Importance of having a financial plan to achieve long-term life goals

“The problem with not having a goal is that you can spend your life running around the pitch and never score.” –Bill Copeland

Finalizing the destination is the first and most important step in planning your trip. A planned route helps to make optimal and efficient use of available resources. Likewise, life goals should be identified before you start planning to achieve them. Financial planning can be defined as a step-by-step approach to achieving life goals. It is the process of setting various short and long term life goals, quantifying those goals with inflation in mind, and having the right investment plan to achieve those goals.

Financial planning prepares an individual for unexpected risks, such as premature death, illness, job loss, etc. With the help of a personalized financial plan, an individual can achieve their life goals, such as buying a house, vacationing abroad, educating and marrying children, planning for retirement. etc as well as financial security. A financial plan acts as a guide throughout life’s journey.

Financial planning elements

Set Financial Goals: Simply put, do the math: Consider building a retirement plan while being mindful of maintaining/improving your current standard of living and future inflation. The easiest way to calculate your required retirement corpus is to arrive at your current monthly expenses and extrapolate the same over the next 20-30 years while keeping inflation in view. Once you’ve arrived at a number that you think is reasonable, it’s time to analyze your current savings and investments and figure out how much extra money you’ll need to generate. Once you know the corpus you should be aiming for, you can then decide on the best savings and investment avenues available to you.

Asset allocation: The long-term financial objective is best achieved by following a disciplined asset allocation strategy. An ideal long-term portfolio involves a combination of multiple asset classes such as stocks, debt, real estate, and bullion. The weight allocation for each asset class should be based on your risk appetite, time horizon and long-term financial goals. In addition to the multiple asset classes, the diversity of products within each of these asset classes is equally important. Each asset class includes a wide variety of sub-asset classes, for example, a sub-asset class within stocks will include large companies, small companies, growth funds, global stocks, among others. To arrive at an effective asset allocation strategy, the investor must begin building a portfolio with a blank sheet of paper and a total investment corpus in mind. In practice, many individuals/investors already have accumulated investments and may tend to alter their asset allocation strategy to justify their existing investments. Therefore, the role of financial advisors is also equally important when developing the asset allocation strategy.

Periodic review and rebalancing of your investment portfolio: Regular portfolio reviews help investors assess the performance of their investments against the benchmark as well as expected returns. Regular portfolio reviews also help investors rebalance the portfolio as necessary to maintain the desired asset allocation, if the weight of an asset class has increased or decreased due to market movements.

The essentials of financial planning: Insurance (term life and medical) is essential as part of any financial plan. Term life insurance is like emergency coverage. In the event of premature death, term life insurance ensures the financial well-being of dependents.

Emergency funds are also like a contingency plan to deal with any sudden emergency expenses arising from situations beyond one’s control.

With a financial plan in place, managing finances is much easier. By following the established financial plan, one benefits by avoiding short-term temptations to divert funds to immediate and discretionary needs. A well-designed financial plan helps curb impulse buying and leads to efficient use of available resources, ie investable surplus. It provides a reason for an individual to follow the “Income minus savings equals expenses” approach rather than the “Income minus expenses equals savings” approach. An investor is likely to be more disciplined with their investments i.e. sticking to their SIPs, adhering to asset allocation, timely rebalancing, etc. Basic financial investment goals help improve one’s lifestyle in a sustainable way, without having to go into debt or compromise other financial resources. Goals.



The opinions expressed above are those of the author.