As a famous saying goes “Failing to plan is planning to fail”, the art of planning applies in every field of life including that in personal finance. Attaining long-term financial security and peace of mind is what all human beings strive for. It is only through sound financial planning that we can ensure that we have enough money to successfully meet all our life goals.
If you think that since you’re currently financially well –off, so you don’t need Financial Planning, you are wrong! Making money is great, but hey, saving and making that money grow is extremely important so that you can maintain your current lifestyle in the future and also tide over any unforeseen circumstances. A quote by Benjamin Franklin fits perfectly here “A penny saved is a penny earned’’, establishing the need to save and invest your money.
Now that you know that smart money management is crucial for everyone, the next question arises that at what stage do we start financial planning? We know that “Time is Money” and that the “early bird catches the worm”, so, the sooner you begin the process the better it is. This will allow your savings and investment more time to grow and compound to help you reap a bountiful harvest!
If you’ve just joined your first job and are in your mid-20s with no dependents, goals like retirement, child education and marriage of your future kids would seem like distant away, and you would probably brush aside the idea of financial planning at this stage. Well that is a terrible idea!
Here are 5 reasons why starting financial planning at the earliest possible age is the right thing to do–
- The power of compounding – starting early gives you the power to earn more money in the form of interest via the compounding principle, while giving you the cushion to save in smaller amounts. So if you start late, to reach a particular financial goal, you will have to invest larger amounts, which could mess up your finances. A small time window will also give your money less time to grow. So start financial planning now!
- Inculcating financial discipline- starting at an early age can bring much needed financial discipline in our lives. A commitment to a forced savings plan will help us develop a habit of spending exactly how much we need to spend, cutting down wasteful or unnecessary expenditure.
- Mitigating stock market risks –We all know that equities tend to yield the best returns in the long-term. A longer time horizon helps mitigate risks by riding out periods of short-term market volatility, smoothing out your returns.
- Flexibility advantage-starting early gives you an opportunity to correct your past financial mistakes and make changes in your financial plan say by tinkering with your asset allocation mix, etc.
- Tiding over life’s uncertainties: Life has the habit of throwing ugly surprises at us and we need to ensure that we are adequately financially prepared for them. Besides insuring life, one also requires financial protection against misfortunes like illness, Accident, Theft of valuables etc. Stocking ample emergency funding and ensuring a comfortable lifestyle for our dependents in our absence is an absolute necessity. -“Fun is like life insurance; the older you get, the more it costs”. The cost to get insured rises with age, so it’s only wise to start saving early.
Why hire the services of a Financial Advisor?
Ok, so we know that we must start financial planning early. But do we know how much to save, in what assets to commit our money and how much money do we have to invest in each asset? Oh now that’s tough! Leave it! This is the job of an expert- in this case it’s a Financial Planner or a Financial Advisor.
Most of us are very busy in our day-to-day lives that we have little time to track financial markets and let’s admit we don’t have the expertise too. So trust an expert who will build a comprehensive financial plan tailor made to your needs, determine the required amount of investment in each asset class based on your risk profile, to help fulfill all your life stage goals. This is your second step in attaining Financial Freedom!
A good financial advisor can make our financial future. In this age when we are bombarded with millions of investment options, choosing the right ones is extremely difficult and one wrong decision can put our financial future in jeopardy.
What a financial planner does
- Understand your financial goals by taking in consideration factors such as current income levels, financial objectives, risk tolerance, tax slab, lifestyle, etc.
- Gathering all the relevant data and information about you
- Analyzing the data – a planner will tell you how much money you need at retirement, education and marriage of your child and also how much insurance cover is needed.
- Building the financial plan and Asset Allocation– this step involves matching your financial goals with the appropriate asset mix, considering your investment time horizon and risk & return preference. For instance, if you seek stable returns and have low risk profile, a financial expert will allocate more of your funds into fixed income instruments such as debt and less amount in equities which are relatively more risky.
- Implementing the financial plan
- Monitoring and updating the plan–this is probably the most important reason why we need a financial expert. Financial planning is not a one-time process; it is rather a constant one. A planner will continue to gauge the progress towards your financial goals and the performance of his investment recommendations. If the investment portfolio isn’t performing up to the mark or a certain asset class is going through a rough period, the planner will make changes in the asset allocation. Also, the financial plan will be updated in line with your changing needs and income levels.
Financial Planning Tips To Fit Every Life Stage Goal
Life becomes a bag of responsibilities once we get married and have children. An increase in the number of family dependents means higher current expenditure. At the same time, we must have an eye for the future. This is where financial planning comes in. Here are some of our common financial goals.
- Child education-We work round the clock so that our kids can afford the best education. Given how expensive quality education is today and will be even more tomorrow when our kids grow up, it is very important to save money from the time of the birth of the child to secure his/her financial future.
- Marriage of child– In India, marriage is a showy and extravagant affair. If you want to have that ‘Big Fat Indian Wedding’ for your children and also cater to some of their post marriage responsibilities, investing early to meet this life goal is a must.
- Retirement planning– retirement is that golden period of our life when we have little or no responsibility on our shoulders and we don’t have to do the daily 9 to 5 grind. A successful financial plan should ensure that we are able to maintain our current lifestyle 20 or 30 years from now by meeting our regular expenses, additional expenses on health (given that spending on healthcare goes up with age) and fulfill our retirement dreams such as a world tour with our spouse.
- Insurance planning– “If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance.” Ensuring that you have adequate life cover is not just a goal; it is a need to grant long-term and adequate financial protection to our loved ones. Insurance planning also involves seeking financial protection against misfortune such as accident, disability or disease of a family member who could be the sole breadwinner of the family, which comes under the General Insurance category. Insurance also extends to your valuable items such as your cars and homes to guard them against the financial impact of risks such as theft and damage.
Let’s look at some tools for financial planning
- Equities- even if you have a low risk profile, equities are a must to spice up your portfolio returns. Historically, the best performing asset class in the long-term, equities can give you enhanced returns especially when you have a longer investment horizon i.e. to meet goals such as retirement, child education and marriage. A long-term equity investment will help you overcome the inevitable periods of market volatility that is typically associated with this asset class, potentially yielding unmatched returns. Equity planning involves choosing sector specific stocks and company specific stocks by analyzing the longer-term fundamentals of companies, industries and countries.
- Mutual funds-one of the most popular investment vehicles, mutual funds allow you to invest in smaller amounts at fixed intervals, smoothing out your portfolio’s returns by riding over the fluctuations associated with stocks and also lowering your costs. Managed by professionals, who invest your funds in a diversified set of schemes across different assets/sectors such as equity, debt etc, they carry lower risk than equities and act as a tool of professional money management. For meeting life goals such as child education & marriage and also a retirement corpus, investment in mutual funds has the potential to yield good returns.
- Insurance– insurance planning involves determining how much funds you need to protect you and your near and dear ones from life’s uncertainties such as death, accident, disability and illness. Aside from the requisite life cover, modern day insurance planning also caters to fulfill long-term investment needs such as retirement with pension plans guaranteeing long-term financial security by giving us regular income in those years when we cease working.
A good financial plan is the foundation stone of sound financial management, resulting in financial peace. Remember “you reap what you sow”.