Financial Planning

Financial Planning has different connotations and meaning for many. There are quite a few myths about financial planning. It is a myth that financial planning is for only rich and one requires substantial amount to initiate a financial plan. Many feels that they are too young and hence it is too early to start a financial plan.

It is a classic example of description not being the thing described. What is financial planning? Financial planning includes:

a.    Identifying all the financial needs of an individual. Be it is marriage or child’s education or to take care of retirement needs.

b.    Translating these needs into monetary measurable goals at different times in future. Building a home can be a goal but that has to be expressed in monetary terms. Moreover, for all future goals inflation also has to be taken into account.

c.    Planning financial investments that will allow to provide for and satisfy future financial needs thereby achieving life’s goals.

Financial planning has assumed great significance of late. The reasons for and the need of financial planning are:

1.    Transition from defined benefit to defined contribution in case of super annuation benefits.

2.    Phasing out of guaranteed return products.

3.    Chances of variation in cash flows due to loss of job, change in job profile etc.

4.    The increase in longevity and hence the increase in medical expenses post retirement.

Advantages of Starting Early:

Let us restrict out discussion to creating a nest egg and advantages of starting early to create the same. If you want to create a sufficiently big nest egg and retire rich, start saving and investing early. The most powerful tool when it comes to retiring rich, is compounding your returns on money saved when you are young. Through the power of compound interest, cash invested today has a massive impact on your wealth level when you retire.

The question often asked is what if I have not started early. If you have not started early, you have to save more in later years to accumulate the required nest egg or you have to opt for higher return securities which means that you have to take higher risk.

Having decided to invest early, the next question is how much to invest? Let us limit the discussion to retirement planning. When winter comes can spring be far behind? Unfortunately, the converse is also true. When we are in the spring of youth, we have to think about the winter of our life and save for it. The steps for creating a nest egg especially retirement planning can be broadly classified as:

1.    Decide on the annual income you desire after retirement to lead the style of life you wish.

2.    Choose a target date. Retirement date in case of retirement planning.

3.    Determine your lifetime average inflation rate.

4.    Determine the average rate of return you expect on your investments before and after retirement.

5.    Determine the current market value of all your investments.

6.    Obtain an estimate of any  company provided pension benefit.

Aimed with the data, you can determine the annual savings required for you to enjoy the good life. You will also be able to play “what if” games and see the results quickly should you decide to vary things like inflation, rates of return, date of retirement, and desired income. You will be able to review your retirement plan if required when any of the data or assumptions change. Invest early, invest wisely and invest systematically to enable you to achieve your financial goals.