“If you don’t know where you are going, you will probably end up somewhere else” – Laurence J. Peter
There are two reasons why people don’t achieve financial independence, despite being able to. I have earlier written about one reason, which is the importance of “understanding (as against underestimating) the long-term”. Today, let us talk about another, which I have termed (a bit simplistically) as “lack of direction”. Lack of direction here pertains to 2 important aspects of our personal financial “kundli”, which is unique to each one of us.
The first is about knowing how good (or bad) is our financial situation with respect to the quality of life that we are leading currently. As a people, we are savers, and most people we meet usually show fair diligence in terms of managing their personal “fiscal” situation. A few times though, we do come across clients who need help in managing their “personal budgets”. Where this goes awry usually is in terms of either having excessive debt, especially of the wrong kind (to fuel a lifestyle which threatens to become unsustainable) or being prone to impulse big-ticket purchases – either for unplanned holidays or gifts or expensive goods to add to their home.
Such situations are relatively simpler to address, since all it requires is enabling people to “allocate” their incomes to different “wallets” and to have the discipline to do this consistently, month after month. There are easy tools that do this such as maintaining separate accounts for incomes and expenses, using pre-set sweep-outs to ensure regularity, maintaining the savings in a not-so-accessible demat account, and having a monthly income-vs-expenses check.
The second aspect is about how well are we preparing to face our future financial needs. While most people have a handle on their present financial situation, when it comes to knowing how prepared they are for their future, most are fairly unprepared. Here, what’s interesting to note is that while we are good savers, we aren’t necessarily good investors. This could be because our investing decisions are usually ad-hoc, driven by what friends and acquaintances tell us or to meet our aspirations.
Quite a few clients we meet don’t necessarily know what they are investing for (except that it seems to be a “good” avenue for “returns”) and what is the “outcome” that they desire from this investment. A key “minimum qualification” to become a good investor is to know what one’s financial goals are, which part of one’s investment portfolio addresses which goal, and with what compatibility.
An easy tool for this is what is simply called a “personal financial plan” which maps your savings and future investments to your goals, and also recommends the best investments to achieve the goals in the most effective and optimum-risk manner. A good financial plan ensures the right mix of asset classes to provide both liquidity as well as stability, the right priorities in terms of goal-funding and the right amount of risk taken to generate the best return, depending on the time-frame of the investment and the risk-profile of the investor.
Achieving financial freedom (or even getting on the road to it with an even chance of getting there) requires you to know what your future financial goals are, and put in place a good plan to fund them from your savings today, thereby giving you the peace of mind that you are not compromising your tomorrow. A good financial planner, whose interests are aligned to yours, can help you put this together for a reasonable fee, while taking the load off you entirely in terms of monitoring and course-correcting, allowing you to live your life fully in the present.
Finwise is a personal finance solutions firm that helps individuals and families plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at email@example.com or +91 9870702277/9820818007.
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