The key factors to be considered are having disciplined spending and saving habits, establishing realistic financial goals and the time horizon to achieve them, knowing how much risk to undertake while investing, and knowing the adequate quantum of risk coverage of life, assets and liabilities
Financial Planning is important for each individual in order to successfully and prudently achieve his life goals and keep their finances in order, point out financial experts. According to them, it is a process to understand where an individual stands today financially and what disciplined way to pursue to achieve his financial and life aspirations by effectively utilising available and future financial resources.
Ranjeet Mudholkar, vice-chairman and chief executive officer, Financial Planning Standards Board India, says: “The key factors to be considered are having disciplined spending and saving habits, establishing realistic financial goals and the time horizon to achieve them, knowing how much risk to undertake while investing, and knowing the adequate quantum of risk coverage of life, assets and liabilities. All the financial activities are to be tax efficient than merely adopting tax saving methods.”
Similarly, financial advisor Manish Verma says: “Money is an important aspect in everyone’s life. If planned well, the road to various goals, including retirement, is smoother. However, more often than not we fail to plan for monetary needs. Most of the times an individual is not aware of small mistakes that are causing him financial loss. For example, keeping money in savings account. If even Rs 10,000 is moved into a better investment option like a debt mutual fund every month, the extra interest earned amount is Rs 17 lakh in 20 years. We make so many more such mistakes when it comes to cost of debt, spending more, investing in wrong avenues.”
Further, he adds that key factors to keep in mind while undertaking financial planning include: starting early and getting the advice of a certified professional. “By starting at early stages one allows time to work for you (power of compounding), you develop a responsible attitude towards money and one can contribute higher percentage of earnings as you have low expenses. In addition, share all financial data with Certified Financial Planner. He is your money doctor.”
According to Melvin Joseph, founder, Finvin Financial Planners, a financial planner will study the needs of an individual and suggest suitable investment options as per the unique needs of each person. “However, select a financial planner who is not selling any products. Fee only financial planners registered with SEBI as Investment Advisors can give 100% unbiased recommendations.”
Further, he states that one needn’t be equity averse. “The era of good returns by investments in fixed return instruments is over. One will have to take risk. You will have to have a mix of equity investments in your portfolio. How much depends on your risk profile, time-to-goal for which you are saving and to some extent, your age.”
Rohit Shah, founder and chief executive officer at GettingYouRich.com, says: “While making a financial plan, one needs to consider current financial and health status, goals and aspiration of the family, financial responsibilities to be fulfilled in one’s absence, risk appetite, asset allocation, personal finance costs, tax strategy, quantum of assets and liabilities.”
Financial planning is important to all but primarily to those people who do not follow a regularised spending pattern and hence have no propensity to save and invest, points out Steven Fernandes, chief financial planner, Proficient Financial Planners. According to him, time is the most important resource which cannot be created. “If people are able to find time then they can begin with preparing a cash-flow statement of income and expenses. Write down their financial goals. List down their assets and liabilities. Select the right asset class as per time horizon and risk profile. Save and invest as per planned schedule. Monitor and review your investments regularly. If you do not have the time, then you can take the help of a professional financial planner.”
Ankur Kapur, director, finqa, is of the view that it’s essential to know your real net worth . “ If you don’t know how much you are worth, how will you grow it. Similarly, knowing how much to save, how to save, and most importantly, where to invest those savings. Besides, it’s essential to make sure you are sufficiently-insured – if something were to happen to you, having that peace of mind that your family will be taken care of.”
Manikaran Singal, financial advisor, Good Moneying Financial Solutions, points out that it is important to follow is structured financial planning. “Where to save, when to save, how much to save, for whom to save, what to do , what not to do, what are good loans and bad loans, how to do tax planning, how much insurance you should have, how to distribute assets among legal heirs …and so on. All these things will be considered and worked upon in a structured financial plan.”
However, he says that since this is a fee-based service so many of the people though do understand but don’t want to get into a structured process. “But still there are many who want to learn themselves and act on it for their better financial future. They should start with understanding of their cash flows in the form of income and expenses. Should curtail the discretionary spending so can save more towards the goals. Better to invest with a goal in mind. Should have short, medium and long-term goals and investment products should be selected as per the risk profile.”
Common Mistakes in Financial Planning Approach
The following are some of the common mistakes made by consumers in their approach towards Financial Planning
- Don’t set measurable goals
- Make a financial decision without understanding its affect on other financial issues
- Confuse Financial Planning with investing
- Neglect to re-evaluate their Financial Plan periodically
- Think that Financial Planning is only for the wealthy
- Think that Financial Planning is for when they get older
- Think that Financial Planning is the same as retirement planning
- Wait until a money crisis to begin Financial Planning
- Expect unrealistic returns on investments
- Think that using a Financial Planner means losing control
- Believe that Financial Planning is primarily tax planning
Source: Financial Planning Standards Board India