Life Goals and the need for Financial Planning

This article is the first in a series of three articles wherein I discuss why we should understand the world of investments. In this article, I present simple ideas to understand the need for financial planning. In the second article in this series, I offer basic ideas on investment planning. Finally, in the third article, I present some of the theoretical concepts behind portfolio formation.


The early years
We all go through numerous years of education and strive to get into employment. Throughout the phases of schooling from kindergarten to undergraduate studies, there are considerable expenses that our parents/guardians incur for us to get a good education and possibly lead to employment. We often are not mindful of the costs that have been incurred so far. Take a pause and think about a rough amount of money that may have been spent on our upbringing. You would be amazed to realize the extent of the expenses. These expenses are indeed an investment in us. And, like any other investment, this investment in education brings benefits in our grown-up years and helps us survive and thrive.

The productive years
When we start earning, say at any age such as 23 years or 27 years or above, our salary (cash inflow) often exceeds our expenses (cash outflow). We find ourselves in a comfortable situation financially. These are also years when we are in the best of our health, have almost no liabilities (unless we have an education loan to repay), and have many aspirations and hobbies (sport, travel, entertainment, etc.). As our cash inflow (salary) can absorb all these activities-related expenses, we financially find ourselves in good shape. This phase of life continues for varying years (next 20, 25, 30 years) where our income may keep increasing. We feel good about this growth. But we need to be mindful of the inflation that may be eating into the ability of money to buy goods at the same nominal rate every year. As long as our income (ideally net savings!) is growing at a rate higher than the inflation rate, we are doing good in terms of real growth of wealth.

The crucial milestones in the journey
As we start growing old, there are many milestones where there is a need to shell out a large amount of money. Think of higher education (say, a master’s degree), marriage, buying a car, buying a home, childbirth, child’s education (key events such as matriculation, intermediate, undergraduate studies), in some cases also marrying them off. These events are, in most cases, achieved over 30 years or so. And by the time we are done with these responsibilities, we have either retired or are inching closer to retirement. Retirement is a significant milestone in everyone’s life. It essentially tangibly transforms our life. Just a month before our retirement date, we have been earning and meeting our expenses. And, immediate next month post-retirement, we continue to have our expenses (almost at the same level as the previous month or slightly lower if we are mindful of what is to come ahead in terms of cash inflow). There may be a few scenarios post-retirement – a) we have pension support (but a reduced inflow than our regular salary), b) no pension support (essentially no salary), c) some assets where we may have invested in (say, land, apartment, insurance-based investment product, gold, stocks, etc.), d) become dependent on our kids or other members of the family for our financial needs. Few other things may severely impact our post-retirement life. For example, we may outlive our available financial cushion (think of the longevity of age), or we may be fraught with major healthcare costs to take care of our health.

The need for financial planning
The journey mentioned above is one that we can relate to if we are in the age group of 40 or above. However, it is more critical for us to be mindful of these aspects of the financial trajectory (planning) relatively early in our lives. The earlier, the better. Most of us may have seen our parents having done this planning in one way or the other. You may recollect that they maintain some amount of money in their savings bank account, invest in fixed deposits, post office savings plan, buy land, buy an apartment, invest in gold, buy an insurance product, in some cases invest in stocks etc. Therefore, it is essential to note that some planning always goes in as we proceed in our lives, which helps us take good care of ourselves and our family at different stages in life. Financial planning is, therefore, an essential and ever-pervasive aspect of anyone’s life. Adding a layer of systematic planning and thought process to this effort might increase our financial wellbeing.

And the right time? – the sooner, the better
As you may have noticed in the previous paragraphs, each of the major events in our life happens at different points in time (think in terms of our age in years). They often require expenses (cash outflow) that exceeds our regular disposable income from the monthly salary available then. Any or almost every such milestone most likely exceeds our disposable income, such as buying a car, buying a house, expenses related to a child’s education at the undergraduate level, etc. Each of these is a lumpy cash outflow. Therefore, wiser financial planning is needed to have a proportional amount of liquid money or assets available to take care of these lumpy expense requirements in life. Most households usually have done some planning for the life post-retirement but lack adequate planning for meeting the expenses related to these events/milestones. They end up borrowing from friends/family or raising a loan from a bank or other financial intermediaries. Such borrowings may put us in debt, and then our whole effort goes into taking care of repayment. This adds to stress in our lives. Prudent financial planning may help avoid such a situation. Therefore, a good understanding of how financial goals could be met with meticulous planning and appropriate investment approaches becomes essential. That presents a need to understand investments.

Disclaimer: The author contributed to this article in his personal capacity. The views and opinions expressed are his own and do not necessarily represent the views of the author’s employer. Any comments or suggestions for improvements are most welcome. Please leave your comments below.

Part 2: The basics of Investments
Part 3: The approach of portfolio construction [Coming soon]

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