Financial Planning
Why A Financial Plan?
When is the right time for Financial Planning? My future is a long way away, why bother today?
The best time to review financial situatuion is today! And you must do this as regularly as you can because your life is never static.
Unless you start early, you might find that time has passed you by. You will get older, your children will have growing needs, your expenses will rise…..and, before you know it, you may be regretting not planning for the future. Don’t be complacent that you will be okay whatever happens.
Financial Plan must be dynamic to reflect the changing socio-economic environment, as well as the stage of life that you are in. Yet, very few of us bother to review our financial situation as we move from one stage of life to another.
Why should you do Financial Planning regularly?
Simply put, time never stands still. You grow old, your needs change, your family’s needs will also change. Additionally, the context around you will also change. There will be new investment opportunities. Some old investments that you would have made might no longer make sense with the passage of time or will need to get updated.
- With the passage of time and your increasing age, your needs change.
- Similarly, due to economic, political and family reasons, the context can also change. Accordingly, you need to adjust and update your financial plan to take advantage of the conditions as well as to react to changes.
- Someone in their 20s will have different needs as they enter their 30s. Also, over this period your risk profile might have also changed.
- Someone who is married with no children will have to update their plan when their child is born. As a start, if the person did not have any insurance, he or she must buy protection because the family size has increased. Also, this would be a good time to start thinking about writing a will to identify who your beneficiaries will be (life- stage based financial planning)..
Go through stages of life: First job, marriage, buying a house, children, promotion, education/marriage,grandchildren/retirement
Why do I need a Financial Plan? Don’t you need to have lots of money?
Financial planning is one of the things that not many people think about. However, financial planning in India is important to do because it can make your life easier.
While you cannot predict the future, you can certainly be better prepared for it. A written financial plan is designed to make sure that you are financially prepared to deal with whatever happens in your life. And this is not just dealing with the unexpected events, but basic things like buying a car or taking a home loan, funding your children’s education or marriage, or taking care of your loved ones.
You don’t have to be mega rich to have a financial plan. Neither do you have to be very old and approaching retirement. It does not matter how much you earn or what your age is. All of us have something to plan for. In fact, our financial situation influences almost every aspect of your
lives….from the type of house we live in, to the type of car we drive, to how many vacations we can take. Regular financial planning can help give you peace of mind.
If you have dreams, you need a financial plan!
So, what do you need to know about yourself when thinking about a Financial Plan?
Your financial plan entirely depends upon how much effort you are willing to put in. This means not just having a good handle on the details of your income and expenses, assets and liabilities, but more importantly on the following items:
- Time Horizon and Goals
- Risk Tolerance
- Liquidity Needs
- Inflation
- Need for Growth or Income
No doubt there are other factors that are important as well, but we believe that the above five require a more detailed study on your part.
- Time Horizon and Goals: It is important to understand what your goals are, and over what time period you want to achieve your goals. Some goals are short term goals those that you want to achieve within the year. For such goals its important to be conservative in one’s approach and not take on too much risk. For long term goals, however, one can afford to take on more risk and use time to one’s advantage.
- Risk Tolerance: Every individual should know what their capacity to take risk is. Some investments can be more risky than others. These will not be suitable for someone of a low risk profile, or for goals that require you to be conservative. Crucially, one’s risk profile will change across life’s stages. As a young person with no dependants or financial liabilities, one might be able to take on lots of risk. However, if this young person gets married and has a child, he/she will have dependants and higher fiscal responsibilities. His/her approach to risk and finances cannot be the same as it was when he/she was single.
- Liquidity Needs: When do you need the money to meet your goal and how quickly can you access this money. If you invest in an asset to and expect to sell the asset to supply you funds to meet a goal, then please understand how easily you can sell the asset. Usually, money market and stock market related assets are easy to liquidate. On the other hand, something like real estate might take you a long time to sell.
- Inflation: Inflation is a fact of our economic life in India. The bottle of cold drink that you buy today is almost double the price of what you paid for ten years ago. At inflation or slightly above 4% per annum, a packet of biscuits that costs you Rs 20 today will cost you Rs. 30 in ten years time. Just imagine what the cost of buying a car or buying a home might be in ten years time! The purchasing power of your money is going down every year. Therefore, the cost of achieving your goals need to be seen in what the inflated price will be in the futur
- Need for Growth or Income: As you make investments, think about whether you are looking for capital appreciation or income. Not all investments satisfy both requirements. Many people are buying apartment, but are not renting them out even after they take possession. So, this asset is generating no income for them and they are probably expecting only capital appreciation from this. A young person should usually consider investing for capital appreciation to takeadvantage of their young age. An older person however might be more interested in generating income for themselves.