The art of financial planning
The art of financial planning is how to plan for one’s financial goals & work towards them in a systematic & disciplined manner. Successful planning is achieving them! The goals could be regular & traditional such as a buying a house or a car, building a corpus for children’s education/ wedding and retirement or exotic/ ambitious such as going for a world tour/ building a bungalow or even outlandish say owning a yacht ! Financial planning ensures the right amount of money at the right time.
“ Becoming wealthy is not a matter of how much you earn, who your parents are, or what you do. It is a matter of managing your money properly “ – Noel Whittaker
Most of us plan for a robust financial future but improper planning could land one in trouble . Umang started saving for his newborn son’s education in 1988 by investing 500/- every month in a recurring deposit & saved 3 lacs in 20 years. When his son qualified for MBA in 2008 he was shocked to know the course fees was 5 lacs. Shashank bought equity shares worth 2 lacs in IT cos in 1999 but suffered a huge loss due to the Dotcom crash. He sold all his shares & did not invest in the market till 2005. He invested 5 lacs in 2005 in equity mutual funds which has grown to 13 lacs today. He wishes to spend for his daughter’s marriage & buy a new house but his investments are not enough . Improper planning is like driving a car blindfolded without the headlights on! Drive but with your eyes on the road & the headlights on.
What about Sushil who is a Regional Manager in an MNC earning a handsome salary. He owns a luxurious house in a posh locality, a Honda City & a Toyota Corolla. He takes his family abroad for an annual vacation ever year. He believes in living well today & not worrying about the future. He spends most of his money for the best education of his children, lifestyle of his family. But he does not have adequate insurance… What happens if he is on a business trip to Japan & tsunami stikes ! Love is living well today & ensure your family lives well tomorrow.
Life’s goals keep on changing with the passage of time. When you start your career, achieving milestones & doing well in your professional life & have a good lifestyle is a priority. After you are married, you would like to secure the future of your loved ones & plan for your golden years. Hence your FP ( Financial Planning not Fountain Pepsi! ) has to be dynamic, flexible & adapting to needs & current situation e.g. as you move close to your financial goal your money should move to safe instruments and not be dependent on the ups & downs of the equity market.
There are 4 major areas of FP & let’s look at them one by one.
Life Insurance – The important thing here is to ensure the security, comfort & lifestyle of one’s loved ones even if one is not there. If the assets of the breadwinner/s are adequate to care of this, that is wonderful. However if there is a mismatch between assets & liabilities the best way to cover this gap will be to buy term insurance. This is the best, purest & cheapest insurance one can buy. Also called “vanilla insurance” it is a peace of mind concept. Similar to mediclaim, it ensures the family does not go through financial stress in case of an eventuality at very low cost. E.g. a 35 yr old man could buy a 25,00,000/- life cover for 7,500/- per annum ( or 625/- per month) !
Touching on mediclaim, it is important to have individual policies of minimum 5,00,000/- for adults & 2,50,000/- for children. While floaters look attractive & cheap ( bought during the early days’ of one’s career) it is important to individual policies as these generate bonuses every year e.g. a 5,00,000/- policy will become a 10,00,000/- policy after a certain no. of years. Critical illness riders/ policies provide an excellent benefit over & above the mediclaim hospital bills !
Investments – This is the next level of financial planning. Having taken care of one’s family security, the next step is to invest your money well, in different asset classes, consistently & scientifically with regular review to confirm that your investments are doing well. One can invest in various asset classes like Real estate – land, residential/ commercial property……., Debt – FD’s, PPF, NSC/NSS, POMIS…….Equity – Stocks/shares , Derivatives , equity mutual funds, Balanced Funds & MIP’s which are a blend of Debt & equity ……Gold – physical gold, Gold ETF’s , Gold Mutual funds………..Important thing is to have a balanced portfolio keeping your goals in sight & knowing your risk appetite .
