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Financial Planning

Over the years, terms like financial planning have become a topic of discussion. Newspapers, blogs, magazines, television channels and almost everyone is talking about financial planning. So, what is financial planning?

In simple words, Financial Planning (FP) is the process of accomplishing your life goals through proper management of your finances. The process of financial planning should help you answer questions such as where are you today, i.e., your current personal balance sheet, where do you want to be tomorrow, the finances associated with your goals, and what you need to do to achieve needed. There, that is, what you need to do to reach your goals.

The process includes gathering relevant financial information, setting life goals (e.g. children's education, buying a house, buying a car), examining your current financial situation, and how you can meet your goals in the light of your current situation and future plans. It may involve coming up with a strategy or plan for this.

Developing a financial plan requires considering various factors. This includes the client's current financial position, their financial goals, any outstanding loan, investment instruments, insurance requirement, retirement corpus, inflation, risk appetite, tax liability, etc.

FP provides you with a way to organize your financial future so that you can plan for the unexpected. Organizing your finances empowers you to be independent and handle unexpected events in your life. Successful personal financial planning is important for anyone who wants to manage financial difficulties and accumulate wealth.

Two factors are responsible for the importance of financial planning - inflation and changing lifestyles. Financial planning can ensure that one is equipped to deal with the effects of inflation, especially in phrases such as retirement when spending continues but the income stream dries up. Another reason is lifestyle changes. Financial planning has a role in helping individuals to improve and maintain their lifestyles. Lastly, sound financial planning can enable the investor to easily mitigate contingencies, without putting pressure on his finances. At its core, financial planning is not a very difficult task. It requires only discipline and religious adherence to the principles of financial planning.

Importance of Financial Planner

Financial planning helps you to set your short-term and long-term financial goals and make a balanced plan to meet those goals. The first step in developing your financial plan is meeting with afinancial planner.

If you work with a financial planner, you will be prompted to answer questions about your income, expenses and goals. If you are able to find the options and analyze them thoroughly, you can do it yourself, but it requires proper understanding, expertise and time. Hence, it is always a better choice to appoint a financial planner.

The investment plannershould be certified and registered with SEBI as per the recent guidelines. That is why it is important that you take the services of an authentic consultant. The example above shows some powerful reasons why financial planning - with the help of an expert financial planner- will get you where you want to be.

Lets look at the role of a financial planner like the role of a fitness coach. We all understand the importance of staying healthy and fit, but we often fall out of our regime due to lack of discipline, paucity of time and ignorance of what to do next. This is where the role of a coach comes in. The role of a coach is to ensure that you work tirelessly towards your goal. He monitors your workouts, controls your diet and carefully monitors your progress.Your money coach is a Financial Planner.

Basic Mantras of Saving Money

  • Save at least 30-35 percent of your monthly income in good quality savings instruments.
  • Keep at least 3 months of your monthly income for emergencies. Alternatively, get a good credit card with a self-imposed financial discipline to clear the total dues in the very next bill.
  • Clear out all of your high interest debt before you save it

And, the Basic Mantras of Making Money

“Compound interest is the eighth wonder of the world
He who understands it, earns it …. he who doesn’t, pays it.”

~Albert Einstein

Start soonest – the sooner, the better. Trust in the power of compounding. Compounding is growth via reinvestment of returns earned on your savings. The earlier you start investing and continue to do so consistently, the more money you will make. The longer you leave your money invested and the higher the interest rates, the faster your money will grow.

Research and History indicate these three golden rules for all investors

  • Invest early.
  • Invest regularly.
  • Invest for the long term and not the short term.

Research and History also indicate these four common investing mistakes

  • Investing without a plan.
  • Not diversifying well enough.
  • Ignoring risk.
  • Getting married to your investments.

All About Your Risk Appetite

Below are highlighted some of the key points to keep in mind while evaluating your own risk appetite. Risk Assessment Tools: Click here to Find out your risk profile

  • The choice of investment should be based on risk. However, remember that risk and return are directly proportional to each other. The higher the risk, the higher the potential for higher returns. The idea is to take the risk-taking ability, not the investment opportunity.
  • The risk associated with an investment is closely related to the timing of investment. Theres a reason so many investors burn their fingers with hot investment opportunities, primarily because by the time they invest in an opportunity, it has run its course and peaked.
  • Another strange aspect of risk is that it tends to decrease over time. As observed by a prominent fund manager, equities are the riskiest asset in the short term and the safest in the long term. Thus, for long-term goals, go for equity, while debt products are best for short-term goals.
  • The investors appetite for risk decreases with age. Since equities can be volatile in the short term, it is advisable to shift most of the assets from equity to debt as the investor approaches retirement age.

In A Nutshell

  • Inflation, i.e., increase in the general price level, is one of the major factors requiring financial planning.
  • Financial planning helps individuals to upgrade and maintain their lifestyle and also helps in meeting contingencies.
  • Setting objectives is the first step in the financial planning process. Each objective must be backed by a dedicated investment plan.
  • When faced with multiple objectives, prioritize and start with the most pressing.
  • Start early and make up for any shortfalls at a later stage. Do not delay the investment process due to small scarcity of funds.
  • Always evaluate the risk in an investment opportunity before making a return. Invest according to your risk appetite, not the expected return.
  • In market-linked investments such as equities, the risk reduces with the passage of time. In fact, Mutual Funds investing in Equity (Shares) are the least risky if the investment horizon is more than 5 years!!
  • Risk is a very personal thing; there is no formula to calculate it.
  • Often with increasing age, the ability to take risks diminishes.