Tuesday, February 20, 2007

Financial Planning is Life Planning

Reproduced below is a post featured on Desicritics, titled, Investing Gyaan;Financial Planning steps.

I have always been smug with my assumption that a sophisticated finance professional will take care of all my wealth creation needs. But the day my over friendly and over smart advisor came, I was more confused when he left than when he had entered!! He talked about sophisticated jargons, terms, options, technology, software, analysis and at the end of it asked me to decide on my own risk appetite. Damn it, if I have to do my own analysis what the heck was he doing, sitting smugly on my sofa while I looked like a sheep in my own house.

To be fair to my financial advisor, he helped me understand that one must take responsibility for oneself. And he logged me on to the fascinating world of finance and investing. As part of the learning process I have built this e-scratch pad and have really enjoyed the process.

My initial findings - investing is no rocket science and can be easily understood by a layman.

There are very interesting tools and calculators available which even a child can use and play with.

It's easy to be overwhelmed with the investment options. 650 odd Mutual Funds, More than 2000 scrips to choose from, options, futures, commodities, real estate, deposits, insurance, tax saving schemes and bonds like PF, NSC, KVP, Infrastructure bonds, et al....... At times I feel the importance of the proverb: " Ignorance is bliss"

Apart from the overwhelming options, you are faced with finance jargon, terminologies, irrational behaviour of the stock markets and smug finance professionals.

Wait a minute. It's critical to be responsible for your wealth and as I said in the beginning, it's pretty interesting too! Here's a indicative list of what you should know for a start and I promise I'll take them one at a time.

1. Why to Invest, Golden rules of investing, Your Financial planning steps.
2. Introduction to stocks, derivatives, options.
3. Introduction to Mutual Funds
4. Introduction to Insurance
5. Product review.
6. Sensex review.
7. Asset allocation, Time, Value of money, etc....

Let's start with the first financial planning steps:

Failing to plan is planning to fail. It is very true for personal finance. Personal finance looks at how your money and future is managed. Personal Finance is financial planning for individuals. Generally, it involves analyzing their current financial position, predicting short-term and long-term needs, and recommending a financial strategy. This may involve advice on retirement planning or pensions, wealth creation through stocks and mutual funds, children's education, home loans, life insurance, and other investments.

Financial planning is a dynamic process that requires regular monitoring and reevaluation. In general, it has five steps:

1. Assessment: One's personal financial situation can be assessed by compiling simplified versions of financial balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, bank loan, home loan). A personal cash flow statement lists personal income and expenses.

2. Setting goals: Setting financial goals helps direct financial planning. Examples of financial goals are: "To retire at age 50 with a personal net worth of Rs 5000000", or "To buy a house in 3 years paying a monthly mortgage servicing cost that is no more than 25% of my gross income". It is not uncommon to have several goals, some short term, and some long term.

3. Creating a plan: The financial plan details how to accomplish your goals. It could include for example, reducing unnecessary expenses, increasing your employment income, or investing in the stock market.

4. Execution: Execution of one's personal financial plan often requires discipline and perseverance, and many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.

5. Monitoring and reassessment: As time passes, one's personal financial plan must be monitored for possible adjustments or reassessments.

It may appear a daunting exercise for many and many more may feel that it is too late for them. It is said that you are young at any age if you are planning for tomorrow. And there are so many tools that are easily available and still easier to use which you can search here.

For example, a simple MS Excel sheet can help find out your monthly withdrawal between the planned retirement and a particular age, say 80, when you plan to invest a particular amount every month. Fill in with the variables like your monthly investment, preferred age of retirement, expected rate of return and you get your withdrawal amount. Toggle around with the figures and you can arrive at setting goals for yourself. Write to me at ranjanvarma@gmail.com for the Excel sheet.

Read an article on how to become a crorepati in Mutual Fund Insight (Value research publication, July-Aug, 06). It says that if you invest Rs 20000 per month in a systematic investment plan of one of the top ten mutual fund for ten years, the value of your investment will range from 1.05 crore to 2.06 crore. A simple strategy, but a lot of discipline, mental strength, and self control is required

Investing Gyan
Reviews, Tips, Calculators with an Indian perspective.
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