The return on your portfolio must beat inflation which is easily around 9 % every year. So if your portfolio is giving a 15 % return your Real rate of return is 5.5 % . so if your portfolio return is just beating inflation you are keeping your head above the water level but if your Real rate of return is 7-9 % or more , you are swimming well !!! Inflation is the biggest challenge to your savings & investments.
There is this funny Youtube clip where a deer is being chased by a tiger & suddenly Rajnikanth appears from nowhere , runs past the tiger , picks up the deer & races away……leaving the tiger far behind!!! This is what your investments need to do – run so fast that the inflation “tiger” cant catch up with & eat your “deer” savings. The asset class which has consistently been beating inflation is Equities with a 17 %CAGR historical return . Real estate gives similar returns but there are issues of safety, evicting tenants who overstay their welcome, depreciation . Gold has been doing equally well & should do well for the next few years.
Retirement – Sar utha ke jiyo. While providing for children’s education, building anew home , taking holidays every year… one must remember to a nest egg for the golden years…. be financially strong independent & self sufficient during your retired years. This has become specially important as the retirement period has become longer . Earlier one worked till 60 and then hit the bucket around 75. Now people work till 50 ( except for doctors , lawyers..) because they get burnt out/ become obsolete and they live to be 80 with improving healthcare & medical facilities.
How big your nest egg depends on what your needs will be after retirement (what lifestyle you wish to maintain) & inflation ! e.g. You are spending 50000/- p.m. , the same figure after 20 years (thanks to inflation) will be 1,60,000/- You wish to maintain 50 % of your lifestyle i.e 80,000/- per month, then your nest egg should be big enough for you to spend 80000/- p.m. for the next 30 years. You must plan & achieve your corpus accordingly. In fact one must start planning for retirement as soon as one starts working !!!!!! funny ? not funny ! the earlier you start bigger the retirement corpus you build – this is the POWER OF COMPOUNDING !
Tax planning – this is how we can plan and maximize our income & wealth and reduce our taxes. It is not evasion of tax but how we can optimize our cashflows to build assets & minimize tax outflow. The direct tax which you and I pay forms a major portion of the government’s revenue & helps them build roads , flyovers, schools, airports……the list is endless. So when you pay tax it comes back to you in some form or the other. There is this excellent ad where a passenger at the airport is requesting a fellow passenger not to damage the seats – “sirji is airport ko banene mein mere bhi paise lage hain – 4 kursiyo ke paise !“ So pay your taxes and be proud of your country and it’s economic growth.
Long term FD’s, PPF, NSC’c NSS ……..give us returns just enough to beat inflation (maybe negative returns depending on what figure you consider for inflation!) whereas ELSS ( equity linked savings schemes (15 -18 %) Long term low cost ULIP’s ( 10 %) , ULIP pension schemes should be in our portfolio to give us the edge over inflation while saving our tax. Infra bonds give us an additional 20000/- saving under 80CCF
An American Bureau of Labour Study shows that 1 % of people at the age of 65 are wealthy, 4 % are maintaining their standard of living, 23 % are still working… can’t afford to quit, 9 % are dead & 63 % are depending on children & charity. We can be sure Indians have a similar profile! So be in the top 5 % of retired citizens who not only have bread & butter but cheese, icecream with strawberries & whatever else their heart desires……………..
So how do you do it ? Plan your journey well – use a map so your path is well defined with a clear destination. Need a GPS device ? No. What you need is a good financial planner to help you take care of all aspects of your financial portfolio. A financial planner would evaluate your existing planning , identify the problem areas , help you plan correctly, assist you to choose the right investment product after assessing your risk appetite . He will review your plan periodically to make sure you are on track especially after a major event like marriage, change of job, birth of a child or increase of income .
So, in conclusion work smart, earn well, plan wisely & achieve your goals. Be financially strong even after retirement. Don’t worry …….be happy!
“You only have to do few things right in you life ,
As long as you don’t do too many things wrong! ’’
– Sir Warren Buffet