Let's answer this important question:
Most of us think that financial planning is only for the very rich or poor. There are others who think that people need to plan only when they grow old as they need to save for their retirement and old age. I would however say that this is not a right way to think about finances as it is required for all phases of life. It would be smart and prudent to embrace financial planning to realize all our dreams and goals in life. Financial planning makes life easier than what we could imagine life without it.
Some may consider risk is the spice of life and may enjoy it. However it is always good to plan and provide for our short, medium and long term goals of life and for those unexpected contingencies that crop up from time to time. The written word is more powerful, so it is best to have a written financial plan than just thinking it just over in the mind. The written word creates focus to provide not only for dreams like the car and house you would like to own, but also for unexpected contingencies.
Truly finances influence every area of our life, so financial planning is for all. Whether we are rich or poor, old or young, as we all have financial needs to plan and provide for our goals and needs. This goes to being smart to enjoy financial freedom and a peace of mind at all times in our life.
Think Financial Planning the Right way:
Making dreams a reality is more than just balancing income and expenses and assets and liabilities; it depends on many more important things like:
a) Time Horizon of Each and Every Goal:
All of us have goals in life that are to be achieved in a short; within a year or two, medium term; after 3 to 6 years and long term; those that have to be achieved in a much longer time. We need to be cautious and conservative in selecting investments for our short term goals as we would need money within a short period of time. We could take slight risk for medium term goals and could afford to take a more risk for long term goals.
b) The need of Liquidity influences our financial planning:
A financial plan is also dictated by the urgency of being able to convert investments into cash at the time of need; liquidity. It depends on how fast you want to be able to convert assets into cash to get money to meet your financial goals. Real estate investments are not easily liquidable whereas investments in shares and mutual funds can be easily liquidated.
c) The appetite to take risk determines financial planning:
Each person differs in his capacity to take risks; it depends on his profile, time required to reach the goals and his age. Those with limited resources and urgent financial needs need to take lesser risks and be very conservative in financial planning. Those that are young and have just started earning could take more risks as they have a long earning period to attain their goals and have no dependents. The same person needs to take a more conservative approach once he is married, has a family and dependent parents. Once one grows older and approaches retirement or is retired a more conservative approach needs to be adapted to not lose on investments.
d) Inflation is an undeniable reality and influences financial planning:
The rate of inflation is shocking; with the purchasing power of money is going down day by day more savings and proper investment is required to keep up with the future purchasing power. A chocolate that cost about Re.1, 10 years back now costs Rs. 10. Our financial planning for a car or a house 10 years later requires planning to take care of the rise in car prices, fuel, maintenance and declining purchasing power! Smart financial planning requires planning for financial goals considering the future inflated prices.
e) Financial planning is all about whether you want growth or an income:
Some of us may want a regular income, while others may want their investments to grow; financial plans are also determined by it. Buying an apartment could be for the purpose of renting it out to get a regular income; an old or retired person could aspire for it. Real estate plots could be bought by a young person with the goal of capital appreciation or increased value of the property over a period of time.
Generally at the younger age you need to look for investments which can appreciate and no need for regular income whereas at the old age, you need to consider investments which can give you regular income with or without capital appreciation.
Have you begun your financial planning?
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.
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