Common Mistakes to Avoid in Financial Planning

Financial Planning

Common Mistakes to Avoid in Financial Planning

“Please suggest some good investments.” “Which mutual fund schemes should one buy this year?” “Which is the best mutual fund scheme?” “Which is the best investment?” “Should I invest in stocks or real estate?” “What is your view of the stock market?” “Are my investments proper? Or should I make some changes?” One hears these and many similar questions, very regularly. There is an issue with these questions. These are about the investments and not the investor. The investor’s needs are not even discussed, and probably not even considered important. As leadership guru and bestselling author Simon Sinek says, “Start with Why”. The discussion of investments must start with “why” – the purpose of investment. “Why is one investing?”  

Financial planning ensures an individual has adequate income or resources to meet current and future expenses and needs. An individual's regular income may come from sources such as a profession, salary, business, or even investments. An individual's normal activities and routine expenses are woven around the regular income and the time when this is received. However, other expenses may also have to be met from the available income. 

The current income that is received must also provide for a time when there will be no or low-income being generated, such as in the retirement period. There may be unexpected expenses that are not budgeted, such as a large medical expense, or there may be needs in the future that require a large sum of money, such as the education of children or buying a home, all of which require adequate funds to be made available at the right time. A portion of the current income is therefore saved and applied to creating assets that will meet these requirements. Financial planning refers to the process of streamlining the income, expenses, assets, and liabilities of the individual to take care of both current and future needs for funds.

There is a large range of financial products and services that are available for investors today and these need to be linked to the specific needs and situations of the client. Not every product may be suitable for every investor; nor would investors be able to identify how to choose and use products and services from the choices that are available in the market. Financial planning bridges this gap as the Investment Adviser possesses the expertise to understand the dynamics of the products on the one hand and the needs of the client on the other. This makes them best suited to use such products and services in the interest of the investors.

Goal setting becomes the central part of the financial planning process and all efforts are then directed towards meeting the goals. Overall goals might not be given too much importance in a normal financial advisory activity, where some specific target is sought to be achieved.

Financial planning looks to ensure that all the financial activities are not at cross purposes with each other. As against this, a typical financial advisory service might not even realize that some steps suggested would be working against some other goal or requirement. For example, financial planning would ensure that the asset allocation for an older individual meets their risk-taking ability and that their equity exposure across asset classes is kept in check. This might not happen when normal advice is taken just for say equity mutual funds investment without knowing the equity exposure elsewhere. 

Financial planning looks to select what is right for an individual and this would differ from person to person. This takes into account both the returns as well as the vital risk. This might not happen for normal financial advice, where the goal might be completely different like earning a higher return, and where risk might be ignored.

Financial planning is the process of setting and achieving personal financial goals through the effective management of resources. It involves evaluating your current financial situation, identifying your financial objectives, and developing a strategy to reach those goals. Key components of financial planning include:

Budgeting

-Tracking income and expenses to ensure you live within your means and save for future goals.

Saving and Investing

Building wealth through savings accounts, stocks, bonds, mutual funds, and other investment vehicles.

Retirement Planning

Preparing for financial stability in retirement by estimating future needs and developing a savings strategy, often through retirement accounts.

Tax Planning

Understanding and managing tax liabilities to maximize deductions and credits, ensuring compliance with tax laws.

Insurance Planning

Protecting yourself and your assets through various types of insurance, such as health, life, property, and liability insurance.

Estate Planning

Planning for the distribution of your assets after death, including wills, trusts, and power of attorney.

Debt Management

Developing strategies to pay off or manage existing debt effectively.

Resource of Information -  NISM Book.