Q1. My investment advisor has been asking me to do comprehensive financial planning. How will financial planning help me?
Financial planning is the process of understanding your life goals and your attitude towards financial risks, obtaining an overview of your financial standing, and chalking out a plan to achieve your objectives. It is a plan for your financial security and prepares you to bear the costs to achieve your goals. Financial planning focuses not only on the present but also on the future.
Many people think financial planning is the same as asset management. However, there is a difference. Financial planning comes first. It helps you to determine how to and where to invest in order to achieve your objectives. Once you have made those investments, asset management helps you manage those in an efficient manner.
How financial planning helps
Comprehensive financial planning involves a range of inter-connected component plans.
Retirement planning: Retirement planning helps you prepare for life after retirement. It helps you to build a corpus so that you can maintain the same lifestyle. It ensures safety and security and, most importantly, peace of mind when you need it the most.
Investment planning: This helps you decide when to invest in those financial instruments that can cater to your short-term, medium-term, and long-term requirements. When done by an expert, financial planning helps you to understand your risk profile, thereby ensuring a proper asset allocation and risk-return trade off.
Insurance planning: This is a very important component of financial planning that many tend to overlook. This includes planning for both life insurance and health insurance. The right life cover ensures that, should something happen to you, your family will be taken care of financially. Adequate health insurance ensures that in case of medical emergencies affecting you or your family, you do not have to liquidate your investments and jeopardise the related goals.
Budget planning: A good financial planner takes pains to understand your incomes and expenses. Prudent budgeting ensures that you get to enjoy your life without compromise and without incurring unnecessary debts.
Goals for children: Parents always want to give their children the very best and ensure that they can achieve their goals. Financial planning helps you calculate how much funds they would require at different stages—during their education, wedding, etc.
Estate planning: Estate planning makes things easier for your family in your absence. This also helps you to prepare for applicable estate taxes, if any.
Tax planning: Financial planning helps you plan for and minimise your taxes.
In short, financial planning looks at all the money aspects of your life and helps you prepare better for the future. Just make sure that the person helping you with financial planning is a Certified Financial Planner with the right qualifications and ample experience.
Q2. I am a 40-year-old working professional. Recently, while reviewing my portfolio, our advisor asked me to plan for retirement and invest accordingly. Don’t you think it is too early for me to plan for retirement now?
Your dreams, goals and objectives change as you grow personally and professionally. When you have a good retirement plan in place, you can enjoy financial freedom, and lead a happy life free from stress.
In simple words, retirement planning is preparing today for tomorrow. It involves identifying the means and sources after you have retired to meet regular expenses, fulfil goals and have a comfortable life.
There are no hard rules regarding the right time to plan for retirement. However, the earlier you begin, the sooner you can have the plan in place.
When you start saving for your retirement early, the savings you can put aside might be small. However, the early start will give your investments ample time to grow, thanks to compounding.
When you start late, closer to your retirement, you will be required to put aside a larger amount. That would be difficult. Also, with less time available, the effect of compounding too would be less.
As you are 40, you are at the accumulation stage in life, and it would be easier for you to save now. You can also ensure that you are also better prepared for medical emergencies. Your savings would have enough time to beat inflation.
As life expectancy has gone up in recent times, you should be prepared to live longer after retirement. You can be sure about living your retired life better when you start investing well before retirement. You can also plan better for leaving behind a legacy for your dear ones or a cause that is close to your heart.
Please keep in mind certain important factors like current and expected inflows, assets, affordability, medical history of the family, financial goals and plans, current and expected inflation rates, etc. A Certified Financial Planner can consider all the variables and help you enjoy your financial freedom now and after retirement.
Q3. I am a stay-at-home mother by choice. My spouse is a businessman, and we live a very comfortable life. How do I contribute to planning and managing finances?
Being a mother is the best job in the world, and the toughest. As a stay-at-home mom, it is important for you to be involved in the family’s financial decisions.
