Follow The Rules of Financial Planning

Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.

Financial planning is an ongoing process that can reduce your stress about money and support your financial needs. A financial plan provides a comprehensive picture of your current finances, your investment goals and any strategies you've set to achieve those goals. However, to make your financial planning process deliver the desired results, you must follow certain rules consistently. 

Here are some of these rules:

■ Have a clear roadmap — You must create a clear roadmap right at the start of your investment process. This would involve establishing your goals to be achieved over a short, medium and long-term horizon, assigning a time horizon and a target as well as determining how much to invest to achieve each one of them. 

■ Give risk management its due — Risk management should be the first step in your investment process. The three aspects of risk management are life insurance, health insurance and creating an emergency fund. While providing for these is important, it is equally important to buy the right products. A term plan for life insurance, a family floater plan for a young and small family and options like bank deposit and liquid funds can be ideal for an emergency fund.

■ Budgeting — While budgeting ensures that you save first and then spend, it is equally important to understand the difference between saving and investing. Remember, budgeting not only helps you save regularly, but it also helps you avoid a debt trap by not using credit cards indiscriminately.

■ Time commitment — Your time horizon plays a key role in determining your asset allocation, which in turn determines the attendant risks and probable returns over a defined time horizon. Hence, once a time horizon is assigned to a goal, you must remain committed to it irrespective of how the market behaves and continue your investment process uninterruptedly. This approach not only helps in reducing the impact of volatility on your portfolio but also hastens the recovery process by bringing your average cost down. 

■ Have flexibility, but avoid frequent changes — Investment is an ongoing process, however, there is no straight path to investment success. Therefore, your investment process and chosen investment options must have the flexibility to rebalance your portfolio in line with your changing circumstances as well as the economic and political environment. While monitoring the performance holds the key to long-term investment success, it’s important not to get tempted to make frequent changes just because you have the flexibility to do so. 

 ■ Give tax-savings investments their due — Tax-saving investments should be an integral part of your financial plan. Unfortunately, many investors have the habit of investing haphazardly to save taxes. In reality, if you integrate these investments into your overall investment program and adopt a disciplined way of investing through the year rather than at the fag-end of the year, their contribution to your wealth creation process can be tremendous.

■ Be open and collaborative — Last but not the least, you must always be open to absorbing knowledge and using it in your investment process. Today, a lot of information is available on various investment options and strategies to invest in them through print, electronic and social media. If you find it overwhelming to analyse this information, don't hesitate to take the help of an advisor. Once you start working with an advisor, listen to the advice carefully as that can go a long way in allowing you to understand the complexities of the investment world. Remember, the unwillingness to listen can make it difficult for you to adapt to the ever-changing investment and economic environment.