Financial Planning

We have all heard about the story of blind men describing an elephant… one describes it to resemble a pillar, another feels that it is more like a broom and yet another avers that it resembles a pipe. That would seem to be the situation on Financial Planning.

Confusion is being created and perpetrated by various product sellers about the true nature of Financial Planning. Every bank, Mutual Fund and Life Insurance Company is claiming to do Financial Planning. Insurance companies have retirement plans & children plans to take care of corpus building for retirement as well as for child’s education. A Mutual fund may similarly be promoting the concept of saving for a car, vacation, home – meeting a need through one of their plans. What actually they are doing is matching needs with products – there is a term for that – Need Satisfaction selling. This is an established method in sales and a useful one at that. But, this is not Financial Planning.

The primary area of difference is that Financial Planning is not just going to address different needs in exclusion. Rather, it is Complete 360 degree approach on everything to holistic and seeks to verify if the stated goals can be achieved within the time frames sought, given the individual’s financial situation. Financial Planning is a holistic process which facilitates goal achievement, through appropriate Financial Management. Financial Planning gives you a blueprint/ framework to achieving goals along with signposts and pathways to make the process reliable, foolproof & dependable.

Now it should be clear that, just matching the cash needed for child’s education itself is not sufficient. Or, for that matter, just matching all the goals with some plan/ scheme is not enough. That is a band-aid treatment – not a real solution. We need to see the whole - not just address the parts with patchwork solutions.

Financial Planning is like a wellness program – the ultimate aim is a healthy body. For that it is not just foods & vitamins which are essential… it is also exercises, proper sleep, rest & relaxation… Addressing the needs of the body with good food alone, may not be sufficient for ensuring wellness.

Many of the aspects and situations in one’s life and their financial impact Is something that a Financial Plan should incorporate. A financial plan has to be detailed and comprehensive.

In real life, we would need to consider the expenses, their ebb and flow over time, due to inflation and due to changing requirements in future; there could be changes in the income pattern. Inflation can play havoc, in many cases. We see that spouses sometimes stop working or even the salary income may stop as they are considering a venture on their own… there could also be unforeseen expenses due to contingencies. Value of investments could rise or fall, new goals can creep in, existing goals may get modified ( a 2BHK apartment may no longer be as attractive as it was 5 years ago and a 3 BHK may now be the cherished goal ). More often than not, changes will be there.

Interplay of these needs are to be understood properly to find out what the impact would be, financially. A robust plan will be able to show you the impact of one aspect on various other areas. For instance, changes in inflation can put paid to a cherished want – like a holiday... as other high priority needs have to be met first. A plan should have enough slack to adjust to changes and shifts, as is wont to happen in life. Such ability to handle all areas of one’s life and the ability to move forward after adjustments, should be embedded in the very heart of a good Financial Plan.

Published in DNA Money on 17/12/2010