In our previous article, we explored how personal biases, financial knowledge, and life circumstances influence our investment decisions. Once we understand this, another conversation arises: how much risk can our financial lives actually accommodate?
From Self-Knowledge to Financial Planning
Financial planning starts with our lives, not an investment opportunity: what we own, what we owe, what money comes in and out, and when we’ll need it.
Once we understand our financial position and goals, we can assess whether an investment serves a useful purpose in our portfolio and where it belongs, or if it's simply not for us. Due diligence and risk analysis remain essential.
Private banking offers sophisticated tools for addressing these questions. Still, the process starts with a conversation about the client’s current situation and what matters to them, then organizes resources around those needs.
Financial planning can also help you manage your expenses relative to your income and grow your savings by giving you a clear picture of your household’s inflows and outflows. That’s the first right step toward a healthier, less stressful financial life.
The Starting Point: Assets, Liabilities, and Net Worth
Start with two sections in your spreadsheet: what you own and owe today, and the income and expenses you expect over time. The first shows your net worth; the second helps estimate your savings capacity.
Many examples online can help you see what it should look like. For now, it’s about reflecting the concepts in the previous paragraph.
Example 1. Assume all figures are in the same currency.
Let’s assume you are single, employed, and have no children, receive a monthly salary and a performance bonus each December, rent a home, and cover your own living expenses. You have $20,000 in accessible savings and a take-home pay of $4,000 a month, with no outstanding debt. Your monthly living expenses are $2,600, leaving $1,400 available.
This snapshot is simple, and it will look very different for someone who owns a house, runs a business, or has a mortgage. Same exercise: list what you own and what you owe; the difference is your net worth.
Salary is generally more predictable as long as you keep your job. A performance bonus is less certain, so record it separately from regular salary and use its expected payment date. Ideally, test whether essential commitments remain manageable without it.
For many homeowners, their home represents a substantial part of their wealth. But its value is not readily available for everyday spending: selling takes time and involves costs, even in a favorable market. Unless it generates rental income, the home itself does not provide cash to pay monthly bills.
Cash-Flow Forecasting: Timing Matters
Now, what about other expenses paid annually? Like insurance premiums, holidays, or maybe replacing your computer.
Example 2. Continuing with our household example, let’s say insurance premiums and trips add $2,400 in yearly expenses. Setting aside $200 a month for them reduces your average monthly remainder to $1,200. If the insurance premium is in September, your yearly December bonus will not be available yet.
This shows a simple truth: in financial planning, timing matters. It’s not only about knowing the variables, but also when they come due.
For people with more responsibilities, such as mortgages, tuition, and other family commitments, there will be more moving parts. Still, the underlying principle is the same: account for what is likely coming in, what is going out, and when.
In our household example, you may still have $1,200 available, but a medical bill or an appliance malfunction could create unplanned expenses. The point is, not all available money can become investment money. You still need a buffer (savings) for life’s unexpected circumstances.
Savings and Investments
Before setting goals, distinguish between savings and investments.
You may feel comfortable investing in the stock market, but that doesn’t necessarily mean you should invest your kids’ tuition for next year in stocks.
Savings are short- to medium-term funds (under 3 years), usually reserved for planned and unexpected expenses, such as tuition, mortgage payments, living expenses during job loss, emergencies, and so on. Emergency savings should prioritize capital preservation and ready access. Money reserved for a commitment in two or three years can be managed around that payment date, seeking a return without compromising its availability or taking excessive risk. Goals three to five years away sit in between, so the closer the date, the more safety should matter.
Money for longer-term goals can take more investment risk. Depending on the objective, investments can pursue growth, income, or both. Prices can fluctuate; selling may realize a gain or loss and may involve transaction costs or taxes. Some products or accounts also impose withdrawal restrictions or penalties.
Example 3. A stress scenario: let’s say the economy is in a hard downturn; equity markets are spiraling; the company you work for is so heavily affected by the current situation that it announces a massive layoff, and, unfortunately, you are part of it. You have a family and a mortgage.
You have limited savings, most of it invested in stocks in the hope that market gains would make up for not saving more. Now, alongside losing your job, those investments have fallen in value just when you may need the money.
Savings matter, but so does how you manage them. Money needed for essential expenses should not depend on favorable market conditions. Money left after accounting for reserves and other commitments may be available for investment, with risk suited to its purpose and timeline.
How large should your emergency reserve be? That depends on your essential expenses, income stability, dependents, and available support. Imagine the same scenario with someone who owns a business and faces this crisis while having commitments to clients and employees: they should assess the business’s cash needs separately and would probably need larger savings. Or the opposite: a single young person with no kids who can count on reliable family support may need a smaller personal reserve than someone facing the same expenses alone.
Financial Goals
What is the remaining $1,200 intended to fund, how much will each goal require, and when?
Let’s say you’d like to buy your first home in four years.
The monthly forecast gives us insight into your potential savings, but it doesn’t tell us yet whether the purchase is feasible. To assess that, we need an estimated down payment, a target date, and a clear sense of how much of your existing savings can reasonably go toward that goal.
We also need to distinguish the home purchase from other uses for the same money.
If we count all $20,000 toward the down payment, what's left for an emergency? You shouldn’t fully commit the same savings to two purposes at once.
Let’s run the numbers. At $1,200 a month, four years totals $57,600. Add your $20,000 in savings, and you reach $77,600. Now set aside an emergency reserve. Three to six months of essential expenses is a common rule of thumb; at $2,600 per month, that’s roughly $7,800 to $15,600. That leaves about $60,000 to $70,000 for a down payment, before any investment returns, the December bonus, or rent changes.
Matching Your Money to Your Timeline
Notice what just happened. Your money now has three jobs, each with its own date: an emergency reserve you may need at any time, a down payment needed in four years, and longer-term goals, such as retirement, that are decades away. Each job asks something different of the money: availability, stability, or room to grow.
Institutions do the same on a much larger scale. Banks, insurers, and pension funds project the payments they owe and manage their assets with those commitments in mind; this is asset-liability management, or ALM. Your spreadsheet is not an insurer’s model, but it borrows the same principle: consider your money and your future commitments together, rather than choosing investments in isolation.
That also answers the question we started with. How much risk your financial life can accommodate depends not only on how you feel about markets, but on what your money has to do, and when.
I want to spend more time explaining what financial planning looks like on a spreadsheet and how to prepare it, but that would pull focus from our main conversation: how private banks profile their clients' needs and net worth.
In the next articles, we will take one “bucket” at a time- the purpose-based groupings that private banks also call dimensions- and explore the investment choices that fit each. Part IV starts with the money you may need soonest: cash and short-term instruments. Later articles move toward longer-term goals and ask where, if anywhere, more complex assets such as alternatives or crypto belong.
As always, these writings aim to provide context on the basics of investing, not specific investment advice.
Best,
