Financial planning has always been with us in a very informal manner. When we were young and dependent on our parents, we used to get pocket money for our daily expenses. We used to save and plan our expenses accordingly for the whole month. Whenever we wanted something we used to save our pocket money in order to buy it.
Early in life, our goals are small but as soon as we enter into the real world our goals become big and more costly. Various factors start playing a big part and we may face major constraints which are needed to be handled in a much more professional manner. Each stage in life, be it starting days of your career, getting married, planning for your child’s education or even building your retirement corpus requires us to have a systematic approach towards accomplishing whatever we would like to in these stages.
We must understand that funds and cash inflows that we have either through a business, rental income or even through your salary should be utilized optimally. The financial goals in each stage of life must be realistic, should be achievable and in line with your income. Therefore it is very important to have a neat and reasonable financial plan ready to start turning these goals into a reality. Remember, we never plan to fail in our financial goals, we fail to plan.
Here comes the role of financial planning in each stage of our life. The person who guides us in this planning process is a financial planner. A Certified Financial Planner is a person who is certified by the Financial Planning Board of India and who gives professional advice related to our finances and helps us in prioritizing as well ascertaining our financial goals. Let’s discuss about the role of financial planning and financial planner in each and every stage of our life.
Early stage: Starting Your Career
This is the period in which we get a new job and everything is new to us. Our income is less as it is the starting phase and every outflow is fixed. At this stage if anyone suggest us about the financial planning or advise us to do the investments at this stage, most of the time we use sentences like “where is the money to do all this” hence we defer or postpone our investment.
However, if we look deeper then, at this stage we must start investing for the future from whatever little we have with us. Your financial planner would be able to help in making understand that this is the time when you can actually take higher risk as you have long earning life with you and if you start early then you would be able to make more fund for yourself.
For example, let’s take two cases of Mr A, who is of age 26 and started earning.
Case I – Mr A starts investing Rs 1500 in the form of SIP immediately in Equity Mutual Fund for 10 years.
Case II – Mr A starts investing same amount but at age 28 i.e. after 2 years.
The accumulated amount after 10 years with minimum rate of return of 12% in equity, in Case I it will be Rs 336054 at the age of 36, and in Case II same amount will be earned but the age will be 38 years. So you can see by yourself that the value of Rs 336054 will be more at age 36 than in age 38.
Therefore, early investments always have a higher value and your financial planner can help you in achieving this by suggesting you the right fund and financial product. Albert Einstein once said that
“The eighth wonder of the world is compounding”. This is not an exaggeration and it is the most powerful force in the financial world.
Marriage and starting a family
Once an individual’s income increases and he/she gets settled with his/her career then, the next step is marriage and thus he/she enters into a family life. This is the phase in which responsibilities come and an individual starts looking for the better amenities as he/she is not alone anymore. Demands starts increasing for a good accommodation rented or owned, having a car for family, vacations with family etc.
Now to achieve all this you need to curb your non-essential expenses and start thinking of various ways through which you can provide all these facilities to your family. Again the role of financial planning increases in our life and a financial planner can help you in prioritizing your financial goals and can provide you with the clear picture of how you should move ahead with your finances.
For example, if an individual who is of age 30 years wants to have a house after 10 years which has current value of Rs 5000000. So, a financial planner can help you in estimating its future cost by taking the inflation of real estate i.e. normally 7% and suggest you a proper investment strategy and the necessary amount which you should invest to reach the future value of your house after 10 years.
In the above example, the value of the desired house will be Rs 9835757. To achieve this figure an individual should invest approximately Rs 43000 per month immediately. Now for the individual whose income is based on salary, this is quite a high amount. A financial planner can show you the path as to how you can invest this money in parts to achieve your goal of your own house after 10 years.
Planning Child Education
Nothing will be a more beautiful gift for your children than to have a good education. One of the major goal which every individual has, is to provide best education facility to their children and make adequate provision for that. But to make provision for anything you should have an estimate as to what is the amount that is needed to be provided for this purpose. Various factors, choice of schools, choice of course for higher studies, choice of place to complete professional education, inflation etc. plays a key role in estimating the cost of the education.
You financial planner can provide you with the estimate of these entire things by taking into considerations the various factors involved. In financial planning there is an assumption and standard cost for every financial goal. They will provide you a proper financial plan showing you the various alternatives that you have to reach the goal by analysing and evaluating your cash outflows and inflows as well as your net worth and provide a proper and needed asset allocation for achieving that goal.
Planning for Retirement
Retirement planning is the most essential branch of financial planning because whatever we are earning today will come to an end at some point of life and then we need a backup to live a financially peaceful and independent life.
To have a peaceful retired life you must have an adequate retirement corpus and if possible a little more than adequate, in case of any emergency. With ageing, we become more dependent on medicines and to have that we need proper flow of income to meet these necessary expenses. Well this can be done by estimating your current household expenses and the proportion by which it gets decrease once the retirement age is reached. Inflation has to be considered. Now a simple individual do not have much time to do all this but a financial planner has.
For example, if you’re incurring current household expenses as Rs 40,000 per month and you are 45 years of age. If you wish to retire at age 65 in case you are a private sector employee, and want to have a monthly medical expense of Rs 10,000 (current value) starting at age of 70 years and expected life is 85 years. What corpus you must have at age 65 to meet all these requirements?
Role of your financial planner becomes important as he will first take an assumption of the prevailing inflation i.e. 6% pre-retirement and 7% post retirement and let’s suppose that after retirement you invest money in debt instruments so the rate of return would be around 9% p.a. After this he will give you an estimate of retirement corpus that you need to have at the age of 65 to live your life peacefully. It can be seen that to have your medical expenses covered at the age 70 you need Rs 22, 72,153 and value of this at age 65 will be Rs 6, 23,793. Therefore total retirement corpus needed at age 65 will be Rs 2, 63, 73,717 including medical expenses.
Once you reach retirement and have a good retirement corpus with you, you can live your life peacefully and the way you always wished for. One aspect of financial planning comes to play a key role in this later stage of your life and that is Estate Planning.
Estate planning helps us in bequeathing whatever little we had earned and accumulated, to our present as well as future generation, by making wills, trust deeds etc. We do not want that after us our loved ones face any legal challenges related to the property and which can deprive them of their rights. Thus, financial planning again helps you in securing your loved ones future with the help of one of its branch i.e. estate planning and your financial planner can help you in that. He/she will take an estimate of your property and will help you in making your will as per your wish so that each member of your family receives what he/.she deserves.
So, by now you must have got an idea as to how financial planning is present with us and how important it is in order to make our life a more fulfilled one. It is time to make financial planning a part of your life because as soon as you start, the more beneficial it will be. You can choose any part of financial planning according to your need. It is a very vast concept and it has whatever you are looking for. “What you need is to just have a look”!