Financial Planning
September 20th, 2024 Financial Strategy
Introduction
Everybody earns money with an objective to fulfil his life goals. They spend it for purposes as simple as funding their daily household expenses buying luxuries for a better life. Money can be saved, accumulated and grown to fund various financial goals of an individual and his family; such as education, marriage, house purchase, retirement and other unplanned expenses. So money earned is either used to fund some of the immediate expenses or some goal in distant future or some unplanned expenses occurring due to some contingencies.
We can broadly classify the ways in which we can earn money into 3 categories, first, one can earn by rendering service’s as an employee to his employer or being working as a professional; second, can earn money by running his show as an businessman and third, by investing and managing his surplus money to let it grow and earn income on his investments.
When savings are made for any specify future goal, it needs to be invested in an optimum way to give maximum returns simultaneously protecting the capital, so while investing, a few prime things which needs o be taken care of is the individual’s risk profile, time horizon of the goal i.e. till what time money can be kept invested, the taxation aspects related to personal finance i.e. what will be the cash inflow and inflation factor.
In earlier days, managing money was not so difficult due to various socio economic factors like high interest rates, guaranteed returns, government sponsored benefits, close knit society, a strong joint family system, a modest lifestyle and cost of living - all made it simple for a person to manage his money without any external expertise. In current scenario things have drastically changed some due to social reasons and some due to economic reforms. The cost of living and aspirations have gone up putting pressure on income. Considering all the things have changed drastically during last two decade which makes it more imperative to have a proper financial plan for servicing his needs and achieving his goals.
Owing to the changes in last two decades an effective percentage of country’s working population has a higher household and disposable income. The number of product offering and their complexity has increased promoting the product offerings with no surety of returns. Interest rates on debt instruments have fallen from as high as 12% in the 90’s to 7% - 9% today (considering bank deposits) whereas inflation is also in the same range. The financial products in nature of offering to retail are loaded with excess of information on issues which needs analysis from the viewpoint of risk, liquidity, and appropriateness apart from comparison within and across the asset classes of such products.
We can say with current life style an individual’s long term goals are more or less determined, portion of monthly expenditure are certain and to support these goals they have certain sources of income along with the income from investment and savings they have made in past. Having said this it is also a fact that an individual is facing scarcity of time in managing their hard earned money. Further adding to the same the increasing complexity of financial products is also making it difficult for individual to monitor his investments and to judge if they falling in line with the goals decided. All these make it imperative for an individual to seek experts’ opinion in managing one’s finances in a disciplined manner.
This is where Financial Planning as an approach to managing personal finances helps an individual to fulfil life’s numerous goals with available resources. A qualified and professional
financial advisor using the Financial Planning approach to offer solutions, products and services in a holistic manner to his/her clients can make a difference to their lives.
Various web definitions suggest / define financial planning as:
“Financial planning is the process of meeting one’s future requirements through a properly developed financial plan considering the life goals of an individual. Life goals will vary from individual to individual.”
“Financial planning is the process of determining the future requirements of an individual, setting his goals, managing his finances and monitoring the progress for achieving the goals.”
“Financial Planning is the process of meeting one’s life goals through the proper management of personal finances.”
The definitions discussed have few things in common:
- Financial planning is a process.
- Process is initiated for meeting goals.
- Managing personal finance.
- Periodic review.
Financial Planning is a Process:
This process can broadly be categorised under 7 steps to deliver a financial plan:
- Gathering client information.
- Analyzing and evaluating the gathered information.
- Risk profiling of the client.
- Constructing a financial plan based on risk appetite and goals of the client.
- Implementing the recommendations.
- Periodic review and monitoring the financial plan.
- Re-balancing and modification (if required) in financial plan.
Meeting Goals:
Individuals and families have many goals in life to fulfil for which they will have to save, accumulate and grow their money. Many a times a proper financial planning also help us determine our prime goals with more clarity. The most common life goals are:
- General Goals.
- Tax savings.
- Retirement Plans.
- Special circumstances.
Managing Personal Finances:
Key part of financial planning is about managing finances of an individual or a family. While offering solutions to clients, the following aspects of personal finance should be analysed as a whole rather than seeing them in isolation:
- Income
- Expenses
- Assets
- Liabilities
- Insurance
- Taxation
Periodic review
Post implementing the financial plan it may happen that returns are not coming as per the expectation of the plan here it will be imperative for periodic logical shuffling within the portfolio and re-balancing the portfolio. This will happen only if the plan made is monitored and reviewed periodically. At some point of time it can also happen that goals so decided are modified by the client and same has to be taken care of.
Need for Financial Advisory Services
So far we have discussed about financial planning and its use. Now an obvious question is how to do financial planning, how to make a financial plan. Well, there are several ways for it but 3 common ways which I foresee are; first, a plan can be made by self using our decision and expertise, secondly, can be done using tools of asset allocation available on net and lastly, can be done by hiring a professional financial planner on his cost. This decision is somewhat like going for medication when countered with cough & cold; whether to consult a doctor or to take some commonly and easily available medicine on self judgement. All of us know what the right way is!
In past two decades soco economic conditions have changed a lot; it won’t be wrong to say now the factors driving the need for financial advisory services are many and increasing gradually, these factors are lead by strong economic growth experienced over the last two decades resulting into rise of household income and disposable income but other effect of this development is that now an individual have a lesser time for activities other than his core business. Simultaneously we have also seen the abundance of product availability across all the asset classes like insurance, equity, debt etc; few people consider it as a side effect that now even gold “a distinctive asset class” which earlier was used only as an ornament now can be held in demat account if not lump-sum than in SIP mode.
In past two decades interest rates on the debt instruments have fallen considerably forcing the investor to seek other asset classes including direct equity and mutual funds in order to beat inflation. Therefore, most of the savings which were earlier parked in investments like fixed deposits and bonds are finding alternate investment avenues for savings, countering the inflation and diversifying the portfolio.
Thus, we can say it’s now easy to invest but difficult to manage its investments. This is yet another factor for a common man to hire a Financial Planner who can guide him through the maze of products help in constructing a portfolio which is as per his risk appetite and committed towards achieving his goals.
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