What is financial planning?

Financial planning takes a wholesome view of a person's financial health. This will entail looking at the age, dependents, income, expenses, loans being serviced, goals for which the person is saving and whether the individual is adequately insured. It will also look at the broad areas of investing. Given all the above criteria, how much of the individual's money must be invested in equity (shares and equity mutual funds) and debt (fixed return investments and mutual funds that invest in them).

For instance, let's say you plan to get married next year and want to put your financial house in order and approach a financial planner.

We will ask you what your major savings goals are. You list four.

1. Saving for a home
2. Saving for retirement
3. Saving for your child's education
4. Saving for your marriage.

The first thing the financial planner will do is prioritise your goals and, taking your age in to account, give a time frame for each.

So, now, your goals will be put in this order.

1. Saving for your marriage
2. Saving for a home
3. Saving for retirement
4. Saving for your child's education

We will also look at your earnings, whether or not you have to support your parents and if your spouse would be employed. Depending on the time frame for each and how much of a risk you are willing to take, we will suggest a broad investment framework. This will include: How much you should invest in equity and how much in debt. What sort of investment instruments you should opt for. For instance, should you opt for a five year recurring deposit or a Fixed Maturity Plan?

We will also look at estate planning (Who have you nominated for your investments? Have you drawn a will? Should your house be jointly owned?) and insurance (Are you well insured? If not, what kind of plan is best suited? If yes, is it the right plan or should you opt out of it?).

If you are steeped in debt, We will help you prioritise your loans and tell you which ones to pay off first (high interest, no tax benefits) and which can be paid back over time (lower interest, tax benefits).

In a nutshell, a financial advisor will tell you how to get your finances in shape.

Financial Planning says, "An essential part of my task is to put the cash flows in perspective and crystallise them." In other words, we will look at where your money is coming from and where it is going and how you can best utilise it to meet your goals.

Role of a financial planner

The aim of the financial planner is to ensure her/his clients reach their financial goals. It is about optimising client's financial resources judiciously and not maximising them.

If a client has Rs 5 lakhs today and needs Rs 10 lakhs after 10 years for her/his daughter's marriage, s/he needs to generate 7.18 per cent returns per annum. Investing simply in Public Provident Fund (PPF) or National Saving Certificate (NSC) or few other debt instruments can generate this. There is no need to invest the corpus in equity where risks are higher.

Make a list of your financial goals
Most of us do not have a clear idea about our financial goals. Check out how many of us have written down our financial goals � those responsibilities and dreams in life for which we are saving money today.
It is not good enough to have them at the back of one's mind. It is important to have them written down. If we do not have our list, then we are wandering in the dark. If we don't know where we want to go, then how is our financial planner going to help us reach our destination.
Another shortcoming of not having "OUR" financial goals' list is that in the absence of it, we try to imitate others. I know of an individual who used to invest in only those mutual fund schemes where his boss invested. Later he found that his boss was saving money for his daughter's marriage, while this individual was not even married!
Financial planning is all about channelising 'OUR' financial resources towards 'OUR' financial goals. It is about making optimum use of our financial resources. In the race between the tortoise and hare, tortoise wins not by maximising speed but by optimising it. If we want to reach our financial goals then we � your financial planner and you - should optimise our resources and not unnecessarily attempt at maximising them.Maximisation comes with additional � and at times undue � risks.

Why financial planning is a must for you

Most people, when they think of financial planning, think investments. Some also feel it has to do with mutual funds and insurance. Honestly neither of it is true. Financial planning is all about channelizing "your" financial resources (income and wealth) towards "your" financial goals.

You all have financial goals. If individuals/families have no goals in life than there is no need to save.Financial goals are those responsibilities and dreams in life for which you want to save. All of us have responsibilities in life.

Typical Indian families share the responsibility of saving for the house, children's education and marriage, parental and siblings' responsibilities and retirement. Of course these are a few common ones and may vary from family to family. Dreams of all families are varied. Some want a home theatre, a luxury car or a foreign vacation. There could be some who dream of latest interiors and there are others who want to save for gizmos.

Financial planning is to divert your financial resources towards your financial goals.

create a contingency reserve
While structuring any kind of financial plan, ensure you first create wealth protection strategies � to protect your wealth from perils. You must set aside funds towards creating contingency reserve and purchase of health, disability and life insurances.
Also, you have to protect your assets like house, car, jewellery and other household things. Wealth protection has to be the base of any financial planning activity. If your base is weak the entire building of wealth can collapse anytime.

Focus on wealth accumulation
After protecting your wealth, you must focus on wealth accumulation. This means saving and investing for your responsibilities and dreams in life.
Depending on your financial goals � like buying a house, children's education and marriage, retirement � choose various asset classes like debt, equity and property. You may also choose an investment vehicle that suits your requirement, like a mutual fund, portfolio management services etc.
If you start accumulating wealth without protecting it, than your wealth will be susceptible to a variety of risks and you may have to erode your capital/wealth if any untoward incidence takes place.

Wealth distribution is important too
Lastly, develop wealth distribution strategies. During your retirement, you will be surviving on the corpus created by you. You will partly live on returns from the corpus and partly on capital. This is the distribution phase of retirement.
Also, upon your death your wealth needs to be distributed to your near and dear ones. Always remember the flow of financial planning � first wealth protection, next wealth accumulation and, lastly, wealth distribution.

Financial planning is just not about savings and investment
Many of us misunderstand financial planning as investment planning and directly jump to savings and investment. Suppose if you do not have a good health protection strategy and if there is major illness or job loss than you will have to bank on all the wealth that you have accumulated till then.
Similarly, imagine you have good wealth protection strategy. You have contingency reserves. However, you did not concentrate on savings/investing. This means you straightaway moved from wealth protection to wealth distribution.
Since you did not follow the flow and did not accumulate wealth, when you reach retirement, there may not be anything to distribute. You may have to depend on your near and dear ones.
Now imagine a situation where you distributed all your wealth to your children during your lifetime and suddenly, after your retirement, and then you suffer from a major illness.
You have not made provisions for a contingency reserve; neither does your health insurance cover the disease. You will have to go to your children and solicit help. This is what happens when you distribute wealth without proper wealth protection.
Any which way you consider it, if you want to create and preserve wealth, then the only way to follow is wealth protection-accumulation-distribution.