Financial planning is a must have tool for investors across the globe. However, this is not how we humans approach our finances. We look at our finances on a piece meal basis. We spend without thinking, we save less and we invest haphazardly. Someone comes along to sell us an insurance policy and we buy it simply because we are sweet talked into buying by the glib insurance agent. We walk into a store to buy a consumer durable and the agent peddles us to buy a particular LCD because it meets his monthly sales target – he isn’t selling because the product is good for us! When we near retirement, we look to reverse mortgage or even liquidate our only home to take care of our monthly expenses. Financial Planning disciplines the way investors spend, save, invest and enjoy their money.
Loosely defined, financial planning is a process by which an investor plans for his financial goals or aspirations in life, decides which investment class to choose for a particular goal and saves and invests his money for the same. Obviously, he will need to perform periodic reviews of the plan to make sure he is on target to achieve his goals.
Financial Planning covers four pillars of a person’s life. They are retirement planning, insurance planning, tax planning and investment planning.
Retirement Planning is about investing your money intelligently to save for retirement so that when you retire you have monthly income coming to you to meet your expenses.
Insurance planning is all about making sure that the earning member of the house has the right amount of insurance cover and through the right products, if he were to die, the rest of the family members should be compensated with enough money so that they can lead their lives with no compromise in their lifestyle. Insurance planning is also about taking insurance for your vehicle, home and health.
Tax planning is making investments in such a way so that saving taxes becomes an easy process and not an activity which you want to complete when the tax deadline looms large – that’s when most investment happens randomly and investors make the most mistakes.
Lastly, Investment planning is about choosing the right products among equity, debt, commodities and other asset classes to make your money grow successfully.
But what exactly are financial goals?
Goals are defined as things for which you will need a large sum of money sometime in the future. An example is retirement. You need a large corpus at retirement and you need to save for it. Since it is very far away, it qualifies as a long-term goal. Buying a new car is also a financial goal. You need money for the down payment of the car. You need to plan to save money so that when the time comes to buy the car, you have the money with you. In the financial planning process, you jot down all your long-term, short-term and medium-term goals. It is often found that investors have tons and tons of aspirations and once they begin to plan for saving for all of them, they realize that some of these are must have goals while others are good to have goals. Must have goals are the ones the investor needs to absolutely save for and good to have goals are the ones the investor can live without.
Once the goals are defined, depending on how far the goals are and what the risk taking capability of the investor is, asset classes are chosen to invest the money so that they grow over a period of time to be liquidated only when the goal materializes.
Financial Planning forces the investor to become more methodical and disciplined as far as his money management is concerned. The investor can plan, save and invest his money to become rich.
If you pause for a moment and think, the entire gamut of financial planning is a very involved task and a very professional one. While investors can take a shot at investing in shares, mutual funds and debt, they can often burn their fingers since they do this part-time and don’t have the capability to do so. This is also a very time consuming task and often an investor will find his work life balance challenged. The small investor also does not have a research team at his disposal to make the right investment decisions and at the right time. This is a job best left to financial planners who are certified to perform end to end financial planning. They advise you what to do and how to implement investments for a fee that you pay them and they are on your side always.
Financial planning is an important tool that all investors need to inculcate and use in their lives.