Personal Financial Planning

You can’t predict your future but you should be prepared for it. As they say, prevention is always better than cure. Personal Financial Planning (PFP) is a systematic process of identifying the individual and family needs at different stages of life and preparing a plan to provide for finances to meet these requirements, keeping in mind the current obligations and constraints on income. All individuals and families pass through different life events most of which may be planned e.g. childbirth, education of the children, marriage, travel, retirement etc. All of these and other predictable/unpredictable life events require money. The individuals and families have to provide for the expenses to meet these needs. They can do it easily, comfortably and without any hassles or tensions if these life events are planned and the individual has accumulated the funds for the specific event through PFP. The wise persons would even accumulate funds for unforeseen situations or life events or they will buy insurance to face such uncertainties. These PFP endeavours of the individuals, in addition to income generation, would involve an understanding of banking, cash management, risk management, insurance, financial instruments, social security benefits, loans/credit, investment, retirement planning, estate planning and taxation etc. 

Generally, a personal financial plan includes a personal net worth statement, a look at your cash flow pattern, a retirement plan, a plan for education funding based on your resources, timing and aspirations, planning for any special needs of your children or parents, a review of benefits from your employer, an analysis of how your current investment portfolio aligns with your long-term goals, a review of your insurance coverage, and recommendations for creating a will.

It is strange that most people spend more time planning their vacations than planning for their life goals and making a financial plan to meet these goals. People have myths about personal financial planning. There is a wrong notion that only wealthy people need a personal financial plan. Research shows that a comprehensive financial plan benefits people in all income brackets. Some have another wrong notion that only older people need financial planning and younger ones need not bother about it. Rather it is imperative for people in their 20s to have a personal financial plan if they want to prevent financial mistakes which are very common in our society. 

A survey shows that less than 24% of people in India actually make a comprehensive financial plan, on their own or with the help of financial advisors. We dream big but actual plans to fulfill those dreams are missing. Every parent wants excellent higher education for their children but 80% of them even don’t know the cost of higher education. Most of them are ready to go into debt to fund the higher education of their kids rather than make a financial plan for it well in time. About 85% of healthcare expenditure is met out of pocket by the Indians and most of them do not have insurance cover for life as well as medical emergencies. They even do not plan for their retirement and they struggle to survive with whatever they manage to save. 

Therefore, it makes sense for we Indians to start making a personal financial plan sooner than later in life. The longer you wait, the more you have to save to achieve your financial goals. Once your personal financial plan is in place, you can fix targets for regularly contributing a specific sum of money toward savings and investments for the attainment of the future goals in life e.g. marriage, buying a house, education of the kids, vacation, retirement etc. 

So, all those who want to be in control of life than having a life which is out of control need a personal financial plan.

If you clearly understand your personal financial goals, have good financial literacy, have sufficient time and expertise to monitor your portfolio of investments, and you keep yourself updated about the changing risks and rewards associated with financial products, and you understand the market dynamics very well, you do not need external expert advice. 

However, trained and qualified financial advisor is better placed to assess your financial position and design a personal financial plan for you, based on his/her expertise in the field. He/she may help you in achieving future goals, in coping with the market volatility and selecting the appropriate product/s from a large number of financial products available in the market, keeping you at low risk. You may not look at your financial picture the same way as an outside expert may. Your advisor may highlight your opportunities to make or save money that you may ignore otherwise. He/she will take care of the financial risk in your plan and ensure that you are fully covered by an appropriate mix of insurance products. 

Every personal financial plan needs to be monitored regularly. Annual review of your financial plan with your adviser will keep you well-positioned and updated about the changes required as per your new needs and life situations.  A lot of research and analysis is needed to select the investment options which may provide better returns at lower risk and help you achieve your goals in time. 

While they don’t need to hire an adviser to create a personal financial plan, many people do so to save time and energy involved in selecting suitable financial products for themselves.  You must choose your financial adviser very carefully. You should verify the credentials of the financial adviser before engaging him/her. He/she should be someone you can trust to reveal your financial situation. You should look for fee-only advisers who do not have the intention of selling you the products and earning commissions on the sale of financial products. They simply charge you a fee, always keep your interest in mind and provide you concrete recommendations to make your goals a reality.