First step towards secure financial future

In this fast moving life,it is pertinent to take out some time and work on a financial plan. A roadmap is the first step towards financial planning.

Written by Ritu Kant Ojha | Published: July 30, 2012 3:05:51 am

In today’s time of increasing disposable incomes and a ‘rat race’ to move ahead of others,a large number of people focus on earning more and spending even more. What they don’t do is plan their finances keeping future requirements in mind. With increasing cost of living,the amount needed to sail through rest of the life,post-retirement,will be much higher in the times to come,than it was a decade back. The answer is financial planning. Let us address some of the critical issues which would help a person plan his/ her finances in a better way.

CONSUMPTION ASSETS

As incomes increase,one tends to consume more – better air conditioners,bigger refrigerators,bigger house and car,holidays in exotic locations,weekend dinners at five stars,so on and so forth. While increase in consumption with increase in income is perfectly normal,what is not correct is not doing it in a methodical way and not creating conservation assets alongside. There are two basic steps that are required. One is to plan in advance and second is to divert savings towards investments. Almost all consumption assets would lose their value year on year. For example,a car would lose 20 per cent of its value in the first year itself. Suppose,you want to buy a bigger car after three years from now,calculate how much you would require to buy a car of your choice and then starting investing towards that goal. Right way is to invest and work towards creating enough corpus to buy a consumption asset because of the depreciation factor. “Consumption,ie depreciating assets,must pay for themselves because over time they will have little or no value. Such methods of buying depreciating assets are part of prudent financial planning,” suggests Kartik Jhaveri,a Mumbai-based financial planner.

PATIENCE IS THE KEY

According to the experts,it is important to manage emotions to be better able to reap benefits of investing money. While there are myriads of emotional ups and downs one goes through during any cycle,two periods are the most important ones – when the going is too good and when it is too bad. For example,during the period between January,2008 to January,2009,investors lost too much money in the Indian equity markets. A large number of investors cut their losses and moved out of the market. However,there were many others who kept investing and during the subsequent rally in 2009-2010,made a lot of money.

“It is really difficult to create a big corpus without keeping patience for long term. Historically,the turnaround is around the corner just when people start losing hope in times of gloom or assume that good times will last forever in times of rally,” says Dhirendra Kumar,CEO,Value Research.

However,it is easier said than done. What helps keep patience is goal based investing. The drill is not difficult when you identify the goals and work towards them.

Prioritising goals is equally important. So,for example,going for a holiday or buying an expensive car can take a backseat as compared to retirement planning and creating corpus for your kid’s education. Once the goal and time period is identified,choosing the right product is the last step left. A good and trustworthy financial advisor would help you with choosing the right product.

IDENTIFYING GOOD PLANNER

While it sounds like a simple exercise,it is quite a task to find a ‘good’ financial advisor. Especially in a world where most of the financial institutions like banks,insurance companies,mutual funds and wealth management firms etc have ‘investment advisors’,it becomes really difficult to choose which one is meant for you. In India,fee-only advisory never took off because most people do not like to pay for advisory and assume it to be ‘free’. However,there are no free lunches. Almost all agents,distributors or financial planners get commissions on the products they ‘advise’ to their clients. Since realising whether the advice provided was correct or not takes several years,there is certain level of trust built-in a client-planner relationship. Most investors tend to get influenced by the swanky offices and well ‘trained’ advisors and sign up for financial planning services. This can prove to be dangerous.

Feedback is the most credible source of information which you should employ while finalising for an advisor. Ask for references and check with their previous clients which will give you a fair idea of the level of services you can expect. Also,ask planners questions like how they get paid,commissions on various products,how often will s/ he review the portfolio etc. Never shy away from paying the advisor as that is his/ her bread and butter. Similarly,it is a bad practice to ask for ‘pass-backs’ or returning commissions on the financial products you bought.

Once the goals are identified,and a financial planner is there to guide,the only thing left is a roadmap. A financial roadmap will help you remain focussed and take firm investment decisions; it will prompt you to keep an eye on the goals and not on the short term returns. Once a corpus is created with 8-10 years of disciplined investing,it will make your life much more comfortable by allowing you to dip into the corpus for variety of goals. Therefore,take out time from this busy life and start planning now before it is too late.

BEFORE IT IS TOO LATE

Right way is to invest and work towards creating enough corpus to buy a consumption asset because of the depreciation factor

Historically,the turnaround is around the corner just when people start losing hope in times of gloom or assume that good times will last forever in times of rally

Feedback is the most credible source of information which you should employ while finalising for an advisor. Ask for references

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