All investors should understand that “Failures don’t plan to fail, they just fail to Plan”. This one line encapsulates the importance & essence of Financial Planning for all investors. India currently has close to 2000 Certified Financial Planners in India. There responsibility and goal is to help the retail investor understand vitality of smart investments and advise them of the same. Financial Planning is necessary to achieve each person’s financial goals.
Before I get into the process of Financial Planning I would like to dwell a little more on the vitality of this concept. Investors should not underestimate its power. Our goals and needs are important to us, but do we do enough to achieve them? Human nature in its essence, values the immediate more than the distant. It values the present more than the time in the future. That’s just how we as humans are wired. Moreover, the attitude of hard work, diligence and an honest approach won’t be of much help if the investor does not chart out the plan well before time. What work’s with investing is what Albert Einstein called the 8th wonder of the world i.e. The Power of compounding. And the power of compounding needs at least 10-15 years to work its magic. The more time the better.
All individuals that have accomplished anything in life, be it small or a big accomplishment, have done so with a well chalked out plan. They have written down their goals and done what is required to achieve them. So why should we have a different approach towards Financial Planning? Is it because we get a few cold sweats and have to ask ourselves a few tough questions? Are we actually going to make such a trade-off where the fear to look into our finances and the discomfort of the tough questions completely outweighs our chances of achieving our financial goals?
Many individuals have plenty of resources or may have surplus funds. Others may have started out on their career and may not have a high net worth (after assessing their assets). For both these types of Individuals Financial Planning can add value. Let’s first take a look at what financial planning is and how it people can benefit from it.
It is a comprehensive process through which the investor sits with the Financial Planner and charts out a very realistic plan for the future. The process is a rigorous assessment that takes into the cash-flow of the investor, his short-term and long-term goals, his debt management, his current tax status and then lists out ways in which the individual can achieve the goals through proper management of wealth and investments in the capital market.
The Financial Planner undertakes the following steps with the client:
- Risk Evaluation:
Through a set of questions on a questionnaire, the financial planner tries to assess the risk appetite of the client. This step should not be underestimated as it determines the correct investment strategy.
Good investments are those that are compatible with the emotional nature of an individual.
- Cash Flow Analysis:
This is where the client needs to frank about his incomes and expenses (discretionary and non-discretionary) with the financial planner. More honest the disclosures, the more accurate the planning will be.
- Goal Analysis:
The goals could be short term or long term. They could be of buying a house in 5 years or sending your kids abroad for higher education. All the goals should be very well thought of. And most importantly they should be S.M.A.R.T (Specific, Measurable, Achievable, Realistic and Time Bound)
- Debt Management:
Many individuals take a loan, but know of various different options on how one can make smart financing decisions. This is where the expertise of the CFP starts to show. Individuals can discuss options for refinancing, can help the individuals seek out lower rates of interest, choose the right type of mortgage, deciding if its beneficial to prepay mortgage principal etc. Information is key to smart decisions and the financial planners bridge this gap.
- Retirement Planning:
The main purpose of the exercise is achieving financial independence after retirement:
- Determine your retirement income needs.
- Figure out how much you’ll need to save.
- Understand your investment options.
- Use the right savings tools.
- Build your retirement fund through proper investment.
- Estate Planning:
Making a plan in advance and naming whom you want to receive the things you own after you die. Your estate is comprised of everything you own— your car, home, other real estate, checking and savings accounts, investments, life insurance, furniture, personal possessions.
- Insurance Planning:
Our life is uncertain and we can’t predict our future. Paying a little for insurance now may save you a lot in the long run. An unexpected illness or injury could require you to pay out-of-pocket if you don’t have health insurance.
- Investment Planning and Wealth Management:
This is another value addition of the Financial Planner. Lets ne very clear, there are only two ways of creating wealth i.e. Start a business or Make investments in the capital markets. Generally, people fear the latter, due to lack of information about the functioning behavior of the markets. Financial planners will help fill this gap too, moreover:
- Identify proper investment avenues.
- Right assets Mix.
- Assess Life stage.
- Risk tolerance.
- Investment tenure.
Now it is up to each one of you to decide whether it is worth starting your investment and financial journey with a seasoned professional whose responsibility is to help you achieve financial and life goals. Or wander in the dark without a torch-beam.