Importance of Financial Planning

ToI 23/4/2009


Do you think you would achieve your financial goals in life? If you pose this question to your friends or relatives, most of them would answer in the affirmative. However, if you talk to advisors, they would tell you that most people are unlikely to meet their financial goals: be it for their retirement or children’s education. Why? Because they don’t have a proper financial plan, experts say.

“Mostly, investments are made in a random fashion. Sometimes there would be a goal in mind, but even in those cases there won’t be any follow up,’’ says Amit Trivedi, a Certified Financial Planner. “In most cases, people don’t bother to review their investments periodically and make additional investment if needed to realise their goals,’’ he adds. For example, some people would have some money in provident fund, fixed deposit, mutual funds and so on. They believe these investments would be enough to realise various life goals. However, that won’t be the case. This is because they don’t know how much money would be needed to send their children to a foreign university. Or what should be the size of their investment corpus. “Since they haven’t worked with real numbers like inflation and rate of return, they wouldn’t have a realistic picture. For example, in the last 15 years the cost of education has gone up drastically,’’ says Trivedi.

That is why advisors insist one should have proper financial planning in life to achieve them. “As individuals, we are exposed to many eventualities in life. We have to be prepared to meet them. That is why we have to plan for it,’’ says Gaurav Mashruwala, a certified financial planner. “For example, we have financial goals like retirement, child’s education, and so on. If you don’t actually plan for them and work towards them, it would be difficult to realise those goals,’’ he adds. A financial advisor, who doesn’t want to be identified, cites the example of a client. “There was this guy who walked into my office just a few months after retirement. He had been steadfastly saving for his retirement. He had frugal habits and his savings rate has been very high,’’ says the advisor. “However, when we sat and worked with real numbers, it became very clear that he would have to scale down his post-retirement expenses. This was because though he saved most of his salary, he put them in safe avenues like fixed deposits and PPF, which give modest returns. His corpus hasn’t grown much because of this,’’ he adds.

This is where absence of a “real financial plan’’ becomes evident. For example, if the person worked with real numbers, he would have had a rough idea about how much money he would have in his retirement corpus. If he thought that wouldn’t be enough to fund his retired life, he could have invested in stocks, which in theory is expected to deliver better returns. Further, if he had considered inflation, he would
have got a rough idea that things would cost more in future, prompting him to add more to his retirement fund.

Mashruwala likens financial planning to driving a car to the destination. “Like a car’s four tyres, we also have four components in our life: income, expense, investments and liabilities. It is about synchronising these four,’’ he says. Trivedi says a proper financial plan would help people meet any eventuality in life. “It could be an individual problem or a general one like the current economic crisis. If you have a proper plan, you can tackle it better,’’ he says.


Steps: Get Ready

Identify a goal

Find out how much fund you would require to achieve it

Work with real numbers to get a realistic picture

Identify the ideal investment vehicle

For short-term goals, stick to safer investment like debt

For long-term goals, you can opt for equity

Always review your investments periodically

Make changes in your plan if required



Vivek Karwa is a Certified Financial PlannerCM from Chennai, India and the contact details can be viewed on “Reach Us” page in this website.

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