What is Financial Planning and Why do I Need One?

Financial Planning is a process of evaluating your current financial position, set future goals and find ways or paths to achieve those goals. You can think of it as a three step process – Where am I? What I want to achieve (goals)? & How to reach my goals?

Everyone wants a secure future and have dreams such as lots of money, a dream home, own business, quality education, etc. You can find people asking questions such as:

Common Questions

• Where should I invest my savings?
• How to pay for my child’s college education?
• How do I live without a job or income after retirement?
• How can I save taxes?
• How to save in order to buy a property?

These are a few out of the several questions that Financial Planners have to deal with.

Goals in Life vs. Financial Goals

Your personal goals in life and financial goals have a difference, but still they are closely related. How? Financial goals are aimed to help you achieve financial well being and also help you achieve balance in life.

Its not just about being rich, but also about being healthy, knowledgeable, having fun, spending time with family, etc. Although money can’t buy everything – finance plays an important role that impacts a major part of our life.

Personal goals like doing well in exams, finding a dream date, losing weight, winning a tournament, etc may not directly be related or confined to just financial goals but will have an impact.

This distinction is important because at times one has to choose between two or more options such as – your retirement vs. son’s higher education expenses, a vacation vs. saving for retirement, term insurance vs. whole life insurance, buying a car vs. shifting closer to office……and so on.

Financial Well Being

Continuing with our previous discussion let me tell you that life is not just about money. You have to strike a balance between finances, health, education, relationships and various other aspects.

For example there are many people who are adept at saving every penny – such as cutting down on a cup of coffee or a short weekend outing. The focus is not 100% about making money or being rich, but more about having the right mix of savings, investments and funds to take care of your future needs.

Everyone wants to become a millionaire but it takes time and efforts to reach that stage. Though financial planning focuses on financial well being it should not be at the cost of sacrificing your health, ambitions, dreams, etc. Financial well being is about a balanced and content life with some financial freedom. In simple terms you also need to think about spending quality time for you family, hobbies, travel, health needs, education, etc.

Why do I need Financial Planning?

To put it in simple terms you need financial planning to achieve financial goals and ensure financial well being for you and your family. Financial Planning is not a product or a set of investments, but a more customized solution to address your financial goals. The common questions we discussed above are answered using financial planning tools. This involves the following steps: –

• Evaluation (to know where you stand)
• Set Goals (Where you want to be?)
• Strategies/Process to achieve your goals

Your goals may be broken in to smaller milestones, so that you can monitor progress at regular intervals.

For instance, let’s say becoming a millionaire (net worth of Rs.10 lakhs) in 3 years is your goal. So you break this down in to 3 milestones such as Rs.2 lakh by Year1, Rs.5 lakh by Year2 and Rs.10 lakh by Year3. Given this framework, you will review your progress after Year1 and make the necessary improvements and changes to get closer to your goals.

Addressing Financial Problems

This is one key area that financial planning tries to address. However, it is wrong to assume that financial planning is solely for people who have financial difficulties. Wrong!! Planning is required for people in all strata of society right from the famous personalities to the normal people on the street. Some of the issues or problems addressed by financial planning include:

1.  Financial Emergencies/Contingencies:

Emergencies such as accidents, critical illness, loss of job, death in the family, etc.

2.  Eliminating Debts:

All debts are not bad per se, but high cost debts such as those on credit cards, personal loans, private loans from individuals, etc can be a drag on your financial wellbeing. Minimizing these and eliminating wherever possible is important.

3.  Retirement Planning:

Post retirement your expenses and inflation can erode your income and assets. Before you retire you need a financial plan to ensure that you can retire with peace and lead a dignified retired life with a good retirement corpus and regular income stream.

4.  Wealth Creation & Estate Planning:

Wealth is seen as something related to rich only, which is not true. Everyone starts accumulating wealth overtime, but being able to manage and grow wealth consistently and the ability to preserve wealth is important. This doesn’t end here, you also need to plan your estate and see how you can pass on your wealth or assets to the next generation, which involves sound estate planning including succession planning.

Conclusion

By now you I’m sure you would have understood the necessity and importance of financial planning to any individual –young, old, rich, poor, etc.

Financial Planner can be seen as a guru, coach, advisor or a friend. Why do celebrities have a personal fitness instructor? Why should the world’s best batsmen in cricket (say Sachin Tendulkar) have a coach?

To put it in a nut shell you need a mentor or coaches (a Financial Planner for your Finance) who can guide you, put you on the right path and monitor your progress and provide tips and help you improve your performance.