This is a debatable question and to give a definite answer to this is quite a task. Financial planning never being a structured discipline, many people think they can do it by themselves or they don’t require it. Financial planning being considered a scientific discipline already in developed countries, it is emerging in India only in the past 4-5 years. Financial planning is synonymous to taking advice on Financial Planning matters from a CA or a Senior in the Family. Also most of the product sellers – From Agents to Relationship managers in banks are using this term to sell their products. Therefore, it is quite obvious that people are confused. Because of this confusion it is quite understandable if people giving following responses to this question.
- I have already done my Financial Planning.
- My CA looks after my Financial Planning
- My father looks after my financial Planning
And the list goes on…..
Nothing can be further away from the truth
When I met Mr. Joshi, he was reluctant to take up financial planning and said he doesn’t have time for this and everything is looked after by his father.
He agreed finally after a lot of persuasion.
When we started the process I asked him “Have you written down your Financial Goals that you want to fulfill?” He was taken aback. He said “He had never thought on these lines and has a rough idea about this”. When I dug deeper and asked “what is your most important goal at this point of time?” He said “I want to create a fund for Retirement Planning.”So my next question was “Have you calculated how much fund is required for the same?” He was clueless.
His financial planning mostly consisted of many insurance policies, real estate and many useless investments.
So after encountering many such cases in my professional life I thought of addressing this issue head on.
What you need to do /or should be able to do to create a Plan without taking a help from a professional (CFP)
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Identification of Goals
It was last year I met Dr Oak for our goal setting meeting. He had a very vague idea about his goals. It was basically restricted to his children’s education, retirement and other basic things. Also there was no clear-cut time frame decided for each goal.
Can’t really blame him as statistically, only 3 % people in the world set goals in spite of direct relation between Goals setting and Goal achievement.
What skills you need to have:-
For setting a Goal on your own you need to have considerable analytical ability and an objective view for deciding your future course of action.
You also need a holistic view to decide on your overall picture of life.
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Quantification of goals
This is one of the most difficult parts of Financial Planning as you need to know different concepts in Financial Planning such as time value of money, Calculation of future value of the expenses, looking at the impact of interest rate on the corpus and the list goes on.
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Optimization of cash flow & prioritization
Not all goals are achievable. Prioritization of the goals and optimizing your overall cash flow for the entire life time is very important to the overall goal setting.
You need to have sound understanding of Cash Flow working, Impact of Return on Investment on your cash flow, Income & Expense growth, etc.
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4 Pillars of financial planning
- Risk management & Insurance planning
You need to have sound understanding of different methods of calculating the amount of Insurance required by an Individual.
Also you should be well versed with the different Insurance products available in the market and have the analytical ability to study them.
- Retirement Planning & employee benefits
You should be equipped to create a plan for an event which is going to come after 20-25 years later in life. You need to know different concepts like growing annuity, return on investment, compounded growth rate, etc.
Also, you should be able to analyze the impact of return on investment post retirement and pre retirement.
Additionally, calculating a personal inflation rate is crucial for creating a plan for your retirement.
- Investment Planning
Understanding your Investment objectives is very important for creating your investment Plan.
You should be thorough with different asset classes such as Equity, Debt, Real Estate, Gold, Art, etc. Also you need to understand their Risk to Reward Ratio.
And most importantly, you need to know what should be the ideal mix of these different asset classes in your portfolio.
- Tax Planning & Estate Planning
Understanding basic taxation concepts like Income from House property, capital gains & different tax deductions is a must.
Also you need to be aware of Legal Angle of Will, Trust, Power of Attorney, etc to create your Estate Plan.
So to summarize the whole canvas of financial planning, you need to know following things
- How to Identify & Quantify your Financial Goals Scientifically
- Risk Management & Insurance Planning
- Investment Planning
- Tax Planning & Estate Planning
And above all, the ability to think strategically about your financial Future.
If you are doing all these things under the banner of Financial Planning- Congratulations!
But if not, you are living in the fool’s paradise of managing your Financial Life effectively….
What the world would be if Financial Planning doesn’t exist??
Money is the most important force in our life.
All the decisions we take (or don’t take) have some or the other bearing of money.
So, taking a good, serious look at planning your finances becomes key.
Many people say that life is so uncertain so what is the use of the planning? Incidentally, that is precisely why you require a plan. If life was predictable, why would you need a plan?
So if you want to achieve your goals and live an inspired life, you need a Financial Life Plan.
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