You and Your Financial Plan

Why do I need a Financial Plan? Don’t you need to have lots of money?

Financial planning is one of the things that not many people think about. However, financial planning in India is important to do because it can make your life easier.

While you cannot predict the future, you can certainly be better prepared for it.
A written financial plan is designed to make sure that you are financially prepared to deal with whatever happens in your life. And this is not just dealing with the unexpected events, but basic things like buying a car or taking a home loan, funding your children’s education or marriage, or taking care of your loved ones.

You don’t have to be mega rich to have a financial plan. Neither do you have to be very old and approaching retirement. It does not matter how much you earn or what your age is. All of us have something to plan for. In fact, our financial situation influences almost every aspect of your lives….from the type of house we live in, to the type of car we drive, to how many vacations we can take. Regular financial planning can help give you peace of mind.

If you have dreams, you need a financial plan!

So, what do you need to know about yourself when thinking about a Financial Plan?

Your financial plan entirely depends upon how much effort you are willing to put in. This means not just having a good handle on the details of your income and expenses, assets and liabilities, but more importantly on the following items:

1. Time Horizon and Goals
2. Risk Tolerance
3. Liquidity Needs
4. Inflation
5. Need for Growth or Income

No doubt there are other factors that are important as well, but we believe that the above five require a more detailed study on your part.

1. Time Horizon and Goals: It is important to understand what your goals are, and over what time period you want to achieve your goals. Some goals are short term goals those that you want to achieve within the year. For such goals its important to be conservative in one’s approach and not take on too much risk. For long term goals, however, one can afford to take on more risk and use time to one’s advantage.

2. Risk Tolerance: Every individual should know what their capacity to take risk is. Some investments can be more risky than others. These will not be suitable for someone of a low risk profile, or for goals that require you to be conservative. Crucially, one’s risk profile will change across life’s stages. As a young person with no dependants or financial liabilities, one might be able to take on lots of risk. However, if this young person gets married and has a child, he/she will have dependants and higher fiscal responsibilities. His/her approach to risk and finances cannot be the same as it was when he/she was single.

3. Liquidity Needs: When do you need the money to meet your goal and how quickly can you access this money. If you invest in an asset to and expect to sell the asset to supply you funds to meet a goal, then please understand how easily you can sell the asset. Usually, money market and stock market related assets are easy to liquidate. On the other hand, something like real estate might take you a long time to sell.

4. Inflation: Inflation is a fact of our economic life in India. The bottle of cold drink that you buy today is almost double the price of what you paid for ten years ago. At inflation or slightly above 4% per annum, a packet of biscuits that costs you Rs 20 today will cost you Rs. 30 in ten years time. Just imagine what the cost of buying a car or buying a home might be in ten years time! The purchasing power of your money is going down every year. Therefore, the cost of achieving your goals need to be seen in what the inflated price will be in the future.

5. Need for Growth or Income: As you make investments, think about whether you are looking for capital appreciation or income. Not all investments satisfy both requirements. Many people are buying apartments, but are not renting them out even after they take possession. So, this asset is generating no income for them and they are probably expecting only capital appreciation from this. A young person should usually consider investing for capital appreciation to take advantage of their young age. An older person however might be more interested in generating income for themselves.

kiran said : 22/10/2010	Financial planning is most crucial aspect but most essential too. I am thankful to your team for sharing nice and expert advice through articles .
Rajeswari said : 20/04/2010	It is very good site for everyone to know about financial matters and take care about every financial planning for now and then
s sridharan said : 21/07/2009	It is a very good site for anyone to know basics of personal finance and utilise the expert knowledge available
Ram said : 25/04/2009	so do you offer financial planning service for clients. i am based at hyderabad
Sumit said : 10/02/2009	Really financial planning should be an integral part of an indian life. Nice article