21 April 2016
In this competitive world where you aspire to match a "spend" of a neighbor with a "bigger spend", when you try to match purchase of a Honda with an Audi, is there a room for rationale ? A question that often comes to our mind is - Whether "Financial planning" ? Do we spend enough time in planning our lives ? Are we able to restrain the urge to splurge, take a pause and reflect on what lies ahead ? Most importantly do we think about this at the right time & at the right age ? "When" has to precede the "what" and once this is sorted, we are atleast on the right track of the "Financial Highway".
For simplicity, let us divide a life into 3 parts.
- Formative ( 25 years)
- The Build (25 -60) and
- The Resting period (>60 years).
While each of the stage is extremely critical, the formative & the early part of the build stage acquires paramount importance. This is the time for you to realize the criticality of drawing a balance between the "need" to plan and the need to control the urge of one-upmanship in this "me too" world (This is the "When"). The "What" to meet the means of "Financial planning" are multiple. It fits all income groups and all you need to do is to prioritize and build a discipline around meeting the objectives. Each of the 3 stages are inter linked, the deft management exhibited in the early 2 stages, will lead you to cruise in the later part of the 2nd & the 3rd stage. You would have heard people say "One should start saving early". While this is right, it is important to know where to save & what should be the path.
I prefer the PSI approach (Protect, Save, Invest). It is very simple, first the basic which is to Protect yourself (ie your financial stream) then start Saving (conservative approach) with easy liquidity and once done, go for the aggressive ie Invest in instruments where you take risks (for a higher anticipated return). Of course, each of this is a factor of one's risk taking ability, but one has to take those chances. Opt for Life Insurance to cover the "P" (pick a term plan which is inexpensive and offers a high sum assured), go for basic savings instruments (FD, RD, Mutual funds (Debt based), Life Insurance (Traditional plans) ) to cover the "S" and then pick aggressive Investment instruments (Mutual fund (Equity, aggressive fund options), Ulips, Primary market (if you have the skill and the time to monitor)) to cover the "I".
Depending on your life stage, you can distribute your income into a % of the PSI. If you are young (& less liabilities) play aggressive on the "I" after you are reasonably sound on the "P" & the "S". If you are in the 30-45 yrs age, for sure secure your "P" (considering the family conditions) and balance the "S" & the "I". As you cross the 50 years, it is consolidation time and hence opt for a moderation of the approach so as to secure the financial stream when you retire from work . While you are transcending the stages of life, do keep an eye on the need to be sufficiently liquid (for exigencies), meet milestone events (children's education, marriage etc) & have a secure financial income stream post superannuation (through NPS, annuities, FD's which give quarterly interests etc).
Financial planning is serious business and one should spend atleast an hour every month (if not more) in evaluating the portfolio, rejigging it & a course correction (if required). One has to constantly keep on changing the balance of the PSI (& the instruments within). Finally the oft repeated question, "How much does one save" ? While there cannot be a right answer to this, however if you invest 1/3 rd of your income diligently in pursuing the PSI model, it would be a good outcome.
Realization is half the battle won, rest is mechanics and this has to dawn on each one of us - the sooner the better.