We've all got responsibilities! And some serious responsibilities:you may need to buy a family house, get your children educated well, married grandly the list goes on and on and on! And maybe after you've managed to achieve these basic goals, you can even begin to think about that beach house you always dreamed of! Sadly though, you can't afford that with just your retirement fund. So, you've toiled hard all your life so you can live your dreams, but despite that, they may remain incomplete Want to know why? Heard of the saying, "By failing to plan, you're planning to fail"? It's true! Everything big in life requires planning and execution. Like financial goals. These major goals definitely need a Plan to become a reality! Even more basic goals, like renovating your house, taking a holiday, and having money ready for emergencies are easier to reach if they're backed by a strong FINANCIAL plan.
A financial plan is nothing but a step-by-step approach to meet one's life goals. Why go for a Financial Plan? Multiple reasons. For one, parental needs are rising, and kids' dreams are going to cost money. Lots of it! Because don't forget inflation It will only make these goals more expensive as time goes by!!!!!
Another reason - the professional environment is now highly competitive, and even with a high income, jobs cannot be taken for granted. This means money must always be available in times of emergencies. And with newer and bigger medical advances, people live longer retired lives!
But how will all this this get funded? With a financial plan that ensures an income post retirement. Finally, with the number of investment products always on the rise, a strong plan cuts through the clutter and ensures that the right investment products are chosen to achieve these objectives.
Imagine if your daughter's wedding is in 1 year and you're trying to decide how much money to put aside for it. But because you did not start planning for this sooner, you can only afford a certain amount. You may still want to give her the best, so you cut back on expenditure and begin furiously saving for the wedding. But as you get closer to the date, you realize things aren't going as well as you hoped. You've booked the space, bought clothes & jewelry, but what about the food? The florist? The wedding invitations? And imagine if these coincides with your son's college semester fees are due at the same time that you have to make big wedding purchases.
A financial plan, drawn early and wisely, may have been able to save you all that stress! With a strong financial plan, your savings can be directed into suitable investment vehicles, building a corpus for the important things coming up (for e.g. children's education & wedding, building a house, retirement funds) and preparing you for the challenges that life will continue to throw at you (illnesses, accidents, unaccounted expenses).
Financial planning is no different from a structured problem solving framework. Every structured business problem solving exercises has specific steps (the same can be applied in financial planning as well). However, there are broadly 6 steps in the financial planning process. Most certified financial planners (CFPs) and financial advisers will be very familiar with these steps. However, investors should understand that, while financial planners or CFPs can play an important role in the financial planning process, the success of the financial plan ultimately depends on the investor. Therefore, it will be useful for investors to familiarize themselves with the process, so that they can work efficiently and effectively with their financial planners or advisers.
The first step of financial planning process is to understand and define your specific goals. The more specific the goals are the better it is. Sometimes, you may not have enough clarity about all the financial goals in your life. An expert financial planner can help you define the goals across your savings and investment lifecycle and determine the specific numbers you need to reach for each of the specific goals. You should remember that a financial plan is not working towards a singular goal, like retirement planning, Children's education or marriage or buying a home etc.
A financial plan includes multiple goals across your savings and investment lifecycle. However, you should establish definite time frames for achievement of each of these goals. Even though, ideally, we would like to achieve or even exceed all our financial goals, it is useful to prioritize the goals, especially if there are constraints with regards to how much you can invest and save. For example, you may prioritize your child's higher education over buying a house or some other financial goals. The financial planner will take your priority into consideration, when developing your financial plan. Once the financial goals and the priorities are determined, the financial planner or adviser will examine these goals in respect to your resources and other constraints, if any. The objective of this step is to help you define specific, realistic, actionable financial goals.
The second step in the financial planning process is to collect the data regarding the your income, expenses, existing fixed and financial assets, life and health insurance, lifestyle & other important expenses, your family structure and other liabilities that will form the inputs in your financial plan. The Financial planner may employ different methods to collect the data from you. Some financial planners or advisers may send you a survey form or questionnaire that you will have to filled out and send back to the financial planner.
