Expert Zone

Straight from the Specialists

Why financial planning is important

By I V Subramaniam
October 30, 2012

(The views expressed in this column are the author’s own and do not represent those of either Quantum AMC or Reuters)

The unexpected sight of a familiar pair of shoes placed on the shoe rack at home evoked memories of my dad, who died a few months ago.

I remembered how, in the weeks after his death, I had to sort out his finances and realised all was not well. It was his frugal habits that allowed him to amass wealth and not optimal asset allocation.

Do you ever wonder what your family would do if you died today? I did and realised I had to be better prepared. I am not as frugal as my dad but do have some of his habits and manage to save. But was it enough?

Was the asset allocation optimum? It was not.

Did I put a financial number to all the financial goals or commitments I had? No, I had not.

Did I have adequate life insurance? No, I did not.

How about medical insurance and home insurance? What about money for my child’s education, with her aspirations increasing by the day.

Can you imagine what your family has to go through in order to pay the bills, if you do not leave enough for them? Planning for the future is necessary.

WHAT IS FINANCIAL PLANNING?
Financial Planning is a solution which converts your goals into action plans and provides the direction and discipline to achieve these goals.

WHY IS FINANCIAL PLANNING NECESSARY?

If you have life goals, such as a worry-free retirement, education for your children at the best schools and colleges, buying a house or a car — then building a financial plan can help you achieve these goals.

Your financial plan will work towards achieving goals such as planning for your retirement, child’s education, marriage, buying a house, debt management and insurance.

Financial planning could help you:

– categorise your risk appetite
– put a number to your goals (what is achievable and what looks difficult)
– map your current and future cash flows to your financial goals
– map your existing assets to your financial goals
– make a statement of your net worth
– look at the adequacy of your insurance
– help you build a corpus for your retirement
– make recommendations for your portfolio

While some banks do offer a financial planning service, I found their approach to be less thorough. I would advise going to an independent financial planner instead. You could even Google “financial planning” or “personal finance” and get a list of websites offering this service.

The importance of financial planning cannot be overstated. Among others, two factors matter a lot — inflation and changing lifestyles.

Inflation is a situation in which too much money chases a limited number of goods. This leads to a fall in the value of money. It is also expressed as a rise in price levels. For example, a product that costs 100 rupees now would cost 105 rupees a year later, assuming prices rise at 5 percent. This is the impact of rising prices over one year. Over 30 years, assuming that inflation continues to rise at 5 percent, the same product would cost you 432 rupees.

Financial planning can ensure you are better equipped to deal with the impact of inflation, especially in retirement when expenses continue but income streams dry up.

The second factor is changing lifestyles. With higher disposable incomes, it is common for individuals to upgrade their standard of living. For example, cars were considered luxuries not too long ago but are a necessity today. Financial planning has a role to play in helping individuals both upgrade and maintain their lifestyle.

Moreover, there are contingencies like medical emergencies or unplanned expenditures. Sound financial planning can enable you to mitigate such circumstances, without straining your finances.

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