11 June, 2010

Earning well and making it work

Julian – the Monk who sold his Ferrari – was exhorting to think of “Who am I ?”, “Why am I here” – the purpose-of-life kind of questions, in the book by Robin Sharma, I was reading. The Sages of Sivana had lot of practical wisdom which Julian was sharing with his protégé – John. Most of us do want these higher questions answered. At some point in time we feel pointless about the mundane existence. While the metaphysical angle does not worry all of us, the questions “Am I going in the right direction?”, “Am I investing enough?”, “Are the choices I’m making, right?”, is nagging most of us.
Most, have not found the answers to their simple, yet important questions. These are questions that keep people awake at night, make them break into a sweat and wake up with a start, in the middle of the night. But, what is the way out?
You might have heard the word Financial Planning? Yeah. This is something that has answers to your nagging problems. But, this is a term which is least understood and most abused. Every bank Mutual Fund, Bank & Insurance company is doing “Financial Planning”, when they are setting you up to buy one or other of their products. Most distributors/ advisors also talk of planning when they explain the merits of their products and how it will be useful to you. That is actually called selling.
Financial Planning is a blueprint or framework to achieve life goals through appropriate financial management. As you can see, we are talking about creating a blueprint so that life’s goals can be achieved. We are not talking about getting into products headlong. Again, there is a mention of life goals. Most product sellers would talk about specific goals like retirement, child education and the like and show you a scheme that will address that. While that is fine, one does not know what happens when all these goals are taken together and resources need to be allocated. Which ones will be achieved? Which ones will be left out? What will be the deficit? Will a goal be achieved, given more time…? For instance, if one wants a home after 5 years instead of 2 years, will it work? These are things that a Financial Plan will address.
A Financial Plan is created after understanding the goals & all other financial details like income, expenses, assets, liabilities, investments & insurance. A complete plan emerges after all the pieces in the puzzle are taken into account. Cashflows are examined, Insurance requirements are assessed, appropriate allocation of available resources are established, past investments & insurances are pored over, to find their suitability now and in future. Recommendations come in last. This obviously means that recommendations in a Financial Plan are a by-product of the entire plan workout and will be unique and customized, to the needs of the particular individual & the family.
This is an individualized and customized offering, just like your personal trainer at a gymnasium might guide you and help you set goals, lay down an exercise & diet regimen to achieve your goals. Aamir Khan would not have been able to sport the famous six-pack abs, without the help of a competent trainer. It looked like a miracle that he developed it after forty, in less than a year. But ask his trainer Satyajit Chorasia and he would attribute it to following a plan & sticking with it, assiduously.
A Financial Planner’s work is also like that of a surgeon. A Financial planner needs to examine the situation, look for symptoms of any ailments, diagnose the cause and prescribe medicines. In situations where nothing else will work, the surgeon will perform an operation or intervention to rectify the problem. After that, he would suggest appropriate medicines for recuperation & also alterations in one’s life style, which would ensure that the problem does not recur.
Most people tend to think that finance is an area they know. To be sure a lot of them do. About 10 - 20% may not require professional help. These are the ones who are willing to put in time, effort and resources in acquiring appropriate information about finances. These people may also take advantage of various sites, self-help books & magazines and other resources to equip themselves, to take decisions. The only thing they may not be able to get is the experience which a professional would have, from years of consulting experience. But for all others, it would be necessary to take professional help.
The problem is that most assume that they belong to that 10-20%. Having some knowledge is a curse. Taking decisions based on half-knowledge can prove to be disastrous. Many take the short-cut of doing what one of their well-informed friends is doing. Unfortunately, what works for that friend may not work for another… because goals are different, situations are different. There cannot be one path for everyone.
Almost everyone takes the help of a doctor for any ailments, lawyers for legal recourse, Architects to get a blueprint before constructing a home & doing it up after the construction. Yet, when it comes to their finances, most of us want to do it ourselves.
Chew on this. We work to get money to achieve our goals. Yet, we spend the least amount of time and effort, to manage it. Most investment decisions are done piece meal… insurance products, which are essentially longterm products, are bought to save taxes or because money is lying around, little appreciating that one is entering into a longterm commitment. Financial decisions are taken in a time-frame, that would make swilling in a softdrink seem like a Ramlila performance… It has low mindshare. How else can one explain money lying in the bank for months on end, for want of proper decisions? In such a situation, where is the strategy? And where will they reach?
Any road is right, when you don’t know where you are going. That’s a proverb I have heard in the past. That’s so true for most of us. A shot in the dark is not planning. Investing here and there and hoping for the best is not a strategy. Not giving it enough thought and taking spur-of-the-moment decisions is a recipe for disaster.
Like the Sages of Sivana say, know yourself… Get clarity on what your goals are. Know if you are competent enough to take decisions on important financial matters… Ask yourself if you have the discipline to follow through on a course you have set for yourself and are willing to revisit & reorient periodically. And lastly, are you willing to put in some serious time & effort to understand all about finances… If your answer is yes to all of them, you could do it yourself. For others, a Financial Planner would do a world of good. If you want higher, existential questions answered, ask Julian, the monk who sold his Ferrari.

A truncated version of this was published in DNA Money , 4th June 2010

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