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Understanding Financial Planning

May 2018

Everybody earns money with an objective to fulfil his life goals. They spend it for purposes as simple as funding their daily household expenses or opting to buy luxuries for a better life. Money can be saved, accumulated and grown to fund various financial goals of an individual and their family; such as education, marriage, house purchase, retirement and other unplanned expenses. So money earned is either used to fund some of the immediate expenses or some goal in distant future or some unplanned expenses occurring due to some contingencies.

We can broadly classify the ways in which we can earn money into 3 categories, first, one can earn by rendering service’s as an employee to his employer or being working as a professional; second, can earn money by running his show as an businessman and third, by investing and managing his surplus money to let it grow and earn income on his investments.

When savings are made for any specify future goal, it needs to be invested in an optimum way to give maximum returns simultaneously protecting the capital, so while investing few prime things which need to be taken care of are

• the individual’s risk profile,
• time horizon of the goal i.e. till what time money can be kept invested,
• The elements across personal finance i.e. what will be the nature of cash inflows, impact of inflation and other such elements.

In earlier days, managing money was not so difficult due to various socio economic factors like high interest rates, guaranteed returns, government sponsored benefits, close knit society, a strong joint family system, a modest lifestyle and cost of living – all made it simple for a person to manage his money without any external expertise. In the current scenario, things have drastically changed – some owing to social reasons and some due to economic reforms. The cost of living and aspirations have gone up putting pressure on income. Given this, it is all the more imperative for an individual to have a proper financial plan for servicing ones needs and goals.

The last two decades have seen working populations have a higher household and disposable income. With the host of opportunities available to expend ones resources (disposable income), it becomes critical to manage the same. The number of product offerings (financial) and their complexity has increased. Financial products today are loaded with an excess of information and one is required to scrutinize these from the viewpoint of risk, liquidity, and appropriateness apart from comparison within and across the asset classes of such products (an aspect, we most often oversee and leave it to the discretion of our portfolio manager or advisor).

Managing wealth not only requires this though – it requires one taking time out and delving through the complexity of financial products. This does not just involve making an investment but also monitoring the same and judging if they fall in line with the goals decided. All these make it imperative for an individual to seek an experts’ opinion in managing one’s finances in a disciplined manner.

This is where Financial Planning as an approach to managing personal finances helps an individual to fulfil life’s numerous goals with available resources. A qualified and professional financial advisor using the Financial Planning approach to offer solutions, products and services in a holistic manner to his/her clients can make a difference to their lives.

What is Financial Planning? Various web definitions suggest / define financial planning as:

“Financial planning is the process of meeting one’s future requirements through a properly developed financial plan considering the life goals of an individual. Life goals will vary from individual to individual.”

“Financial planning is the process of determining the future requirements of an individual, setting his goals, managing his finances and monitoring the progress for achieving the goals.”
“Financial Planning is the process of meeting one’s life goals through the proper management of personal finances.”

The definitions discussed have few things in common:
• Financial planning is a process
• Process is initiated for meeting goals
• Managing personal finance
• Periodic review.

Financial Planning is a Process: This process can broadly be categorized under 7 steps to deliver a financial plan:
1. Gathering client information.
2. Analyzing and evaluating the gathered information.
3. Risk profiling of the client.
4. Constructing a financial plan based on risk appetite and goals of the client.
5. Implementing the recommendations.
6. Periodic review and monitoring the financial plan.
7. Re-balancing and modification (if required) in financial plan.

Meeting Goals: Individuals and families have many goals in life to fulfil for which they will have to save, accumulate and grow their money. Many a times a proper financial planning also help us determine our prime goals with more clarity. The most common life goals are:
1. General Goals.
2. Tax savings.
3. Retirement Plans.
4. Special circumstances.

Managing Personal Finances: Key part of financial planning is about managing finances of an individual or a family. While offering solutions to clients, the following aspects of personal finance should be analyzed as a whole rather than seeing them in isolation:
1. Income
2. Expenses
3. Assets
4. Liabilities
5. Insurance
6. Taxation, based on one’s location

Periodic review: Post implementing the financial plan it may happen that returns are not coming as per the expectation of the plan here it will be imperative for periodic logical shuffling within the portfolio and re-balancing the portfolio. This will happen only if the plan made is monitored and reviewed periodically. At some point of time it can also happen that goals so decided are modified by the client and same has to be taken care of.

Need for Financial Advisory Services

So far we have discussed about financial planning and its use. Now an obvious question is how to do financial planning, how to make a financial plan. Well, there are several ways for it but 3 common ways which I foresee are;
First, a plan can be made by oneself, using discretion and expertise,
Secondly, it can be done using tools of asset allocation available widely over the net and
Finally, can be done by hiring a professional financial planner based on a cost model.

This decision is somewhat like going for medication when countered with a cough & cold; whether to consult a doctor or to take some commonly and easily available medicine on self judgement. All of us know what the right way is!

Over the past two decades socio-economic conditions have changed a lot; it won’t be wrong to say now the factors driving the need for financial advisory services are many and increasing gradually, these factors are led by strong economic growth experienced over the last two decades resulting into a rise of household income and disposable income but an alternate effect of this development is that now an individual has lesser time for activities other than his core business. Simultaneously, we have also seen the abundance of product availability across all the asset classes like insurance, equity, debt, etc; few people consider it as a side effect that now even gold “a distinctive asset class” which earlier was used only as an ornament now can be held in demat account if not lump-sum than in SIP mode. Thus, we can say it’s now easy to invest but difficult to manage ones investments. This is yet another reason for a common man to take the assistance of a Financial Planner who can guide him through the maze of products towards constructing a portfolio, which is as per ones risk appetite and committed towards achieving set goals.


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