There is a misconception that financial planning is only for the wealthy. Well! That is a myth. Being wealthy is not a pre-requisite for financial planning; in fact, it is vice versa. Wealth creation begins from the very first penny you earn and how you put it to use in the long run will decide your ability to create the wealth you desire. Nothing can be achieved without proper planning; this holds true in the finance world too.
So, how does financial planning help you?

It helps you to,

  • Determine your goals, both long-term and short-term
  • Create a personalized roadmap to achieve these goals
  • Set milestones to monitor your progress and success

Let’s take an example, of Mr. A, a salaried employee who has been diligently investing 30% of his income in the stock market since the day he received his first salary. The rest of the 70% of his salary was just enough to cover his monthly essential expenses, bills, and routine lifestyle expenses. Essentially he was left with little or nothing by the end of each month. It’s been 5 years of investing and today he has built a decent corpus in stock holdings. From an overall perspective he has been investing 30% of his income, which is great; but by investing solely in stocks, was that the right move?

He has broken one cardinal rule of investing by risking all his money in a single asset class. What would he do in case the stock market crashed? On the other hand, his savings are at the mercy of the stock market, the lack of liquid investments or an emergency fund for contingencies could land him in a soup in case of a job loss, loss of income, or any untoward medical expenses.

Here is where planning comes to play.

  • First and foremost, ensure you build a corpus that acts as your umbrella for a rainy day. Invest in liquid investments too with a goal to cover unexpected emergencies.
  • Secondly, do not risk all your investments in a single highly-volatile asset class. Based on your risk profile, appetite for risks, and goals your investment should be well-diversified across asset classes to ensure your portfolio remains afloat even during turmoil in the financial markets.

Let’s take another scenario:
Mr. B, a businessman, has followed all the rules in the rule book. His portfolio is well-diversified across equity, debt, and physical assets. He has prudently invested in an emergency fund that covers 6 months of his essential expenses both for household expenses and business continuity. He has invested in his children’s future educational expenses too. He has even invested in health insurance for his family (dependents) and term insurance for himself. He doesn’t feel the need to spend on term insurance for his wife or dependents since they are not breadwinners.

All said and done, Mr. B’s investment journey seemed to be on the right track. One mistake though may have caused him a roadblock. In a sudden unfortunate situation, Mr. B’s wife passes away. He has to now cope with the loss of his spouse as well as shoulder her contribution to the household activities. Besides the emotional support, his only choice is to outsource her chores to domestic help. His monthly expenses have now tripled due to payment towards these support services forcing him to dip into his savings. His current emergency fund needs to be revisited and replenished to match his now ballooning expenses. This has added to his stress at work and home.

The future is something we can never predict, but we can always create security to break our fall.

  • Invest in the right insurance coverage for both term and health.
  • Calculate the accurate cash value of a term insurance policy that covers all future expenses of your dependents in your absence.
  • Ask these essential questions:
  • How much money will suffice for my spouse and kids to maintain their current quality of life?
  • How much will they need to pay debts, taxes, and maintain physical assets or related costs?
  • How much coverage would be needed to ensure my kids have a sufficient income through college?

Pertinent questions that run through every investor’s mind:

  • How do I map my personal goals in financial terms?
  • How do I calculate my risk-taking capability?
  • Given my current income, how much should I invest to build a decent corpus for retirement?
  • Where should I invest to create passive income streams for the future?
  • What is the required corpus to set aside for emergencies and unforeseen expenses?
  • How do I diversify my assets appropriately? What is the right ratio for me?
  • Where do I invest my wealth to guarantee zero loss of capital?

For you, a 70/30 investing strategy may work, while for another it could be a 50:50 split. There is no standard answer or a one size fits all reply. Every investor has his/her own specific life goals, wealth creation capabilities, and investment outlook. It is essential to create investment roadmaps that align with the individual investor’s unique requirements, family needs, and end objective.

Wealth creation and wealth preservation are both equally important and can be achieved only with prudent planning and decisive action. It is best to let experts assist you in these crucial life decisions.

Have you begun your journey to a financially independent future? Are you on track?