Many financial planners prefer face to face meetings with their clients to collect this data. Face to face meetings is often more effective than just sending a survey form or questionnaire. Through a face to face interaction, the financial planner or adviser can clarify certain details about you that the questionnaire may not be able to. A personal meeting also helps the investors clarify doubts, expectations or share additional details with their financial planners or advisers. We recommend that, you should have a face to face meeting, even if your financial planner does not ask for one. It is always helpful for you.
Whatever the method is for interaction and data gathering, it is always beneficial for you to share as much information as possible with your financial planner. Withholding financial or other important information from him is never useful. You should remember that the role of the financial planner or adviser is very much like a family physician. Just like, we should share all medical and health related information with our family physician, we should share all our financial information or any other information that may potentially have an impact on our financial situation with our financial planner
The third step of the financial planning process is the data analysis part. The financial planner will review your financial situation - assets & liabilities, current cash flow statements, debt or loan situation, existing insurance policies (both life and non-life insurance), exiting savings & investments and other legal documents (if required). Through a structured financial analysis process, the financial planner will determine your asset allocation strategy and insurance (life and health/ critical illness) needs to meet your financial objectives. The financial planner may also suggest additional life and health insurance, if he or she determines, based on your financial analysis, that you are not adequately insured.
What is your responsibility at this stage? While all the work in this step is done by the financial planner, as an investor, you should also involve yourself in this process by scheduling review of the plan and making sure that you understand the analysis. After all, it is your financial plan!
After the above 3 steps are covered, your financial planner will make the actual recommendation with respect to your comprehensive financial plan. This will include your asset allocation strategy based on your risk profile, alternate investment options like, mutual funds, equities, traditional debts, tax saving strategies, life and non-life insurance requirements etc. Your financial planner should schedule a meeting with you, to discuss these recommendations. This is a very important step in the whole process as you should make sure that you understand all the recommendations he or she has made and the reasons thereof.
At this stage, you should ask him/ her as many questions as you would like to, regarding each strategy or product investment recommendations, because they will be crucial in meeting your financial objectives. You should note that the final investment decisions rest with you, and therefore you should ensure that you are comfortable with the financial plan drawn and its execution strategy. Recommendations can change during this step and altered based on your inputs to the financial planner.
The penultimate step of the financial planning process is the implementation of the investorâs financial plan. This involves the actual process of purchasing the investment and insurance or other products. At this stage various regulatory and procedural requirements need to be fulfilled, depending on the each product involved. As an investor, you may have to submit the documentation for Know Your Client (KYC), fill up the application forms for mutual funds, opening of Demat and share trading accounts for equity investing, and finalising proposal forms for life and non-life insurance plans.
Your financial adviser will play a big role in fulfilling these requirements, including collecting the documents for KYC and helping you in filling out the application or proposal forms. However, it is important, that you remain involved in the entire process. Even if you delegate the responsibility of filling the major portions application or proposal forms to him, make sure you verify the information in the forms post t is filled up, to ensure nothing is incorrectly stated. You should also carefully read the brochures/ scheme information documents of the products that you are investing in, so that you understand all the terms and conditions of the product(s).
The final step of the financial planning process is to monitor and tracking the progress made on your financial plan. You should review your financial plan in order to evaluate the effect of changes in your income levels, your financial situation, tax obligations, new tax rules, new products and changes in market conditions. Normally, your financial planner should schedule meetings with you at a regular frequency (once every 6 month or 12 months) to review your portfolio and discuss if any change needs to be made in your financial plan, asset allocation strategies and investments.
But even if your financial planner does not schedule regular review meetings, you should insist on meeting with him/ her at some regular frequency, e.g. Semi-annually or annually etc. At the end of the day, it is your financial plan and your financial future is at stake. Therefore, the onus is really on you, to make sure that your financial plan is on track. Also, you should remember that financial planning is not a static, but a dynamic exercise. Your financial situation, goals and aspirations may change over a period of time. Therefore, you should meet with your financial planner or adviser on a regular basis, to ensure that your portfolio is doing well and at the same time, ensure that any change to your financial situation, goals or aspirations is appropriately reflected in your financial plan, and executed upon.