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Financial planning is a need or a want?

Do you need it?

Is it essential for everyone who earns money and has goals?

To know more about the world of financial planning, you may like to explore the various reasons and different kind of causes that can affect your behavior towards money.

But successful people across the world have adopted some great practices towards financial planning and got amazing results.

Deep research revealed a combination of the seven different reasons for financial planning:

  • What are the top reasons as to why you need financial planning
  • How is financial planning different from Wealth Management?
  • Why should you make a financial plan?
  • What are the seven components to be included in financial planning
  • What are the leading financially successful people’s habits that make them happy?
  • What are the three most important things to keep in the heart of your financial plan?
  • Which six tools are used for simple financial tracking?

If you would like to know more about these seven sets of secrets for "why financial planning" and take benefits, this blog is for you. 

What are the top reasons as to why you need financial planning

  1. Cash flows refers to the inflow or the outflow of money. It includes all planned or unplanned expenditures. By making proper prior plans, you can make provisions for all future expenses, perhaps control some also.
  2. Income: by planning your expenses for the month and your future expected taxes, you can well prepare your income required to sustain both expenses as well as lifestyle.
  3. Capital: With cash flows and income know and increasing capital, you can now plan investments also
  4. Life Security: While taking loans or having debts, you may also have assets or capital. If there is a difference in these, then you should consider having next options. For example, you may have loans of Rs. 1 crore and assets like mutual funds of Rs. 50 lakhs, then take steps to offset this gap by either immediate capital of Rs. 50 lakhs or take life insurance of Rs. 50 lakhs.
  5. Investment planning: investment is not saving! And Saving is not termed investment! Unless you invest what you have saved, as per your goals, time horizon and risk profile, in proper investment vehicles, how will you reach your financial destination! You can read more in our blog about aligning your thoughts to get rich here:
  6. Tax Planning: 3 areas of tax planning are critical:
    1. Current income be optimized to save maximum tax
    2. All the sections of income-tax are checked to ensure that you are deriving the maximum benefits out of each of the relevant sections.
    3. Future tax-free earnings be planned so that today, you take steps to harvest tax-free incomes in the future
    4. Post Retirement period should have all tax-free earnings
  7. Standard of living: To maintain the same standard of living should any of the following happen in your life:
    1. Sudden loss of job
    2. Loss of income
    3. Unexpected huge expense not planned
    4. Death of the bread earner(s) of the family
  8. Family Security: Further to above points 4 and 7, let your family members know that you have made provisions in case of an emergency. This way, your family will also feel secure, and happiness comes in with such satisfaction.
  9. Assets: Building assets like a home, the car brings the comfort of own assets. Planning for these events or property brings comfort and joy of having made investments for them as per a plan. Also, make sure you are building assets and not liabilities. Taking a home loan for a property yet not delivered and in uncertain times can bring in stress. If you are not able to get appropriate rent or possession delays can lead to the unnecessary feeling of ill-planned investments.
  10. Ongoing Advice: Financial planning is always an ongoing process and never a one-time exercise. Like your daily routine of walk or exercise or diet. You have to take regular reviews of your investments to ensure that they are in sync always with your goals, time horizon, incomes, savings.  Align with the ups and downs of the market.
  11. Emergency fund: Creating a fund for all the possible emergencies is a great move in personal finance. Plan for the following kind of exigencies:

    1. Dental problem
    2. Car Accident leading to your hospitalization as well as immediate vehicle damages
    3. Sudden death in the family
    4. Unforeseen expenses
    5. Travelling
    6. Family needing cash loan
  12. Children’s education or marriage needs: Planning for your children’s education or their marriage requires future time value calculations. Keeping inflation in mind and all graduation or post-graduation expenses for each of your child needs conservative estimation and investments then. You should be able to get the exact amount in that year irrespective of the market movements, hence ensure liquidity and market sensitive investments at that time of cash withdrawal.
  13. Retirement: Plan ahead. Read more about your retirement planning in my other blog here
  14. Buying Home, car or Holidays Planning: Planning for such expenses can be quite daunting without professional financial planning help. To make it easier and knowing the steps to achieving these goals, make use of tools to know how much you need to save every year or on a monthly basis.
  15. Estate planning: You may acquire enough assets like your home and financial assets in your lifetime. Ensuring that your legal heirs get them as per your wish may need planning. Besides, you may like to have other persons getting benefit from your estate. Also, You like to give something to charities.
    . You may like to do the same even during your lifetime. All of these kinds of decisions lead to the process called as your estate planning including making your WILL.

How is financial planning different from Wealth Management?

