As clichéd as it may sound, Failing to Plan is Planning to Fail. While we take great pains to plan for small events like vacations round the corner or a birthday party for our child, we do not have a plan for our finances. Therefore, does that mean all of us who do not plan, live life king-size with no worries for tomorrow? No! Of course not, we Indians have an extremely healthy savings rate, currently pegged at 34% of GDP as against 17% of GDP for the US.
Now you would wonder, if we Indians do save such a huge chunk of our income, where is the problem? Why bother with financial planning? Before we answer that, let us look at exactly how we go about investing our money.
How do we go about investing our savings?
• Luckily for us, culturally many of us have been brought up with the belief that one must invest in Gold and Real Estate whenever one has surplus. Contrary to what media and many finance experts have you believe, these asset classes have generated fabulous returns over the last 7 to 10 years. So, pat yourself on your back if you had invested in these asset classes 7 to 10 years back, you have done well.
• We invest in mixed needs products where the performance is just about average and end up not taking care of either of the needs completely or optimally. Examples which have been debated at length would be money-back and endowment insurances. These give you the emotional satisfaction of having catered to both insurance and investment needs.
• A lot of our decisions to invest in a particular product or asset class are driven by the fact that people in our social circle have invested in these. They are almost always ad-hoc and do not follow a particular plan and definitely are not done with the end objective in mind.
Points to ponder
• Gold and Real Estate – Do you understand the risks associated with these asset classes? Wouldn’t it be risky to put all your eggs into these baskets? Will they give you the same kind of returns in the future?
• As you embark on the second half of your corpus accumulation phase, how aligned are your investment decisions to your end goals? While you have got your big decisions right, what about those 20% of your financial decisions which will finally decide if you have an average plan or a good one?
• While you have got your investment decisions right till now by being in the right asset class at the right time, will you be able to repeat your performance going forward? Timing your entry and exits can lead to wonderful results if you get it right and it can just as easily erode your capital when you get it wrong. Are you willing to gamble or would you prefer to take risks which are more planned and thought through?
What is Financial Planning supposed to do for you?
• To start with, take a look at where you stand in terms of your financial health currently. This is done by examining your assets, liabilities, income and expenditure, investments, tax and estate plan.
• You set realistic personal and financial goals. These would include goals like children’s education, retirement, second home, etc.
• Make a comprehensive financial plan to meet your goals. The plan should address your financial weaknesses and build on your financial strengths.
• The most important part is to implement – to put your plan into action and monitor its progress.
• Last but not the least, review the plan periodically to course-correct as well as align to changed personal objectives.
Financial Planning as opposed to a plan is a continuous process and needs to be reviewed regularly to account for changes in personal circumstances, tax laws and introduction of new products.
Where does a financial planner fit in?
• A financial planner would bring in her/ his expertise.
• Will help in instilling financial discipline and focus to follow through on the plan once made.
• Will give you a third party unbiased perspective on what are often emotional, difficult decisions.
Managing your personal finances is ultimately your responsibility. However, you don’t have to do it alone. A qualified financial planner, such as a CERTIFIED FINANCIAL PLANNER (CFP) professional, can help you take decisions that make the most of your financial resources. A Financial Planner is someone who combines the technical expertise of a doctor, the discipline of a traffic policeman and the unbiased connect of a friend, to help manage and regulate your financial well being.