From Cash Flow to Investments: A Guide to Personal Financial Planning

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 a 2019 financial literacy survey conducted by the National Centre for Financial Education (NCFE), only 27% of Indian adults are financially literate. And this refers only to basic financial knowledge. Furthermore, when it comes to capital markets (stock market, mutual funds, exchange-traded funds, etc.), the financial literacy score drops to just 8%. This is an alarming number for a country with the 4th-largest GDP in the world. As Robert Kiyosaki says in his famous book Rich 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 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 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 spend; otherwise, you will be in financial trouble, often called a ‘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 may employ experts for other sections (e.g., Cash Flow Analysis, Investment Management, or creating and activating your financial plan), Financial Goal Setting should be done strictly by the person for whom the financial planning is intended. 

Once financial goal setting is complete, you will know the delta (the difference between your income and expenditure) as well as your future financial requirements. Your task is to invest this delta in a way that helps you achieve most, if not all, of the financial goals you have set for yourself.

However, before moving to investment management, it is important to first cover your life’s risks. Experts often refer to a financial pyramid, which begins with building emergency funds and then covering risks through various types of insurance. Once you have provisioned for emergency funds and your risks, and if money is still left, only then should you start planning your investments. It is generally advised to give higher priority to your ‘needs’ rather than ‘wants.’ After allocating money to various investments, it is time to create a financial plan by assigning actual investment products available in the market to achieve your investment goals. While assigning a specific asset class and subsequently market products to your investment goal, it is essential to understand your risk profile. 

Risk profile has 3 parts as mentioned below:

1. 1. Risk profile of the goal 
   2. Risk profile due to the financial condition of the person 
   3. 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 (JP-SSSC) attempts to create a detailed guide for personal financial planning based on the above philosophy. It has been observed that even the most educated people 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

Member, JP-SSSC

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