  1. Wealth management is about the generation of income from your investments. Actively participating yourself or having a professional looking after your wealth creation is an option.
  2. Managing your money involves various stages like:
    1. Wealth creation: Investing your capital and then actively trying to create wealth from wealth opportunities are part of the starting process. But knowing which stage in your life or life stage is critical. Having met all your goals or at least actively investing towards them makes you free to invest your extra savings into other investment opportunities leads to wealth creation. Having a goal here also gives you clear directions. Directions, that you wish to be financially free after 20 years, gives you that satisfaction of working towards greater goals than just saving every month.
    2. Wealth conservation: while you may have started on your journey to wealth creation, be careful to look at conserving whatever you have accumulated meanwhile in your lifetime. Taking insurance and protecting all your assets from natural or man-made disasters is also an important safeguard.
    3. Wealth distribution: From having created wealth, make sure that you have taken steps for a smooth flow of this money to your legal heirs, charity or other purposes that you so dream of.
  3. Wealth creation needs capital to be managed while financial planning may not need money right away to start with. You may have accomplished most of your financial goals and may be now looking at just multiplying your wealth using market opportunities. While for financial planning you may not be wealthy or have assets, yet search for strategies for investments to achieve your financial goals.
  4. Financial planning is also for those who are looking at wealth creation.
  5. Wealth management is only for those who have wealth.
  6. Financial planning can be the passive management of your finances while wealth management involves more of active management at all the times.
  7. Financial planning is the need of everyone while wealth management is the need of only the wealthy or those desiring to be wealthy.
  8. Phases of both management
    1. In the education phase, you may not need wealth, but financial planning needs you to start planning actively. To know clearly about your goals, incomes, expenses is knowledge.
    2. Accumulation phase Start enacting strategies for wealth accumulation. While wealth management may not be actively required at this stage but active financial planning is needed at this juncture. Re-evaluating and rebalancing frequently is essential under financial planning.
    3. Reaping Phase: like in retirement, if you have accumulated sufficient wealth, then you may need wealth management. Financial planning is definitely required in retirement. If you have not been able to generate desired wealth by your retirement life, then no management may be necessary.

Why should you make a financial plan? Why is a financial plan required and what are the strategic benefits of having a plan made for your personal finances? Here are some of such benefits:

  1. Future Buffer System: To be able to plan for uncertain future or making your future certain, financial planning is one such significant step in life that helps you not only to prepare but secure your future.
  2. From securing to bailing you out of difficult times, financial planning gives you the ability to be able to personally understand and then take your decisions independently.
  3. To know how many loans to take, or rather not take perhaps, are options that would help you to save a lot of money. Like going to a doctor who prescribes certain medicines and helps to prevent a necessary surgery is called as God sent messenger!
  4. Giving you the flexibility to know when is the right time spend or hold necessary spending.  Like vacations or buying a house. Furthermore, this helps you to avoid ill-planned investments or expenditures that may not be warranted at that time of your life. This kind of neutral bias opinion from an independent financial advisor gives you an immense satisfaction that you are taking significant decisions and perhaps saved from bad spending!
  5. Your financial planner thus becomes your mentor or Guide to help you to take decisions. Decisions, which are very personal and sometimes critical in nature. A friend like advice from your trusted financial planner who empathises with you and understands your feelings. These are important factors not be missed while selecting your financial planner.
  6. Preparing you for unseen circumstances: Your financial planner would and should make provisions for such unseen events. This has been elaborated above under contingency planning. You may not have thought of keeping money aside for such events.  But having an equivalent amount of 3 to 6 months of your monthly expenses is a great move.
  7. Making maximum use of all your available resources: All your available funds or investment would be “mapped" to each of your goals. This is the starting of financial planning and an excellent base for future.
  8. Best Standard of Living: A lifestyle that you dream of or you have got used to, is a desire that it never ends. Making a list of expenses necessary to maintain such standard, is a part of financial planning.
  9. Furthermore, this measure is taken as a base when future value calculations have to made for your post-retirement life stage.
  10. A Disciplined life: knowing your income, expenses and how much can save, gives you that confidence. Confidence to lead a very financially disciplined life. All is well. This feeling is sometimes important to tell your family or yourself that everything is working our fine. That, you should be happy. Enjoy life now. Celebrate such moments in life.
  11. Financial Planner: hiring thus a professional who is a certified financial planner. Who is also a registered investment advisor will give you the complete confidence in financial decisions. Confidence, that all your financial matters are in the hands of a master who knows where you are going and keeps giving you the right direction. It will give you great confidence that your interests, plans and money are working for you in the way you want it. Hence, you can concentrate on your work! Immense satisfaction is derived and happiness experienced!
  12. Poor financial decisions or lack of proper guidance can sometimes prove to be disastrous! With my experience of having advised over 300 families, and having met one such new prospective client every day, I come across such blunders in financial decisions. Decisions where sometimes immediate remedy is also not possible. Reversing some inappropriate investments would not bring in the capital invested. Instead, save you from further future loss of better investment opportunities.

What are the seven components to be included in financial planning

  1. Assessing the present situation: Taking stock of the current scenario lets you know what the available resources with which you can plan your future. Understanding the income-expense-saving levels, lets you clearly know as to how much you can invest.
  2. Understanding Limitations gives you clear guidance on your available resources. Furthermore, what’s your risk profile, time horizon (for each of your goals.) This gives you the ability to start laying a strong foundation for your financial future. How much equity and how much debt allocation is guided by your risk taking capability. While doing this risk test, our clients get the complete understanding as to how much equity or debt should they be taking for their investments, thus eliminating the over or under utilisation of their personal riskendurance. This leads to complete satisfaction of getting the relevant desired returns based on their respective risk appetite. Furthermore, knowing the limitations (or rather the opportunities!) of taxation policy of country, you would choose that particular asset class or investment vehicle to avoid  paying unnecessary tax for ill-planned withdrawals
  3. Need for reviewing the financial plan regularly. Financial planning is not static but a dynamic activity. It can’t be a once done and over exercise.
  4. Setting goals: read more on our blog.
  5. Investment Strategies: If you are clear about your goals, time horizon, risk profile, then financial planning leads you to chapter two, that is, execution of investments. Having an investment strategy for your particular financial plan leads you to clear investment in those particular investment vehicles. Keep reviewing and rebalancing periodically.
  6. Keep Adjusting, modifying and aligning all your goals to be in sync with your income. Thus ensuring you are going on the right track always and not gone astray with time!