Financial Planning Overview

Financial Planning vs Investment Planning:

• • Do you often get confused between Financial Planning and Investment Planning? 

• • Have you made investments without knowing the financial goal behind them? 

• • Do you want to know the asset classes in which you can invest? 

If the answer to any of the above questions is yes, then you should read this article. According to the NCFE survey of financial literacy in 2019 study reveals that only 27% of people have financial literacy in India. This is only basic financial knowledge. Further, if we talk about capital markets (stock market, Mutual Funds, exchange-traded funds, etc.), the financial literacy score slides down to only 8%. This is an alarming number for a country having the 5th highest GDP in the world. As Robert Kiyosaki says in his famous book “Rick Dad Poor Dad”, “It’s not how much money you make. It’s how much money you keep.”. A person needs to understand how to make the most out of what they earn.

Following is a guiding map for a Journey of Financial Planning. This will give you guidance on how you should plan your finances. 

The first milestone in the financial planning journey is about doing your Cash Flow analysis. Simply put, try to know how much you earn and how much you spend. You should earn more than you save; otherwise, you will be in financial trouble, often called ‘Debt Trap’. The difference between your income and expenses is the money left for you to plan. Cash flow analysis also involves smaller topics to be considered to increase this difference. A few questions to ask yourself, such as “Am I in the best tax-saving mode?”, “Do I control how much I spend for each category? Am I saving at least 30% of my net income?” will make you reconsider whether you can manage your cash flow more efficiently. While doing cash flow analysis, don’t forget to include your yearly/half-yearly/Quarterly payments such as school fees, insurance premiums, etc.  

After the cash flow analysis is done, you should create a financial goal matrix based on your own aspirations and assign a financial amount and target year (horizon) to achieve the financial goal. A sample matrix would look as shown below: 

While you can have experts employed for other sections (i.e. Cash Flow Analysis, Investment Management, creating and activating your financial plan), this section,i.e. Financial Goal Setting, should strictly be done by the person for whom the financial planning is being carried out. 

Once the financial goal setting is done, you will have the delta (difference between your income and expenditure)  and also the future financial requirements. Now your task is to invest this delta in such a manner that you achieve most (if not all) goals from the financial goal you have set for yourself. 

However, before investment management, it is important to first cover your life’s risk before you start planning for investments. Often, the experts talk about a financial pyramid which starts with having emergency funds and then covering your risks by buying different insurances. Once you have provisioned for emergency funds and your risks, and if money is still left, only then should you start your investment planning. It is generally advised to give more priority to your ‘needs’ than  ‘wants’.  Once the money is allocated for your various investments, it is now time to create a financial plan by assigning actual investment products available in the markets to achieve your investment goals. While assigning a specific asset class and subsequently assigning market products to your investment goal, it is essential to understand your risk profiling. 

Risk profile has 3 parts as mentioned below:

1. 1. Risk profile of the goal 

1. 1. Risk profile due to the financial condition of the person 

1. 1. Risk profile due to the behaviour of the person

Since #2 and #3 are different for different people, it is important to know that the investment plan created for one person will not be fit for another person. 

At last (but not least), it is essential to know that this exercise is not timeless, and a periodic review is important to keep track of your goals. 

Jnana Prabodhini Social Sciences Study Centre attempts to create a detailed guide for personal financial planning based on the above philosophy. It has been observed that most educated people also fail to plan their finances. Kindly provide your suggestions/review comments, which we will try to consider while we are creating a study course. Also, please provide your contact number in case you would like to be notified once the personal financial planning course is ready. 

Amol Sugandhi, MBA Finance, CFA, Financial Coach