
Growing up in this competitive world and fighting the competition to keep up the pace is just not enough in today’s world. You’ll be in the race till you run, once you slow down or stop, it will be almost impossible to compete in this race. Most of ours’s financial situation is also on the same footprints. We are just dragging ourselves, trying to meet the obligations that society is pushing onto us.
What if you stop working today? Or God forbid, something unexpected things occur in your life, Do you think your financial goals would be still achieved? Can your children afford the same lifestyle? Will your spouse be able to manage the households? What would your post-retirement life look like? It may sound bizarre to think about these questions now, but do you realize that this is the reality and it may happen to any one of us. Imagine such problems on your face, and you are standing there without any solutions to fight them?
Comprehensive financial planning may help us to tackle such problems avoiding the bumpy ride. So what exactly is included in the comprehensive financial planning?
The Financial Planning process comprises 6 main pillars:
1. Cash flow analysis
Cash flow analysis mainly focuses on the household income and expenses of the family. This can give a clear idea of what is left behind every month which can be invested for a brighter future. Along with cash flow analysis, a Balance sheet also plays an important role in giving a clear overview of your assets and liabilities. It can be used to calculate your net worth.
Net worth can be wisely used to calculate your year-on-year progress in terms of financial matters. The focus should be on reducing the liabilities part and growing your assets, the ones which will truly increase your net worth.
2. Retirement planning
This is the reason that we need to take this retirement planning seriously and plan early for this expense.
Retirement planning is often the most important goal for everyone. For a few people, retirement savings start with employment through instruments like Provident Fund (PF), Gratuity, or in some cases 401(k) plans. Few people even invest in a few long-term instruments for the sake of tax savings. But if these investments are not selected properly, they can prove to be a costly affair.
‘Retirement is just like a very long vacation where you tend to spend more. The only difference is that there is no income source during this period.’
Moreover, with increasing advancements in the medical field, the average human life expectancy is also increasing and so is the retirement corpus. Most people fail to correctly identify the actual corpus needed to fund their expenses in retirement, which may lead to a financial disaster. Hence, planning early may be helpful for happy retirement life.
3. Investment management
Once the life goals are identified, a financial planner can assist you in the proper planning regarding the future value that you will need to plan for. Based on that planning, he may suggest to you the suitable investment options to choose from.
It also includes a strategy or a road map for all your financial goals. An investment plan is devised considering your risk tolerance and risk appetite. A suitable asset allocation needs to be set considering the time horizon of the financial goal. As the goal nears, this asset allocation needs to be adjusted accordingly.
4. Risk management
In personal finance, all the factors are personal and unique to each and every investor. Considering this fact, we need to take into account the risk appetite and risk tolerance of every individual. Based on the risk profile of the investor, a Personal Financial Professional (PFP) may suggest the appropriate asset classes.
Managing the risk tolerance and risk appetite helps meet the financial goals effectively.
5. Tax management
Tax planning highly affects the net returns that the investor will enjoy. For example, a person investing in a Bank Fixed Deposit yielding 5% will finally get only 3.5% after deduction of tax, assuming that the investor lies in the 30% tax bracket.
Hence, knowing and managing the tax implications with minimal impact on the portfolio returns will help get higher tax-adjusted returns.
6. Estate planning
Once all the financial goals are successfully met, one needs to think a step ahead in the future for the distribution of wealth to the successors. There can be specialized need-based solutions for cases like Trusts for Minors, children with disabilities, etc. Professionals like Chartered Trust and Estate Planner (CTEP) can help with proper ways of creating and managing Trusts, Distribution of wealth, etc.
Going through the series of such planning exercises with a Personal Financial Professional (PFP) can help an investor create a roadmap for himself and his Family’s financial goals. However, just creating a Financial Plan is not good enough unless implemented. Also, it should be reviewed periodically so that if there is any change in income/expenses or the assumptions like expected returns or inflation, they can be considered and the plan can be modified accordingly.
Get in touch with your Personal Financial Professional (PFP) to create your Personal Financial Plan.