What is Financial Planning and why you need it?

Instead of getting into any kind of financial jargon, let us take a simple example. Suppose I have an empty plot of land and wanted to build my house on it. What would be my first step? Well, I will have to first look for an architect and get the plan done, based on my requirements. He would make a drawing on paper, which would show me how the house would look like. Where would the kitchen be, how big it would be and would also provided a pretty good estimate of the cost I would incur. The plan is my basic document, based on which the house shall be built. After all details are finalized, as to type of material used, budget etc, the construction shall start on the plot. This process of planning shall be very detailed and shall be personal too. Because, everyone has unique requirements and these are very personal. Even my family members shall be involved in this process. I would start the construction only after I am satisfied and comfortable with the plan & its details. Till this happens, I won’t normally start building. I shall change and fine tune the plan to suit my requirements and esp. the budget. Once the plan is ready, only then the actual building activity starts.

This is exactly what Financial Planning is. As the name suggests, it’s planning your Financial Life. All of us have expenses and all of us have dreams and aspirations. Each one of us earns from a job, a profession or a business, or a combination of these. The money we earn is used to meet these expenses and realize our aspirations and dreams for a good life we all wish to live.

Financial planning is the process by which we plan all our expenses well in advance. There are some basic steps; let’s take a look at them.

1. Goal setting –

From the day we start earning, we have an idea of some major goals that would require big money. These are things like children’s education, their marriage and our own post retirement life. There would be other major goals like buying our own house, a car, a world tour or such similar aspirations. We need to put all these on paper in terms of amount of money required and the time when it shall be needed. This is the first step; know where you want to go and when.

Sample output – I wish to retire @ my age of 55 in the year 2030 and have Rs. 1 crore in my pocket as my retirement corpus.

2. Income Expense budgeting –

The second step is to know your income and expenses pattern. You will have to decide how much money you will spend for the present quality of life you live and how much you shall spare for your future. This decision is very important. The amount of money you need to set aside for future shall depend on many things like your income, your responsibilities in life (expenses), number of income sources you have, your future goals etc.

Sample output – 80% of the income for current expenses and 20% for the future.

3. Creating the plan –

Now you know 3 things. First you know what your major financial goals in life are. Second you know how much money you spend for maintaining the present quality of life and third how much money you are ready to set aside for the future. Based on this data, you need to create a plan to reach/meet your future financial goals. This plan shall list your goal, its time period and various options on how it can be achieved.

Example - I wish to retire @ my age of 55 in the year 2030, in 20 years from now, and have Rs. 1 crore in my pocket as my retirement corpus. So in order to have Rs. 1 cr in my pocket 20 years from now, I shall have multiple options like – fixed deposits, PPF, Mutual funds, stocks etc. This plan will show me how much money I need to set aside annually for this goal. The amount shall vary based on the option as every option has a different rate of return. Suppose I choose 10% FD to achieve this goal, I will need to put in around 13000 to 14000 per month (based on other variables like inflation etc) and suppose I choose mutual funds (assumed ROI @ 15% pa) I will need to put in around 7000 to 8000 per month.

Now this step provides you with multiple ways you can reach the same goal. This is to be done for every goal you have listed.

4. Choosing your options-

This step is a crucial one. Above step has told you exactly how much money you will need to set aside for every single goal, based on what option you choose to use. At this step you need to consider your risk taking ability, your current expense levels and the time period you have to reach the goals. Based on these and similar factors, you will have to choose one option for one goal. You need to do this for every goal. You will also have to consider how realistic your goals are at this step. You will need to fine tune the goals as well as your income expense allocation to arrive at a practically possible and actionable way of reaching your goals. At this step you will have the sense of direction for your financial life.

Output – This step shall tell you exactly how you are going to reach every single goal and what type of investment vehicle (option) shall be used for that.

5. Contingency planning –

Now that you have planned for major goals that are known, you need to also consider the unknown, the risks. This is the stage where one needs to consider the worst case scenario in one’s life. Events like hospitalization, untimely death, accidents, disability etc are the points of consideration. These events are capable of washing away years of hard earned money in a matter of days. Hence this step must get its due importance. At this stage you need to consider insurance as a major protection against eventualities. This will include considerations for health, accident and life insurance. Our income levels, type of occupational risks, our goals, current state of health etc shall be the deciding factors.

Output – This step tells you what kind of protection you and your family members will need, in case something unpleasant happens.

6. Restructure and fine tune –

Now that you have accounted for the known as well as the unknown, its time to re-look and review the entire plan up to this point. Any changes can again be made considering income, expenses, goals and contingencies. At this stage your blue print is ready. This is your road map to reach your goals as well as to deal with any unforeseen events that may happen.

Output – This step tells you exactly how you are going to reach your goals and also how you well protected you are. This provides you with a clear cut sense of direction and how you need to manage your income expenses priorities from here on.

7. Product selection –

This is the execution or action stage. At this point the products have to be chosen and acquired. Now that you have the plan deliberated and ready, product selection becomes imperative. You need to choose products carefully, based on logical decision making models and not on sales talk by a product selling agent etc (this is how most people do it). You also need to consider the cost of acquiring the products, so that you do not end up paying more than you need to. You need to understand what you are buying, why you are buying it and how well it is suited to your financial plan above.

Output – At this stage you will know exactly which products are going to help you reach the financial goals or meet any contingencies.

8. Action & Review-

This is the point where you acquire all the products you need. Also you need to periodically review the plan regularly. This will keep you on track. You will also need to keep fine tuning and amending the plan based on changing circumstances in life like increase in income, addition of new family member due to marriage, child’s birth etc. Taking a periodic review and making changes as required is extremely important as it keeps you in the right direction and at the right speed.

Output – You remain focused, in action and on track at all the time. You respond to any changes in your life as well as outside circumstances.

This entire process is called Financial Planning.

It is easier said than done. 

Some important things to remember are –

1. The earlier you plan in life the better it is. Because the price of the plan is measured in terms of time and not money.
2. Most people are busy making money in some job, profession or business. They do not find much time to spend looking into their financial lives. Even if they have time, the may not have the aptitude and or the resources & information needed. Hence it is recommended to consult an expert, a full timer who will guide you through the process and stand by over a period of time. It’s just like you go to the doctor for your health, or the mechanic to service your car.
3. Most people treat money like they treat their health. They do nothing about it unless they start having problems. Remember to act as early as you become aware that you need to plan. Procrastinating kills.

My wife, Aparna Machawe offers the following services for you –

1. Complete counseling and hand holding support for Financial Planning.
2. Detailed financial auditing and reporting.
3. Financial goal setting and preparation of your “Financial Life Plan”.
4. Product recommendations and related servicing.
5. Periodic review of your financial life plan and amendments
6. Website support
7. Knowledge sharing

For details contact - Mrs. Aparna Samir Machawe, 98222 89916,

Email:aparna_machawe@rediff.com, machawe.aparna@gmail.com