Whether working or not, every woman needs to have a financial plan in place. Even if you are a stay-at-home mother, you need to be prepared for unforeseen situations. It is your support that makes it possible for your partner to devote more time and energy to his business. So, do not hesitate to be actively involved in matters of money—incomes, expenses, debts, and assets.
Communicate: If you are not a part of the decisions yet, start having regular money conversations with your partner. Start learning about existing and planned investments. Discuss with your partner if you are comfortable with the philosophy behind those investments.
Storage of data and documents: Go through all the documents pertaining to your finances, especially investments—from statements to receipts. Maintain your own copy of everything. If you are not a joint holder, check if nomination is updated in all investments. Keep a note of all bank accounts, fixed deposits, mutual funds, portfolio management services, national pension system, public provident fund, and any other investment.
Plan your finance: While you are already managing everyday household finances, also plan for the expenses that you are likely to incur in the near as well as the distant future. Create a budget for regular expenses. Provide for bigger goals like buying a property. If your children are young, make a separate savings plan for every milestone in their life—education, wedding, relocation, etc. You and your partner will eventually retire; start planning for it now, so that both of you can live comfortably without any financial stress.
Insurance: Make sure that you and your partner have adequate life and health insurance. You may think that since you are not earning, you do not need life insurance. This is not true. You are taking care of umpteen chores. It may require considerable expense to get those tasks done right, in time, in your absence. Similarly, have adequate health insurance cover so that in case of medical emergencies, you do not end up blowing up your savings.
Save in your name, too: While you may have a joint account and your husband is taking care of all the expenses, you must have savings and investments in your name, too. Maybe you could put aside the little surplus from your household budget. No amount is small when it comes to saving for contingencies. Your personal savings will give you a sense of financial freedom and help you learn about investments.
Participate in decisions: In this age and time, it is very crucial for both partners to know how the finances are being managed. Let your partner know how you are handling the day-to-day expenses. Both of you must know how investments are being decided and done, and how retirement is being planned. Know your debts and how you have provided for emergencies. Keep a close tab on the education fund of children. If you have decided on common goals for the whole family, make sure there is viable financial backing to attain those.
Q4. We have two children—9 and 13. My partner and I want to make sure that their education does not suffer, no matter what. How do you suggest we ensure this?
Good education is the greatest gift that you can give to yourself or your loved ones, a gift that can never be taken away.
The rising cost of education is a big concern today. Over the past decade, the cost of general and professional education has soared sharply in India and across the globe. If the child is studying in a different location, then you will also need to budget for travel, boarding and lodging. You must also keep in mind the effect of inflation, which increases education expenses by 10% year on year.
Here are a few steps you can take to ensure your children are guaranteed the education they deserve.
Define the time horizon: How many years do you have before your child takes admission in college? How many years to post-graduation?
Estimate cost of education: Do you want your child to study abroad? Or in an expensive college in India? Do remember to factor in 10% inflation in the cost of education.
Assess available assets, inflows, and outflows: For example, if you have a fixed deposit set aside for your child’s graduation, what is its current value? What will be its maturity value? Is it enough to cover the likely cost at that point in time?
Know the amount you can set aside: Once you have assessed the current assets and liabilities (including regular expenses), calculate the amount that you can invest on a regular basis for your child’s education.
Invest smartly: Take the help of your financial advisor to assess your risk profile and, accordingly, decide on the asset allocation. Diversify your investments to optimise your returns. Given the age of your children, you have a longer horizon and, therefore, you can look at long-term equity investments.
Ensure adequate life and health insurance: Insurance will ensure your child’s education will not be put at risk by unforeseen circumstances. Your advisor may suggest some good children’s plans on offer by renowned insurance companies based on your unique requirements.
Start now: The sooner you start, the better it is. When you start right away, you will have more time to invest and can reap better compounding benefits.
Just as a carefully structured and thoughtfully implemented syllabus ensures good education, well planned, well diversified asset allocation will help your portfolio grow exponentially. It will ensure that your children will gain from education even in uncertain, volatile economic situations. Consult your certified financial planner today.
Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.
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