The Hindu Business Line : The ABC of financial planning

We all have dreams! For buying a new car, that dream house, getting their children married in style, or simply retiring early. All these are also significant financial decisions. Astute long-term planning may make life financially secure, while inadequate or misguided planning could turn it awry. The process of meeting your life's goals, through prudent management of finances is what is often referred to as `financial planning'.

Financial planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision can affect other areas of your finances. For example, buying a particular investment product might delay your retirement significantly. By viewing each financial decision as part of a whole, you can consider its short- and long-term effects on your life goals. You can also adapt more easily to changes and feel more secure that your goals are on track.

Financial planning covers the various facets of individual's financial needs, which include:

Accumulating capital — Cash flow planning and budgeting

Protection against risk — Insurance planning and risk management

Investment planning and advice

Estate planning: Wills and trusts

Retirement planning

Tax planning

If you hope to realise your goals, you have to put a sound plan in place and follow it.

Here are the six basic steps.

Step 1: Establish your goals. Think long and hard about what you want to accomplish in life — your current status and future potential of your earnings

Step 2: Gather data. Start by collecting all your bank and brokerage statements, insurance policies, real-estate documents, and maybe even your most recent tax returns. List your assets and liabilities. You will also need to gather records of all your sources of income and expenses, and anything else you can think of that is related to your finances.

Step 3: Analyse the data. At this stage, you will create a personal net worth statement and a statement of annual cash flows. You will also analyse the adequacy of your estate plan and insurance coverage. As the picture develops, specific shortfalls or excesses will come into focus, along with areas you need to change.

Step 4: Create a plan. Now you're ready to lay the roadmap that will help you accomplish your goals, given your risk tolerance and time frames. Your plan may call for immediate changes, such as diversifying your investments, shifting your asset allocation, consolidating accounts, optimising your insurance coverage, or drafting wills and other estate planning documents. Your plan may also call for longer-term actions such as altering your spending and saving habits over time.

Step 5: Implement your plan. Here's where the rubber meets the road; implementing your plan may involve opening certain types of accounts or purchasing certain types of securities, policies, funds or other financial and investment-related products. Suitability and performance hold the key here, of course. But remember, you can potentially boost the overall, long-term performance of your investments by keeping costs and expenses as low as possible. Also, take advantage of available tax-free and/or tax-deferred accounts, in addition to your regular taxable brokerage account.

Step 6: Monitor your plan. This involves keeping an eye on the performance of your investments, periodically rebalancing/churning your portfolio. In the absence of a major event in your life, once or twice a year should do it.

Changing your plan

If the future always went according to plan, financial planning would be a one-time exercise. But life throws a few curves now and then. So, when you monitor your plan, revisit the goals you set in Step 1 as well, for two reasons:

You want to measure your progress towards your goals and objectives to make sure you are on track.

Once in a while, you may find that your goals need to be modified.

Get help if you need

The financial planning process is not exactly rocket science. However, given the specialty areas of income-tax, succession planning, retirement planning, insurance and investment planning not to mention how each of these areas can impact the others — it might pay to enlist some professional assistance, at least to get started.

(The author is CEO, Financial Planning, at ASKRaymond James.)

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