Sub Heading : The framework has to take into account the family's goals
Content : "If I have eight hours to cut a tree, I'll spend six hours sharpening the axe"—we all would have heard this pithy aphorism. It lucidly brings out the need for planning and preparation. A lot of us do not pay heed to this important aspect and go headlong into doing things.
In India, we have this underlying spiritual outlook that makes us think God will take care of us—this sentiment is neatly compressed into the 'God is Great' bumper sticker slogan that can be found emblazoned on lorry bumpers, along with the ubiquitous OK TATA. God of course takes care of us - but that is no reason to abjure responsibility.
We keep talking of "hard earned" money. Why the adjective is required, I fail to understand. Probably what people mean is that they have actually worked for it and not just warmed the chair. Fair enough. If that is so, it is imperative that the money so earned be treated with the respect it deserves.
What does a farmer do if he wants to plant rice this season? He first clears the field, tills the soil, adds manure and compost and tills and mixes it again. Then he fills the field with water and allows it to soak for a couple of days. He dykes a small portion of the field, where he sows the seeds. Once the saplings sprout, after it grows to about 6 inches, they are transplanted to the field. The field is watered. Fertiliser is sprinkled. In due course, he will have to remove weeds and take pest control measures. After all this tending, the plant grows and in due course is ready with the paddy, which is harvested. The farmer follows a proper process. He does not decide one day to grow rice and start sowing. It is no different, for any other endeavour.
Planning and preparation are important. Without it, one will be doing things in an ad hoc manner and the results will reflect that. Yet, despite knowing all this fully well, many people invest in anything that is suggested to them.
A framework is required to lay out the broad direction in which one wants to progress. That framework has to take into account the goals that the family unit has, the various milestones that come along the way and the expenses. There needs to be a safety net in place for the family. If there is a lacuna there, that needs to be addressed too. The surpluses generated will need to be deployed in line with the specific requirements of the family unit. This is financial planning.
If this exercise is not done, it will be the same as sowing the seed without preparing the field. It will not produce the desired results.
Many people have the objective of getting the highest returns on their investments. Chasing high returns without paying heed to the goals, cash-flow requirements, time frame, risk appetite, liquidity & other considerations is like shooting in the dark and hoping for the best.
Also, many investors are guided by the reigning sentiment of the day—be it investing in real estate, mutual funds, gold, stocks… which is fine as long as it meshes with their overall requirements. But most are not checking that first, which is a problem. Investors should understand that they need to evolve a broad strategy vis-à-vis what they want to achieve in life. And the actions they take should fall in place, so that they progress towards achieving their broader objectives. That is financial planning again.
Financial planning is in the news these days… everyone from an insurance company to a mutual fund agency to a distributor of financial products is talking about it. But be aware that financial planning is not accumulating various products. It is getting the framework and strategy regarding your finances right.
For the most part, financial planning is common sense. In that sense, many investors are already practicing financial planning. But again, some may require help. It is like doing up your own house with a contractor vis-à-vis calling in an architect. An architect will be able to bring in his knowledge & experience and be able to come up with appropriate solutions. But there is a fee to be paid for that. Architects are in demand as they are able to understand their clients requirements and are able to come up with creative solutions that are holistic, utilitarian, aesthetic and mould the space to their client's specific requirements. So it is with financial planning. It is an individual's call to do their planning themselves or to involve a professional. But, there is no debate on whether financial planning itself is required.
The writer is a certified financial planner at Mumbai-based Ladder 7 Financial Advisories. The views expressed are those of the author and do not necessarily represent those of FPSB India. Feedback may be mailed to myplan@fpsbindia.org
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