Guru Speak

It has nothing to do with the group of people bearing large debts and scant savings. However, financial planning can be also applied to this case.

Similar to Maslow's "Hierarchy of Needs", in which a person's physiological and psychological needs are arranged in order of importance, financial planning has its "Financial Planning Pyramid".

In this hierarchy, the lowest tier signifies the basic needs that should be met before moving to the next step. Cash management occupies the most elementary tier, while the upper tiers represent insurance, investment, retirement and estate planning.

Focusing on the ground level, a planner will conduct a financial checkup embracing an analysis of cash inflows and outflows, as well as debtrepayment capability.

It should be noted that incurring debt does not always pose a threat to personal financial wellbeing. Depending on the purpose, debt financing is considered advantageous when the benefits earned today are more apparent than delaying them into the future.

Owning a home or car is an obvious example, since most people cannot purchase these items without some sort of financing.

However, debt will need to be used more carefully if the purpose is to spend for normal living expenses.

Although the proceeds from personal loans or other kinds of shortterm debt can be used to satisfy an immediate financial need, it comes at a high price.

Financial planning plays a crucial role here. The planner often employs a method called "Financial Checkup" to assess a person's financial profile.

Collecting data on monthly cash flow, assets and liabilities, the planner can come up with some fruitful results.

By breaking down expenses into categories, unnecessary outlays can be detected and a propensity to spend less and save more will be discussed. At this point, the planner might be in the right position to help you set a realistic budget to pay off your debts.

This financial information can also indicate the capacity to service debt. Dividing scheduled monthly repayment by monthly income, the debtpayment ratio is presented as a percentage.

The rule of thumb suggests that this ratio should not exceed 35 per cent, or about onethird of monthly income.

Finally, a sound financial planner might suggest further how to mitigate a deficiency should unexpected events occur, namely a layoff, disability or severe case like death. These risks should be insured.

The financial planner usually recommends building up cash and liquid assets totalling three to six times average monthly payments.

Applying credit life insurance against massive debt such as mortgage loans is a good choice.

Paying low premiums in exchange for total debt coverage, you can be ensured of effective protection without leaving the financial burden behind on your family.

Should you find this analysis complicated or need through guidance, consider having your own financial planner today.