Financial Planning - overview

Financial planning is a critical necessity for each one of us who seeks financial control of our affairs and wish to create wealth. Then why is it that most of us do not have a Financial Plan or have not even given a thought to it?
Why is it that we keep trudging along and feel that all will become right one day? Why is it that we always think of how to earn more but hardly give a thought to what our earned money is earning for us? Most of us have not even thought of having a dual income stream – one from our work and the other from our investments.
Whether we accept or not, each day or each time we think about creating wealth we are imprisoned by what I call - the seven deadly sins.
Pride: Caused by excessive belief in one's own abilities, Pride happens because in school we were taught to believe in ourselves. But that belief was with knowledge. This sin is committed when we believe in ourselves and choose to act without adequate knowledge. All we want to have is only some idea of what is the best investment. And believing it to be the best for us, we commit that sin forever under the pretext of “I know how this works.”
Envy:You've just seen someone make a killing. And you think, that is reason enough for you to take the plunge as well! But then what if you have taken the plunge at the wrong time. We all know the old age wisdom, “Do not break your own hut by seeing someone else's palace.” Then why is it that we change our asset allocation and bet on something that has worked for another?
Gluttony:Have you incurred credit card debt? Well...in that case know for sure that you are committing a sin each day. Have you taken a loan for a depreciating asset? Now thats an example of financial gluttony. But then, if you're able to manage the instalments of that depreciating asset from your investment returns you're a smarty.
Lust:Whatever you do you are driven by money only. And if you're prepared to move from one job to another for a 20% rise without considering the credentials of the company and the nature of job, you're far from being smart. What if you've just missed on the stock options there. Besides you could have always had the opportunity to create a niche for yourself no matter how large the organisation.
Anger:This is widely seen when you are dealing with an agent to who comes to make a sales call and objects to your knowledge or when your broker did not sell when the markets were falling. In both the cases, you were to take the decision. You recall that with anger and/or arrogance you commanded that nothing be done without your consent. Know that in financial management there are two choices – either you take all decisions yourself or let your advisor take that for you. Of course given that you trust his skills and knowledge.
Greed:I hardly need to say anything here. Most people rush to invest in the stock markets when they touch an all time high. Others think markets will go up forever. Surely you cannot time the market but when the goal is achieved why not sell? After all, that's precisely the reason why you invested in the first place. Now if there is no goal and no plan to manage that goal, it is quite likely that this sin will keep revisiting you from time to time.
Sloth:This is the one that I love to talk about. The bible says “Whatever we do in life requires effort” so if we wish to ask for tips and then act, it is a sure way to disaster. Either we must take effort to do all the hardwork ourselves or take the effort to search for a trusted advisor and outsource our efforts. Finding a trusted, knowledgeable and skilled advisor is not a very easy task to do.
Sins that were spoken of centuries ago are still so relevant. Needless to say, it is up to us how much we wish to cleanse.

Financial Analysis - purview

You must plan for your financial goals’, ‘We conduct a complete needs analysis and then give you solutions’, ‘Our method is superior’ so on and so forth. These lines are used as punch-lines by most financial product sellers while talking to you and posing as financial planning advisors. Goal planning is a far more complex exercise than you can possibly imagine. In fact, it is the heart of financial planning. A good goal planning structure could give you a lot of control with your cashflows and gives you adequate bandwidth whereby you do not have to compromise now or in later years of your life.

Considering that you have many goals, lets talk about three goals that need to planned viz., down payment for purchasing a vehicle in two years, providing interior decoration to your house in say five years and planning for wedding of your child, in say 12 years. In order to do good goal planning, the amounts for these goals would need to be defined now and a projection must be made (based on timeframe) for the future value of these goals by taking into consideration the inflation rate or rate of inflation pertinent to that goal in question. For example, if you propose that you child should study in Australia perhaps you should look at the Australian rate of inflation rather than the Indian rate of inflation.
Now, as you can see that the time frame for each goal is different and planning would depend on your existing assets, i.e. monthly cashflow available and the time that you have for achieving your goals. The time frame would be your starting point and that coupled with your cashflow would dictate the rate of return that you need to earn on the goal in question. Further, the rate of return would dictate the asset allocation i.e. how much money into risk instruments and how much into non-risk instruments and this then culminates to your risk profile for a goal in question. Yes risk profile is different for each goal. Against this backdrop, how could you possibly have a single risk tolerance framework – the one that is determined by some questionnaire or very crudely put, you being asked by your advisor the level of risk you wish to take? It is the advisor who should advice on the level of risk needed for achieving each goal rather than you choosing it yourself. The purpose of planning is defeated if you choose a generic level of risk.

Once the goal planning is done and if you then feel that the level of risk is higher – you have three choices. To take lower risk, you will have to have an increase in your cashflow and that may not be possible as you suddenly cannot increase your income or change your job. The next is to extend the time frame – but then that is again not necessarily possible with all goals, for example, you cannot say that your child will go to college about five years later when you have more cash. The third is you will have to compromise on the quantum of the goal – but if you had to do that why would you do financial planning in the first case?

Now, from the goals mentioned above, if the goal was two years away perhaps the strategy for goal fulfilment would be biased toward low risk instruments typically generating lesser rate of return but then the contribution from your end would be much larger here. Against this, the goal that is 12 years away perhaps the strategy for goal fulfilment would be biased toward high to very high risk instruments typically generating a much higher rate of return and then the contribution from your end would be much larger lower. That is how you can balance your cashflows so that from what you have you are able to achieve all of your goals.
Remember different goals have a different rate of return and hence they would earn different rates of return. A generic risk level and thereby buying some products viz., ULIP (unit linked insurance plan) or MF (mutual fund) or life insurance would just not help. It would do more harm in the long run and at that time there is a chance that you have to do fire-fighting to provide for the money, there is stress, assets have to be liquidated, some assets just cannot be liquidated as the maturity date is still away and in general the financial situation becomes a complete mess.

Like I said, a goal planning gives you adequate control of your finances and provides a lifetime of peace. If you are not at ease with your finances be sure you don’t have goal planning or that the goal planning you have is just not effective.