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Guide to financial planning for a safe future
Sandeep Shanbhag, Moneycontrol.com | January 11, 2007
Year 2025 - eighteen years from now. Though no one has seen the future, one thing is certain that time and tide wait for none. Therefore, what we do now will indeed give its fruit in the year 2020. What we do not know however is, how the world will be at that time and what will be one's own position in life then. But does that mean that we sit helpless and basically take what fate decides to bestow upon us? Definitely not.
The first step is obviously to assume a medium term scenario for the future. Not too optimistic and not too pessimistic either. May be the Sensex would have risen to a level of 75,000 and above - who knows? But one thing is certain; it isn't staying static at current levels. So basically, assuming that the world in general and India in particular will progress as it has been with all the geo-political, currency, inflation, war etc. risks existing as they are, one has to go on.
Once this much is done, the next thing to do is to plan for your own self such that your goals and objectives are reasonably met in eighteen years from now. This is of critical importance.
In fact, from the most basic of tasks to the most complex, we humans plan almost by instinct. Take a simple example - say you want to travel from point A to point B. Before you embark upon the journey, the planning process has intuitively already begun in your mind.
You quickly decide that first you would walk up to the train station, and after disembarking from the train, perhaps take a cab for the short ride up to the desired destination. You may not even realise it, however, in effect, you have planned your journey. Planning is inherent in every aspect of life, may one be a student, a teacher, a businessman, a doctor or even a housewife.
The moot point then is that when it comes to your life and indeed your finances, do you indulge in planning? In other words, do you do financial planning for yourself and your family? Unfortunately, in most cases, the answer is in the negative. For the simple reason, that most investors do not know (or think they do not know) how to do financial planning. Or they feel it is too late to start. However, the fact is that it is far easier than you think and it is never too late.
It's a given that as an individual, you may have certain desires, or in this case let's call them goals. In 2025, your children may be wanting to study abroad or you may want to buy your own house, or you may want a holiday abroad or there is this car that you always wanted to buy. Then of course there is the universal need of having enough saved in the bank to take care of your retired life. In order to achieve all of this, you need to plan your actions, especially the ones with financial implications.
By now you would have guessed that financial planning, though it may sound esoteric, is nothing but arranging your finances in light of your future goals. A goal-oriented approach will almost certainly ensure that you achieve your objectives without having to compromise on your standard of living or in the worst case, some of the goals themselves.
For example, say one of your objectives is to construct a house in your native place as you near retirement. Obviously, you cannot do this overnight. Your expenses, savings and investments have to factor in the objective of buying a house at a certain point in the future. Similarly, keep on imputing and factoring in other objectives and what evolves is a broad roadmap of sorts to guide you in your future.
Also know that - discipline achieves what ambition seeks. Having a map automatically makes you allocate your income systematically and in the most efficient manner. Wasteful expenditure can only be curtailed if you have a firm grip of where you stand financially and how you have progressed towards achieving your goals. Ergo, financial planning also makes you a more disciplined and discerning spender.
Lastly, in India, we do not have social security. Employees can at least fall back upon their provident fund and gratuity. The self-employed are pretty much on their own. Even the PF money may not be enough to ensure the same life-style. Financial planning helps you get that badly needed financial cushion during your retirement.
For example, on a salary of say Rs 500,000, buying a house may be a realistic goal, wanting it to be on the seafront in one of the most expensive parts of the city may be over stretching it a bit. Therefore, have realistic goals and quantify them.
Quantifying makes the picture clearer by removing any subjectivity. Also, prioritise. Normally wants are many, the resources limited. Some goals may be more important than others. Prioritizing helps you retain your focus and be on track on the map.
Lastly, undertake periodically reviews. Planning for the future is not a one time exercise, its rather a constant, continuous process of knowing where you stand and what you have to do if you have strayed from the demarcated trail.
They say the only thing constant in life is change and it follows that your goals, purposes, intent or for that matter life itself changes with the events that happen. Therefore, review your financial plan every year and thereby monitor your progress.
Financial planning does not mean using different investment instruments or structures than you may be investing in now. It is using the same instruments in a systematic goal oriented manner.
Therefore, you may use various kinds of mutual fund schemes, bonds, fixed deposits or small saving schemes for your aim. How best to use these tools can be worked upon, if needed, with the help of a professional financial planner.
However, it is never a good idea to depend entirely upon someone else. Start drawing your own map, and go to the professional only for the fine tuning.
The time to mend the roof is when the sun is shining. In other words it is never too early nor too late to begin your financial planning exercise. Yes, it will not happen overnight and it will take hard work, attention and time from you. But the key is to start. If you have not already, do so now! Now who's scared of 2025?The author, Sandeep Shanbhag, is the Director of A N Shanbhag NR Group, a Mumbai based tax and investment advisory firm. He may be reached at firstname.lastname@example.org
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