We all have read and heard leaders and emminent personalities talking about their well chalked out plan in order to achieve success. And it holds true for one and for all! Whether it is preparing for an exam, or preparing for a performance or for that matter achieving your goals in life, having a plan in place is very essential. Needless to say, the same applies when it comes to achieving our financial goals as well.
However, the importance of having wealth (money) has been debated by philosophers since centuries. Right from Aristotle to Soren Kierkegaard to Karl Marx have had their take on the importance of possessing wealth. Nonetheless, we all understand what value ‘money’ holds.
But how do we go about creating the wealth we aspire to achieve? How do we grow the money that we earn? Well, the answer lies in having a proper financial plan in place and strictly abiding by the same. A proper financial plan not only provides a comprehensive overview of an individual’s financial status but also helps him in bringing about any positive change that is required.
Most importantly, how do we develop a solid financial plan that can help us achieve all our goals? Also, what are its main components?
Commenting on the components of a financial plan, Neeraj Chauhan, CEO, The Financial Mall states, “The main component of financial plan is to prepare an itinerary for future. It needs to understand the current financial and non-financial situation of client, seen and unseen circumstances. The idea is to look beyond what the client sees or what she wants to see. As planners, we try to evaluate his or her financial preparedness for the future, expectations and aspirations. The motive is to help him or her achieve the desired goals and make him or her aware of the realities.”
Developing a financial plan requires patience, perseverence and of course, some expertise. The best way to do so is to approach a professional financial advisor. And when a financial advisor appears in the scene, he or she takes care of the entire financial management process in a bona fide manner.
However, there is a particular process that these financial advsiors follow in order to curate the best possible financial plan, that can help you achieve all your financial goals within a stipulated time frame. And, chalking out a solid financial plan, involves at least half-a-dozen steps.
The first step starts with understanding the background of the client. The advisor needs to gather relevant data, both qualitative and quantitative. While the most important factor happens to be the client’s source and amount of income, others include age, marital status and number of dependants.
Understanding and analysing the client’s current financial siatuation is also necessary, which includes regular saving and investments; and also properties owned by the individual.
After getting a deeper understanding of all the above-mentioned aspects, the advisor focuses on understanding of the client’s financial status. This involves analysing the current cash flow and the projected cash flow for the next year. It also involves gathering financial statements and deriving net worth of the client. In fact, to cut the long story short, a financial plan should have the ability to dig-out in-depth information about the client’s current economic situation and thereby, come up with suggesstions to work upon loopholes, if any.
Sharing her views on the importance of charting out a proper financial plan, Tejal Gandhi, CEO and Founder, MoneyMatters says, “A financial plan should bring out the transition through in-depth information to be obtained from the clients. The behaviour of the client plays an important role in the financial plan balancing.”
As mentioned at the beginning of the story, having concrete goals make things much easier for both the parties – client as well as the advsor. Hence, its very important for the planner to have a clear idea about the client’s financial goals. Having an idea of the client’s goals helps a financial advisor to design a appropriate plan, which can help the client achieve his or her goals with ease.
Now, financial goals can be divided into three major segments – short, medium and long-term ones; and goals differ from one person to another depending upon their choices in life.
Let us take the exampe of a 40-year-old married individual with family (spouse and two kids). A short-term goal from him would probably include a week-long family vacation in Australia within the next two years or the down payment of the latest car. On the other hand, long-term goals would include saving up for children’s higher education and their marriage; and of course building a corpus for retirement. In case, the individual does not have a house, buying a property would also figure in the long-term plan.
Similarly, on the other hand, a 28-year-old single professional will have different goal sets. For him, taking a two-week long trip across eastern Europe might feature in his long-term goal; and buying the lastet iPhone be his short-term goal.
Now, an advisor will have to weigh both the pros and cons of these two clients, and then weave in a financial plan that will eventually help both achieve their goals.
Depending upon the current situation and taking into account all kinds of goals, a client decides on his goals after discussing them with the financial planner. More often than not, goals need to be prioritised. For example, if one is falling short of funds for child’s education in a few years, one may decide to cancel the international holiday or may choose to opt for a car, which is less expensive.
Next, the planner devises an investment plan to map with the goals. Here, several things are taken into consideration by the planner.
The first one happens to be the client’s risk appetite while the other important factor is time horizon. For short-term goals, the advisor would suggest to invest mostly in debt products.
On the other hand, to achieve long-term goals, the client can choose to invest in direct equities or equity mutual funds, depending upon his choice. Asset allocation plays an important part here. Aggressive investors may decide to invest up to 100 per cent in equity for goals that are roughly five to seven years away.
Whereas on the other hand, investors with a moderate risk appetite may choose a mix of equity and debt funds or hybrid funds. This could be done through investing in systematic investment plan (SIPs) via mutual funds. Investors with a very high risk appetite could also have a portion of their portfolio in mid cap funds, small cap funds and sector or thematic funds.
Consequently, conservative investors may want to invest majorly in debt products like fixed deposits. However, the planner would make them aware of the importance of investing in equity as, it is the only asset class that will give inflation-beating returns in the long run.
The goals are divided into separate buckets and how much of investment is required for each is decided upon. Other investment classes like real estate and gold may also be considered.
This above process involves making certain assumptions regarding returns on investments. “The future values should clearly bring out the long-term goals like child’s higher education and retirement. The assumptions taken should be realistic and calculations should be done with multiple assumptions,” says Gandhi.
Apart from all these, understanding and addressing risk management also forms an integral part of financial planning. Every financial advisor, while drafting a plan for his or her client, always takes into consideration, apsects like need for insurance plans.
After gathering information on existing life insurance and health insurance plans, the advisor will suggest probable insurance plans for the client. It might include separate health insurance plans or a family floater plan.
However, all these heavily depend upon the client’s current financial situation and long-term goals – both life and financial.
The next part is the execution of the plan. This process involves carrying out the suggestions in the plan. The planner would guide the client in the process.
Once the plan is prepared, it needs to be reviewed every six months. The idea is to track the progress and make any necessary changes. When the client is entering into a new stage of life whether it is marriage, kids or retirement, changes also need to be made accordingly.
“Financial Planning is not just data crunching and preparing plan on the basis of financial data. It is about helping client to navigate through ups and downs of life to achieve important financial goals of life. It is about counselling client on various aspects of life which are affecting or may affect his financial life or may jeopardise his financial future,” Chauhan sums up.
Creating a financial plan requires some time and energy. While no amount of planning can guarantee the exact desired outcome but, having a financial plan in place is always better than not having one at all.
Adding to this, an experienced financial advisor can always help you come up with an appropriate financial plan and hence help you realise your goals.