One cannot start a journey without having a destination in mind. He would soon be going round in circles. Can one leave his financial needs and goals to chance and not make a financial plan. The result would be utter failure and frustration would follow. A financial plan involves setting a destination or a target which is financial security in life. This plan stimulates action which involves making the right investment decisions and a continuous monitoring of the plan to secure the necessary result. Now ones destiny is truly in his hands. Remember good plans shape good decisions. That’s why good planning helps to make elusive dreams come true.
What is financial planning?
Financial planning is all about defining a financial goal such as purchasing that dream home, buying that beautiful car or taking ones family on a dream holiday. This goal also needs to have a value as well as a time frame in order to be defined as a financial goal. This could be the purchase of that dream home costing INR 50 Lakhs in a 10 year time frame or a foreign holiday for the family costing a lakh of rupees a year from now.
- Financial goals could be short term, medium term or long term in nature depending on the time frame of these goals. A dream home is a long term goal as it may have a time frame of 10 years while the purchase of the car in a time frame of 2 years could be a medium term goal.
- Financial planning is all about taking control of one’s finances both assets and liabilities. Current expenses are satisfied from current income and sums of money are set aside from the current income to match up to future needs such as funds for retirement. One saves a sum of money necessary for contingencies basically an emergency fund. The excess amounts are invested to give one decent to high returns over time. High value assets can be built on a sound investment plan. Financial planning also involves insurance planning, plans to retire debt, investment planning, retirement planning as well as tax planning.
What are the steps involved in financial planning?
- Clearly state and define goals: One needs to clearly state a financial goal which needs to have a value and a time frame. The goal of purchasing a dream home worth INR 50 Lakhs in 10 years is a financial goal. Well began is half done and clearly stating and defining a goal is a step in the right direction.
- Know ones financial position: Financial planning is about collecting and collating ones financial information. One needs to make a budget of all sources of income such as one’s and his spouse’s salary as well as income from rent if he has given his house on rent. Make a list of all expenses. Putting down in writing all income and expenses gives one a bird’s eye view of his finances.
- Develop a financial plan: One knows his current financial position from the budget he has prepared .One also knows his financial goal. The next step is asset allocation basically deciding how much money is dedicated to which asset based on his risk profile. If one is risk averse a huge allocation of over 60% of his portfolio is made in fixed income securities mainly debt such as a fixed deposit or a public provident fund. If he likes to take risks investments are made in equity of over 60% of the portfolio. One also needs to see which stage of life he is in when making his plan. If one is over 50 years of age and fast approaching retirement he would shift all equity investments into debt in order to protect his portfolio from the volatility of the stock market .Investment decisions are then made based on the stage of life one is which basically means the time one has in hand to achieve his financial goals.
- Implementation of the financial plan: One needs to remember that thought without action is procrastination. The financial plan needs to be put into action .One needs to put his money where his mouth is .Money needs to be put into the investment decisions made and profits realized over time. One needs to take up the insurance plans, implement the investment decisions and pay back loans to reduce debt. Remember it’s not important whether one is right or wrong while making investment decisions but how much one makes when he is right and losses when he is wrong is a famous saying.
- Monitor the plan and take corrective action: One’s financial plan needs to be dynamic in nature and adjust itself to the changing situation. This is akin to a guided missile which makes course alterations whenever necessary as it closes in on its target. This course correction or modification of the financial plan as and when required makes all the difference between success and failure. Success is more than luck. It’s about planning towards achieving it.
Should one abandon the financial plan in difficult times?
One surely remembers the stock market crash of 2008.Panic selling in the market resulted in investors making a beeline for the exit. Many years of intricate investment planning were lost. On hindsight one needs to ask the question should the panic button have been pressed? One is plagued by doubts at this time. Has one made the right decision? Should one have focused on saving rather than bother investing? The answer is obvious. If one cannot stick to the financial plan in hard times why make one? Remember tough times don’t last. Tough people do. Whenever one makes an investment plan especially in equity the outlook should be for the long term. Equities give the best returns only with a time horizon of at least 3 years. Stay invested. It pays.
There is a famous saying “Let our advance worrying become advance thinking and planning”. Stress and worry is just a needless waste of energy. Use this energy to make a financial plan .This financial plan will stand good stead in tough times.