts for you to enjoy a better life, especially during the pandemic. For professional or investment management advice to your finances you can reach out to Rani Jarkas today.

Financial Planning Process