Many a time, prospective clients approach us with the aim of undertaking financial planning. However, when we ask them as to why they want to undertake it, more often than not, they are puzzled. Some of the reasons commonly given are: they have heard that it is a useful thing or they believe it will make them rich.
Only a few state that they believe in preparing and following a financial plan will enable them to achieve their financial goals. In other words, goals are the starting point. Lack of clarity regarding goals may render your plan meaningless. So, let us begin our journey with this important four-letter word.
A planner can certainly help people in refining these aims, but the process will have to be initiated by the person seeking to make a plan.
Here are a few pointers which may be useful in the process:
Clarity of thought: They should be specific such as 'A house of my own' or 'An MBA from Harvard Business School for my daughter' rather than vague desires such as 'I want to retire rich'.
Be realistic: For instance, a person earning Rs 500,000 per annum can today aspire to purchase a house of around Rs 50-55 lakh (Rs 5-5.5 million). This is a realistic goal. However, aspiring to purchase a house worth Rs 5 crore (Rs 50 million) is unrealistic and can lead to frustration.
Consensus-based goals: Goals should be decided after discussing them with important family members If this is not done, it may lead to discord, as one member may accord more priority to a certain goal.
Short-term goals: These generally pertain to goals which should be met over a few months or, say, in a year or two. For instance, you may want to visit the West Indies for the Cricket World Cup in March 2007.
Medium-term goals generally refer to those which should be met between two and five years from now. For instance, a person may wish to get married six years from now and would like to purchase a house two years prior to that.
Long-term goals refer to those with targets beyond five years from now. A couple may have plans to fund their new-born daughter's MBA Programme, 23 years from today. This is a long-term goal.
Horses for courses
The main reason for classifying goals in the manner given above is that it helps us in choosing the right type of investments in order to meet them.
Short-term goals will require safe investments, where there is minimum risk of capital loss. For instance, in case there is a small shortfall for the West Indies trip, maybe a three/four month bank fixed deposit or a liquid mutual fund may be an appropriate investment.
Finally, goal-setting should be an integrated process. While financial planning is concerned with financial goals, you must not lose sight of goal-setting in the other aspects of your life too, say, in the physical or spiritual areas, as lack of clarity in these areas can affect us financially over the longer term in the form of increased medical costs.
I do hope that after reading this, your first steps in the world of financial planning will be more confident than before.
The writer is vice president, Parag Parikh Financial Advisory Services
