|What is financial planning ?|
Financial planning is the process of meeting your life goals through the proper management of your finances. Financial planning helps you make advance provision for financial needs that will arise in the future. The objective of financial planning is to ensure that the right amount of money is available in the right hands at the right point in the future to achieve an individual's life goals.
|Why should I make a financial plan ?|
Financial planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. For example, buying a particular investment product might help you save adequately to finance your child's higher education or it may provide enough for a comfortable retirement. You can also adapt more easily to life changes and feel more secure that your goals are on track.
|Who is a financial planner ?|
A financial planner is someone who uses the financial planning process to help you determine how to meet your life goals. The key function of a financial planner is to help people identify their financial planning needs, their present priorities and the products that are most suitable to meet their needs. He or she normally possesses detailed knowledge of a wide range of financial planning tools and products, but his major role is to help clients choose the best products for each need. The planner can take a 'big picture' view of your financial situation and make financial planning recommendations that are right for you.
|Can I do my own financial planning ?|
Some personal finance software packages, magazines or self-help books can help you do your own financial planning. However, you may decide to seek help from a professional financial planner if:
|What should I look for in a financial planner ?|
A financial planner works for you. His or her loyalty should be to the client, not the product (s)he is trying to sell. The financial planner should be in a position to provide you with unbiased advice and recommend products that match your needs and are the best performing ones available. Look for any affiliations of the financial planner to any product manufacturer. Until unless the financial planner is truly independent, (s)he will not be able to give you objective advice.
|How can I plan for tomorrow when I can hardly pay for today ?|
Have a budget. Determine what you actually spend each month. There are fixed expenses like rent, loan repayments, etc. every month about which we can do little. The variable items such as food, clothing and entertainment are often what get away from us. Use your discretion to contain these variable expenses to start saving.
|How much should I be saving ?|
It is hard to apply a rule of thumb toward savings, because it varies with age and income level. Ten percent is a good start. If you find that is too high for you, don't let that deter you. You can start by putting a little aside each month and then slowly increasing it.
|What if I don't achieve my goals ?|
Financial planning is a common sense approach to managing your finances to reach your life goals. It cannot change your situation overnight; it is a lifelong process. Remember that events beyond your control such as inflation or changes in the stock market or interest rates will affect your financial planning results.
|Why do I have to provide so much personal information ?|
Consider a visit to your doctor. Without complete and fully accurate details, your doctor cannot prescribe the best course of action. The same applies to financial planning. In order to obtain the best service for your 'financial health' all details and specifics must be disclosed.
|What type of information do I have to provide ?|
Typically, information regarding investments held, number of dependants, income and expenditure details, savings and financial planning needs, etc. The more accurate information you give, the better the quality of advice given.
|What should a financial plan include ?|
A financial plan should include a review of your net worth, goals and objectives, investment portfolio, cash flow, investments, retirement planning, tax planning and insurance needs, as well as a plan for implementing your goals.
|Why is there an evaluation of my insurance needs ?|
Evaluating your insurance needs is part of personal financial planning. Insurance takes care of your unpredictable needs and as these needs can arise at anytime, insurance is extremely important. Investments take care of your predictable needs and ideally should follow after your unpredictable needs are first addressed. The insurance industry has changed a great deal over the past few years and there is a whole array of new products from LIC as well as private insurance companies.
|What about taxes ?|
It is important that financial plans are tax efficient. The financial plan should help you in minimizing your tax liability and also maximizing your after-tax returns from your investments. Some financial planners help their clients in preparing and filing their tax returns.
|After a plan is developed, what next ?|
The best plan is useless unless it is put into action. Your financial planner will assist you completely in implementing the plan, if and when, desired by you.
|How often should I update the plan ?|
It is good to review the plan when there is a lifestyle change such as marriage, birth, death or divorce. Any change in financial position should be evaluated as well. Most people have an annual update that reviews how the plan is being implemented. The review also considers changing goals and circumstances.
The first and most important step in your life as an investor is to define your goals at the onset of your investing activity. This will map the road ahead for you in terms of time, amount, type of asset and risk. At this point of time you must also decide how much you are willing to save. When you look at defining your goals think carefully and try to include all your requirements, here are a few things that might help you:
• Retirement – In how many years ?
• How much money will you need ?
• How long will you need it for ?
• Daughter’s/Son’s wedding – When and how much ?
• Daughter’s/Son’s education – When and how much ?
• Purchase of big ticket items e.g. House, Car etc. –
• Again, when and how much ?
A simple way to get an overall perspective is to draw a time line starting from today with the amount you have saved up till now labeled at time zero. Going forward you can label your major outflows as and when they occur till retirement and then the steady outflows for your retirement income. Please remember your worst enemy “Inflation” and factor this into your targets. Remember that in an inflationary environment an apple will cost more tomorrow than today. For example:
Let us say that you have Rs. 5,00,000 saved up today. In addition to this you figure that in year 10 you will need Rs. 5,00,000 for your daughter’s wedding. Also you decide with your wife that you will retire in thirty years time and will need Rs. 6,00,000 per year for 15 years after that. You also decide that you want to play it safe and want to invest only in debt products. Taking an annual rate of return of 7.00% you will have to save Rs. 38,042 per year for thirty year and you will be able to withdraw Rs. 4,61,958 (5,00,000 – 38,042) for your daughter’s wedding in year 10. Another scenario with 9.00% is available as well.
Now let us assume that you and your wife require Rs. 20,00,000 per annum for 15 years after retirement and want to spend Rs. 15,00,000 on your daughter’s wedding. Knowing this you decide to take the additional risk of investing your money in equities that historically do tend to provide double-digit returns in the long run. Assuming an annual rate of return on 13.00% per annum you would have to save Rs. 36,328 per year for thirty years to achieve your goals. An example with a 15.00% return is provided as well.
Investors usually diversify their investment between debt and equities and earn returns that are commensurate with their asset allocations.