Eating health food and daily exercise leads to a good health. Similarly knowing where we are investing and a routine check-up of our portfolio leads to a good portfolio health. Financial health means the status of our personal balance sheet meaning where we stand today in terms of our finances, expenses and future goals. And based on our current financial well-being are our future financial goals achievable or not.
Financial planning is a roadmap towards achievement of Financial goals and wisdom. It is a process and once started, it should be followed in a disciplined manner to achieve the set targets.
So how do we begin with the process? The process is very easy. We as financial advisors do it on an integrated financial planning template. This process involves current expenses, current income, current outstanding loans (if any), current assets held and so on.
The financial process deals with below mentioned areas and strategies:
We take into consideration the current salary and assume a growth rate on the salary to calculate future expected salary. It also takes into consideration the insurance cover needed by the breadwinner of the family and mediclaim cover needed by all the family members.
We do the same with the current expenses, we consider that current expenses will continue to incur in future and based on inflation rate, we increase the expected expenses year-on-year.
Once we are aware of our future goals like creating a retirement corpus, holiday home, child’s education, child’s marriage, buying a car, or going on an annual vacations and so on, we may have a rough idea of the money required to fulfil those goals.
Once we learn the goals and money required, we may calculate the total investments or investments to be made at regular intervals in order to achieve the set goals.
Obviously one should take into account the current assets and liabilities while calculating the goal achievement strategy.
This exercise is quite an exhaustive one, but once it is done, it becomes easy to figure out the gap between our current status and goal achievement (if any).
This exercise can be a confidence booster as well as a scary picture for investors and simultaneously for financial advisors like us. Many a times it happens that if a client starts planning at a later stage in life, it clearly means he has a shorter period to save the money and hence he may have to compromise on certain goals, if achieving all goals seem to be difficult.
As the proverb goes, early to bed is early to rise, same applies to investment segment, the one to starts saving and investing at an early stage is the one who can benefit out of the Compounding effect and will be better off than the ones who start late in their lives.
After going through the financial planning exercise of where we stand and where we want to reach, many people get a clear picture of their current holdings and expenses. It may be an eye opener for some and may be a confidence booster for some as they know they are on the right path of Financial wisdom.