09 August, 2012
Is Financial planning only for the rich?
I don’t have money, what planning can I do? This is a common refrain I get to hear. These same people often tell me that financial planning is for the rich, the fat cats. Let us examine.
A person has low or no savings : Every single individual has goals and aspirations irrespective of whether they have money in the bank or, are living from paycheck to paycheck. How are they going to meet their goals? Not by continually saying that they don’t have money. They may require help, if they have been here long. They don’t have money probably because they accord more priority to living well today, than saving for tomorrow. Then, there is frustration awaiting them in future. Correcting this is critical, as only that will result in putting aside something to meet the goals.
No margin for errors : People with comparatively low incomes do not have a margin for error. If they get their investments/ insurance wrong, it would have a significant negative effect on them. A wrong insurance policy, especially can bog one down for years, sucking up liquidity & locking them in an unsuitable product. Also, traditional insurance products offer typically between 4-7% tax-free returns. ULIP returns can vary. But, in case of ULIPs, since the premium is going into the same funds or set of funds, there is a concentration risk. Any error on investments/ insurance made especially by a low income earner, would be far more detrimental as compared to another, who is a high income earner.
The rich get richer due to better investments : The well-endowed choose their investments well. They get their asset allocation right. They invest in a manner that they earn better returns on their funds. For instance, even funds that may be needed anytime can be kept in a liquid fund, instead of in the Savings Bank account. Liquid fund offers better gross returns and better tax treatment, leading to better post-tax returns. Similarly, FDs may not be the best product in fixed income. A better product would be a FMP or a debt fund, in terms of post-tax returns. The rich have advisors who would take care of this. Others have to get it right themselves or take professional help. Quite some money can be earned if invested in the right avenues.
Can you achieve this goal? Almost everyone, irrespective of their income level, have this question. Will I be able to buy a home in 3 years? Will I be able to educate my son/ daughter till post-graduation? Will I have sufficient money when I retire? Proceeding with life without knowing this is dangerous, for you know not, where it is leading you. But to understand this you may require to do your math. Hence, this is needed irrespective of income level. Whether you are going to do it yourself or you will be taking professional help is the question.
Prioritisation of goals & right sizing them : Ideally, we all want to achieve all goals. Sometimes, that may not be possible. We will need to prioritise and keep goals that are really important and scale down or eliminate other goals. For example, it may be that education of children & retirement funding goals are possible, but not buying a bigger home. This, we will come to know, if we do the calculations. Getting this right is important so that the client knows fully well, what he is saving for and has no unrealistic expectations. Some of the goals may not be dropped, but will have to be scaled down, or pushed back. To what extent these have to be done, needs to be seen.
Implementation & Management : Once decisions have been taken about what needs to be done, they need to be done. Financial Planning is only the beginning. Only if it is implemented, it would yield results. Lots of people do not implement or end up implementing partially. This produces less than desirable results. After implementation, people forget all about it. Periodic reviews are not done. Sometimes, the proceeds of past investments themselves are not claimed. Reinvestment of the proceeds is not done in reasonable time. And for everything, they just rely on what their friends/ colleagues tell them. All these would mean that one would get poorer results than what could have been.
It is important to take finances seriously. If one is unable to do it, one should engage someone who can do it for them. It is a fallacy to think that professional financial planning services can be afforded by the rich. If one were to total up all the potential losses and the cost of wrong decisions, the fee would be paid for. Plus, one gets the assurance & peaceof mind that a well-crafted plan brings in.
It is nothing to do with being rich or poor. It all boils down to how seriously one takes one’s own future.
Author : Suresh Sadagopan, Ladder7 Financial Advisories ; Published in Moneycontrol. com on 9/8/2012