A financial plan is the blue print of your financial life

We all make plans and promises: to wake up early, to exercise, spend more time with family, to donate… Shouldn’t your money, too, be a part of this? It should, because many of the goals that one makes are likely to be connected to money—buying a home, starting a business, saving for your children’s college education, taking a dream vacation and retiring comfortably to name a few. Having a financial plan helps give shape to these goals. A financial plan is like a blue print of a person’s financial life. It is the direction that one needs to take to meet some goals.

Here are some of the problems such a plan helps resolve so that the overall direction of your savings and investments remains forward:

1. It helps set realistic financial and personal goals: Will you be in a position to buy a 1.5-crore house in five to seven years? Will it take longer? Or, should the budget be reduced?

2. It helps assess one’s current financial condition, by examining assets, liabilities, income, insurance, taxes, investments and estate plan: The investments you had allotted to retirement may be needed to pay off a home loan, or fund a child’s higher education.

3. It allows you to keep track of and meet changing goals and personal circumstances, and also changes in products, markets and tax laws: New types of mutual funds may come up that suit your requirements. Or, a new health insurance policy that covers an ailment that wasn’t covered earlier. Or, maybe more preferential tax treatment has been introduced for a particular investment. The life insurance that you had bought five years back may have to be enhanced since you earn more now.

4. It creates an organised framework and structure to manage your finances: It will tell you which products you have and how much you have invested in them. For instance, if a Public Provident Fund investment is meant for retirement, you won’t assume that it can be used to pay off a home loan. If a mutual fund scheme has the goal of child’s education attached to it, then it isn’t available for an emergency expense.

5. It indicates and helps optimise cash flows: With a proper plan in place, you can spot the chinks in the armour and take corrective action, such as build adequate life and health insurance; divert money to pay off some debt if liabilities are more than you are comfortable with; postpone buying a new car if emergency funds are running low, and much more.

6. It helps maintain a budget.

Often, people realize the need for a financial plan only when their finances have become messy. This could be for many reasons. They may have been sold products that are irrelevant, and have high costs but low returns. Many products are sold without an underlying objective, need or goal. Some don’t have the paperwork in order. Many don’t realize where their money is going. For instance, young techies, in addition to earning good salaries, also receive good bonuses and employee stock options, which can equal 25-40% of their take-home annual income. This makes them spend too much on vacations and cars, only to realize later that they are spending too much and need to save for the future. Therefore, even the guilt of having spent too much, makes them want to settle down and save more for the future.

The realization that one needs a financial plan is the first step of the process. Implementation is the next.

A financial plan starts with the data gathering, and then moves to analysis and evaluation of one’s financial status. Each stage provides a vital link to the next. Unless the information at the very beginning—the data gathering stage, also the most time consuming and exhaustive stage—is complete, accurate and up-to-date, moving ahead is difficult, even for a financial adviser. Sometimes, though this is rare, some people seek the advice of a planner just to ensure that their self-planning is in order. For example, well-informed overseas clients, who have done their own financial planning, want to validate the assumptions, portfolio selection, growth rates and resource allocations made for their goals. What they are looking for is a third-party opinion, just the way we look for a second medical opinion.

After data gathering comes analysis, including risk analysis. This is an integral part of the planning process and should be undertaken at life’s milestones such as birth of a child, her marriage, retirement or loss of a family member. This is to ensure that your risk tolerance has not changed, and if it has, only marginally.

Once a financial plan is complete, assets and investments are given an objective, goal, time horizon and need. There is a specific objective for each resource and a time horizon for each goal.

Regular review is also needed to ensure that things are fine. Often, without re-iterating the need for a goal review, people often forget the objective for which they are saving.

In essence, a well made and well maintained financial plan helps you connect the dots.

Dilshad Billimoria is the director and certified financial planner Dilzer Consultants Pvt Ltd.