As part of my day to day work, I keep coming across this question from a lot of different people – friends, family, prospective clients, people in my professional or social network. My one line answer to them always is “You need financial planning NOW“.
Before we dive deeper into why it makes sense for everyone to have a financial plan, lets understand what exactly is a financial plan and why is it important irrespective of what age or life stage you are in.
What is a financial plan?
Simply put, a financial plan is a tool which puts together all aspects of your financial life in one place
- what are the goals or key milestones that you want to achieve in life and what do they mean in financial terms,
- what are the assets (& liabilities) you have created so far,
- your cashflows (income & expenses).
The financial plan then matches the assets and cashflows to the goals and gives you an understanding of how you should go about achieving your goals.
Why is financial planning important?
A financial plan makes you sit back and think hard about what you are doing with your money and helps you track it regularly.
- Gives you the ‘magic number’ – the amount that you need as of today to meet all your goals. This number never fails to draw an “Aha” from our clients when they are shown the same.
- As humans we are always biased towards the short term as compared to the long term. A financial plan makes you invest for the future based on the importance you attach to different goals and not simply based on which goals are just round the corner.
- A financial plan also helps you take more informed investing calls because it ties the investments to goals. Hence, every investment gets tied to the duration of the underlying goal. This reduces volatility to a very large extent.
When does one need financial planning?
Finally, coming to the original premise of the article, I will try to answer this by considering different life stages that we live through and making an argument for financial planning for each.
I have just started working and i am earning for the first time
The first pay-check brings with it the independence of being able to spend at your own accord. The moment we start earning, there are a host of things vying for our attention – credit cards, gadgets, holidays with friends etc. While doing all this is important, a financial plan will help you keep track of the big picture as well. You don’t want to be in a situation where 10 years have passed by without a single penny being saved for the future.
I am married and thinking of starting a family
By the time we are married and have kids, many of us are already earning decently well. The added responsibilities bring with them the added stress of how to best plan for your family’s future – purchasing a house, planning education of kids etc are some of the things one would seek answers to. A financial plan at this point will give you a good understanding of where you stand and what more you need to do.
I am at the peak of my career with a few more years to retirement
Typically for most of us, the highest standard of living that we achieve is right before we retire. By that time, we are used to a certain life style, a certain range of monthly expenses, support staff managing aspects of our lives and it is jarring to think that soon it might all go away. That we might need to pay for a lot of things which came with the job & the seniority. This brings a lot of anxiety. A financial planning exercise at this point can help you put everything in context and also help you answer what is it that you need to do to maintain the same standard of living that you are used to – what are the sacrifices, if any, that need to be made for the same. Also, it will help you course correct any wrong investment decision that you might have made.
I am already retired & living off my assets
If we think objectively, by the time we die, we should have consumed all the money that we made in our lifetime – either towards doing things that we need to or want to do or towards people or causes that we are passionate about. A financial plan post retirement will help you do just that. It will help you articulate very clearly how much money needs to be allocated for different things you want to achieve. At the same time, it will also tell you if there are changes you need to make to your life style to be able to live comfortably using the assets that you have.
In conclusion, the sooner you do a financial planning exercise, the better it is.
A lot of people confuse financial planning as a one-time activity and hence don’t attach a lot of importance to it. This could not be farther from truth. Our lives are dynamic and our aspirations and wants are continuously evolving. This makes the financial plan also a dynamic ever-changing tool which keeps providing you the most updated picture of your financial life.
Given that all of us are busy managing our personal & professional lives, the role of an advisor becomes very important because a good advisor can help you keep your financial plan updated & also keep providing you with transparent & unbiased advice to help make money-related decisions.
