What is Financial Planning?
Everyone has needs and aspirations. Most needs and aspirations call for a financial planning and commitment. Providing for this commitment becomes a financial goal. Fulfilling the financial goal sets people on the path towards realizing their needs and aspirations. People experience happiness, when their needs and aspirations are realized within an identified time frame.
For example, a father wants his son, who has just passed his 10th standard Board examinations, to become a doctor. This is an aspiration. In order to realize this, formal education expenses, coaching class expenses, hostel expenses and various other expenses need to be incurred over a number of years. The estimated financial commitments towards these expenses become financial goals. These financial goals need to be met, so that the son can become a doctor.
The needs or aspirations are a good starting point, but in order to plan, these need to be converted into financial goals. The financial goals must be defined in terms of time horizon and the amount of money required to fund the goal.
In the above example, the father has to plan (financially) for funding the son’s medical education. For that purpose, one needs to know the time when the son is ready to go to the medical college, which will be after 2 years, in this example as the son has just passed his 10th standard examination. The father also needs to estimate the amount required for tuition fees and other related expenses.
Financial planning is a planned and systematic approach to provide for the financial goals that will help people realise their needs and aspirations, and be happy.
What are Financial Planning Objectives and Benefits?
The objective of financial planning is to ensure that the right amount of money is available at the right time to meet the various financial goals of the investor. This would help the investor realize his aspirations and experience happiness. It gives direction to the investor’s spending and saving habits.
An objective of financial planning is also to let the investor know in advance, if some financial goal is not likely to be fulfilled. In the above case, the investor knows that if he cannot make the requisite combined investment of Rs 21,33,238 in debt and equity today, then financial constraints may affect the realization of his aspiration.
Thanks to advance information available through financial planning, timely corrective actions can be taken, such as:
- Reviewing what is a “need” and what is a “desire” that can be postponed for the more desirable objective of realizing the aspiration of son becoming a doctor.
- Moving to a smaller house, or a house in a less expensive locality, to release more capital.
- Improving the future annual savings by economizing on expense, or taking up an extra part-time job, or influencing the spouse to take up employment for some time.
- Considering an education loan to bridge the shortfall in funds.
Financial planning thus helps investors realize their aspirations and feel happy. It also helps the financial consultant, because the process of financial planning helps in understanding the investor better, and cementing the relationship with the investor’s family. This becomes the basis for a long term relationship between the investor and the financial consultant.
What is the Need for Financial Consultant?
Most investors are either not organized, or lack the ability to make the calculations described above. A financial consultants service is therefore invaluable in helping people realize their needs and aspirations.
Even if the investor knows the calculations, the knowledge of how and where to invest may be lacking. The financial consultant thus steps in to help the investor select appropriate financial products and invest in them.
Transactions such as purchase of house or car, or even education, necessitate a borrowing. The financial consultant can help the investor decide on the optimal source of borrowing and structure the loan arrangement with the lender.
Taxation is another area that most investors are unclear about. Financial consultant who are comfortable with the tax laws can therefore help the investor with tax planning, so as to optimize the tax outflows.
What are Alternate Financial Planning Approaches?
The financial plan detailed above is a “goal-oriented financial plan” – a financial plan for a specific goal related to the aspiration to make the son a doctor.
An alternate approach is a “comprehensive financial plan” where all the financial goals of a person are taken together, and the investment strategies worked out on that basis.
The steps in creating a comprehensive financial plan, as proposed by the Certified Financial Consultant –
Board of Standards (USA) are as follows:
- Establish and Define the Client-Planner Relationship
- Gather Client Data, Define Client Goals
- Analyse and Evaluate Client’s Financial Status
- Develop and Present Financial Planning Recommendations and / or Options
- Implement the Financial Planning Recommendations
- Monitor the Financial Planning Recommendations
The comprehensive financial plan captures the estimated inflows from various sources, and estimated outflows for various financial goals, including post-retirement living expenses. The plan can go several decades into the future.
A comprehensive financial plan calls for significantly more time commitment on the part of both the investor and the financial consultant. However, the time commitment needs to be viewed as an investment in a long term relationship.
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