Financial Planning
Whenever I hear or read the word planning anywhere, I am reminded of Chandran, the protagonist of R K Narayan’s novel “Bachelor of Arts”. In his final year bachelor of arts course in the college, Chandran manages to while away his initial time during the course of the year by indulging in miscellaneous avoidable tasks. With another six months to go for the final examinations he realises the enormity of the situation and makes a study plan.
His detailed plan covers the entire syllabus comprising all the subjects, covering several chapters in each of the subjects, hundreds of pages of study matter to be read. The goal being to cover the entire syllabus and be well prepared for the final exams. His father is unable to understand what Chandran has planned, but encourages him in the exercise. Suddenly he gets certain additional responsibilities in his college. Chandran now has to make certain modifications to the plan, which include getting up at 4 AM in the morning to start his studies. After he starts following the modified plan certain domestic issues arise that prevent him from getting up at 4 AM in the morning. This calls for more changes in the plan. However, with a plan in place, modifying and tweaking it as the situation demands, he manages to complete the examinations successfully and pass the final year with honors.
With this backdrop, we discuss the topic of the day, Financial Planning.
Several definitions of Financial Planning are available, but the following two definitions give the essence.
The Financial Planning Standards Board Ltd (FPSB) defines Financial Planning as “a process of developing strategies to help people manage their financial affairs to meet life goals.”
Investopedia defines Financial Planning as “A document containing a person’s current money situation and monetary goals, as well as strategies to achieve these goals.”
A financial plan, therefore, is a process which is documented and which lists out a person or family’s financial goals and strategies or means to achieve these goals. Some of the major financial goals could be (1) children’s education, (2) purchasing a house, (3) retirement planning. There may be several smaller ones such as buying a vehicle, repaying loans, travelling, regular vacations, hobbies, taking a break from career, purchasing a second house, leaving behind a legacy, charity or social work, home renovation, etc.
A financial plan can be a simple one pager with a list of goals (with time frame) and a strategy of how to achieve the goals. Or it could be a detailed plan running into several pages and sections. A comprehensive Financial Plan covers several dimensions such as assets liabilities (net worth) statement, cash flow, income statements, ratios, insurance, taxation, risk profiling, sometimes estate planning, etc.
An individual or a family can prepare their own Financial Plan or can take the assistance of qualified professionals like a Certified Financial Planner to prepare the same.
When an individual approaches a Financial Planner to get a Financial Plan the professional typically (1) understands the exact requirement, (2) gathers the initial data or information, (3) develops a plan suitable to the specific case, (4) discusses the same with the client, (5) sees to it that the client implements the same and (6) monitors the happenings vis-a vis the plan. Periodical review meetings are held with the client to ensure that strategies developed in the plan are followed properly.
Each of the above steps are equally important. But many a time the client would feel that once the implementation phase is put into motion the role of the planner comes to an end. But this is not true.
The strategies developed for a particular plan are based on certain assumptions which are typical to the specific client. With the flow of time, situations may arise where such strategies may not be workable or the assumptions may no longer hold true or the goals may change. In such cases (and these happen quite frequently) the plan is modified suitably by incorporating these aspects. Sometimes it may be required to scrap the existing plan totally and prepare a new plan to suit the new situation and goals. This may involve a different set of assumptions and / or different strategy. This is the reason why one can see a client planner relationship which are several years or decades old, sometimes spanning across generations.
To conclude, like Chandran in the story of Bachelor of Arts, any person who has a financial plan in place and follows it religiously will find it much easier to attain his financial goals. A Financial Plan is therefore the Financial Bhagvat Geeta, the writings there in to be followed religiously if one wishes to achieve his financial life goals.
