Write the First Stage Financial Planning.
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Financial planning is planning your finances right, that's the key of financial planning. And, constant monitoring of one's financial plan is equally important.
In financial planning, mapping each and every asset with each and every goal is important before one starts investing.
At ET Wealth's Investment Workshop held on July 7, Puneet Oberoi, CFP, asked a basic question related to financial planning - do you know how much you spend in a month and do you write it down? Only one person out of the 400-odd present their raised his hand.
This when he stressed on the point that if you do not know how much your expenses are, how can you save? "If we don't know that, there's a bigger question to that - how much should one save?" says Oberoi.
He suggests that one should know one's monthly expenses and should actually write down their monthly expense to know one's surplus.
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Oberoi was speaking at ET Wealth Investment Workshop held in Delhi on July 7, 2018. At the workshop topics like tax planning, financial planning, and mutual fund recategorisation were discussed.
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Every professional, businessman or a salaried individual will have their own goals be it in business or profession but when it comes to goals in personal finance, we don't have them. But, to know how much we have to save, we need to know our goals.
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Oberoi shared few examples of this. A person starts investing for his child when the child is born and invests in a Rs 5 lakh policy, without really thinking about how much they need. They don't realise the value of the investment when it matures after 15-20 years as the requirement could be Rs 1 crore.
He gave another example: A person with a monthly income of Rs 1 lakh income, has in mind that he has Rs 60,000 expenses. Of the balance Rs 40,000, and with the usual goals in mind like house purchase, children's education, and marriage, he starts investing 10,000 every month. The balance of Rs 30,000 is kept for contingencies but that amount actually goes into petty household expense. This, according to Oberoi, is true with everybody because we don't know our goals and our expenses.
So what is the right way to about planning our finances? Oberoi said that there are six steps to financial planning.
1. Identifying current financial situation
In the first step, Oberoi informs that if we don't know what our income and expenses are, how we will know how much the surplus is. So, all incomes and expenses (no matter how small) have to be accounted for. Even expenses on festivities, vacations, attending marriage functions have to be accounted for. Once this is done over a period of about six months, we will get an idea of the surplus.
Also, as all existing investments are scattered across assets such as debt and equity including shares, mutual funds, fixed deposits, life insurance policies etc., the financial planning process will have to take into account all asset classes, to get the individual's net-worth.
2. Managing risk appetite
Every person will have a different risk appetite which can be 'aggressive', 'moderate', 'conservative', and lastly 'not sure'. However, in reality, most advisors force their own risk appetite on investors.
In practice, while undergoing the financial planning process, a risk profiling questionnaire helps to identify each person's risk taking ability. "Still, we don't strictly go by what the results show and over a period of time we conclude what the person's risk appetite is," said Oberoi. He added that "Initially, we remain conservative and gradually increase risk in the investor's portfolio to make it more comfortable for the investor."
3. Identifying goals
Oberoi said that identifying goals is mostly mis-understood. According to him, we are aware of goals but we talk about goals on today's value. However, value of goals is important and not the current value. For example, if someone who wishes to send their kid abroad to study after 18 years whose current cost is Rs 35 lakh, needs to save for the future value of the course. It is only then can we find how much we have to save towards that goal and invest across investments to achieve it.
4. Mapping of assets
There could be existing investments say earmarked for specific goals. So, we have to map them for the underlying goals and invest only for the shortfall. Therefore, mapping each and every asset with each and every goal is important before one starts investing. Thereafter, according to the current situation, it can be seen where exactly we have to invest, whether its mutual funds , fixed deposits, FMPs. This is where we have to decide on the asset allocation.