21 November, 2009

Building your Finances - brick by brick

“When you want to build a house, would you not first get a blue-print done and then construct it according to that?”, I asked Rahul. He readily agreed. “ Then, how come you just invest here & there, without having any specific roadmap?”, I asked. This made Rahul think. But he retorted,”By investing, do I not take care of the future? Anyway, I can invest only what surpluses I have”.
Lots of people, think like Rahul. In chess, both players start with the same number of pieces. As the game progresses, one person gains an advantage and eventually wins… because he used a strategy to engineer his win. In life too, we all have some resources, at our command. How we use it, is left to us. Random moves in chess cannot ensure a win, just as much as random investments cannot take care of life goals & ensure a comfortable retirement. You would have to work to a plan, for that.
That is Financial Planning. Financial Planning lays down a pathway which ensures that the goals are met by deploying the resources at one’s command, optimally. Yawn! How boring?!
Yeah… possibly. But it will help bring home the bacon... or the dal roti, paneer makhanwala if you will, to your plate. A Financial planner can help you here. Just like a doctor would help you in diagnosing the disease, treat it & suggest some medicines, exercises & food for wellness, a financial planner will be able to look at the current state of finances, past investments & insurances & other information like Assets ,liabilities, Income, expenses etc. and suggest course correction as well as an action plan for the future, in line with the goals.
Cashflows will be drawn up and any deficits will be funded from available resources. Also, any expenses like insurance premium payment, holidays etc. may come up, which needs to be funded. Provision will be made for these as well. Also, a liquidity margin will be kept aside as a contingency. Appropriate allocations are made for all these in short term FDs, Bank account or in Debt Funds.
Insurance requirements are to be met before any investments are done. Most have some insurance cover. Many have medical cover from their employers. Some even have life and accident cover from their employers. These needs to be considered and further insurance requirements need to be estimated. Human life value, Expenses replacement method, goal oriented method may be used for arriving at the life insurance requirements. Appropriate medical cover, life cover , accident cover etc. are suggested, in line with their requirements.
Investment surpluses beyond this – both lumpsum & monthly surpluses are invested, in line with their specific situation like station in life, time to retirement, commitments, goals, risk appetite, past investments & liabilities etc. Again, the investments suggested will vary from person to person, in line with their specific situation. The complete plan recommendations are implemented & the investments are managed & monitored and a review is done typically after a year, to take stock of what has happened and to take the plan forward.
Does it not look like a chess player making a considered move than a random draw of a card? Now you decide, what you would like to do. But, choose a qualified financial planner with appropriate experience; not someone who calls himself/ herself one. There are lots of them who have given wing to their creativity and call themselves Financial consultants, Financial Advisors, even Financial Planners. Evaluate properly before engaging one to ensure that - else the plan will be for his/ her betterment, not yours!

Published in Moneycontrol.com in Nov 2009

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