When people hear the term, “Financial Planning”, some are immediately put off, as they simply do not have the time to plan (Now they do). They think of the process as complex and time-consuming; in fact, most believe they should think of a financial plan once they have enough wealth. Some even think of financial planning as investment planning or tax planning. There are many such myths about financial planning, and it is important to understand what financial planning really is.
Any decision about money impacts your overall finances. In fact, deciding not to invest or not to plan is also a decision. Any decision that you take about money and that has an impact on your overall financial situation is financial planning. The irony is that most people do financial planning unknowingly and in an unstructured manner, whether it is buying insurance policies, or stocks, or investing in real estate or taking a loan. These decisions are generally taken in isolation, with no relation to each other, and without considering the impact of one decision on the other.
So, why not do it in a structured manner?
Financial Planning is the process of utilizing your Financial Resources in the best possible manner to achieve your Financial Goals. I know it is a boring definition so let me make it a little more interesting.
Financial Planning is the process of helping you Live your Happiest Financial Life and never ever worry about money. Even in times like today, the process of financial planning should ensure that you have sufficient liquidity to take care of your lifestyle rather your modified lifestyle.
However Financial Planning is not the same as Investment Planning or taking advice from a chartered accountant or a banker and it generally starts with setting a Goal.
What is a Financial Goal, You Might Wonder?
Setting financial goals is the heart of the financial planning process. It is a critical component that you should be clear about.
A financial goal is a clearly defined, quantified and time-bound goal that a person or family has. Buying a house is a goal but buying a house for around Rs. 5 Crore by March 2021 is a precisely defined financial goal.
Does Everyone then Require Financial Planning?
Some people live in the fallacy that just because they are successful, they do not need to plan, or they think they know what planning is all about. At the other end of the spectrum, there are people who think they do not have money to plan.
Every person, however poor or wealthy, requires financial planning just as any poor or wealthy person requires medical treatment.
Every person and family need to plan because:
a. There is a finite source of money that needs to be allocated for different needs, wants and requirements. Hence, there is always a strong need for prudent cash flow and debt management.
b. There is no social security system in our country, and one must plan properly for retirement, contingencies (including medical) and unforeseen events.
c. There is a need to have discipline into their financial matters.
d. They must invest surplus cash flows in line with their overall objectives and financial goals.
e. With so much uncertainty around us, it is very important to start the financial planning process to figure out how much you really need, where you are and what is it that you must do for liquidity ,security and peace of mind.
While taking a drive to an unknown place, the first thing that people will do is to zero in on the driving directions. Similarly, when cooking a new dish, most people will want to ensure that they have the recipe in place.
Having a financial plan is like having a recipe when you plan to cook a dish. This is to ensure that the right ingredients in the right proportion are thrown in to meet your cooking expectations. Financial planning is not about being a financial whiz kid, but all about making sure that you meet your goals and dreams.
We plan most things in life right from taking a vacation to which car or TV to buy, but when it comes to financial planning, most of us take a reactive approach. It is only when your cash flows are in a mess, or you realize you have been taken for a ride or have suffered a loss do you realize the need for financial planning.
Why don’t People Plan?
There are several reasons why people do not plan:
- Time Poverty: Most people do not have time to even think about financial planning. Planning requires a dedicated effort to set aside some time and meet up with someone who can help you achieve it. Even if a person is capable of doing it on his own, he still does not have the time to do it.
- Most people do not understand Holistic Financial Planning and think it is the same as investment planning or tax planning. Just because they are investing in real estate, insurance policies and PPF, they think they are already doing everything. Some are advised by their friendly bank manager / relationship manager and believe that their planning is being taken care of.
- Myth of No Money or Enough Money: There are people who believe that they do not have sufficient money to plan. What they do not realize is that less money means you need to plan even more. At the other end of the spectrum, some people believe they have enough and are doing well so they do not need to plan. This category lives in an illusory world until some disaster strikes and causes financial problems.
When a patient goes to a doctor:
Does the doctor show the patient a Cipla or Lupin medicine and then starts explaining the features of the medicine? OR
Does he first diagnose the patient, understand the problem, and then prescribe appropriate medication?
All people would agree on the second approach. Additionally, does the patient directly go to the chemist and ask for a medicine or does he go to a doctor first?
However, when it comes to financial planning, most people first look at the products being pitched to them, the attributes of the products and then see how it fits in their life.
Is this the right approach? No certainly not, it is an insane approach of seeking advice or doing financial planning.
Think about it.
Answer the following questions
How do you plan your finances?
How much time do you devote for it?
Do you buy insurance and investments in an adhoc fashion?