Financial Planning always fails. Financial planning never pays. Financial planning is a useless activity….and so many statements like this usually comes from some of the stressed lot whenever I address a group of persons.
They have their own views like how can you plan for a future which is uncertain, all insurance companies are “chor”, Equity investment is gambling, Real estate, and gold are the best and safe investments, all advisers are there to missell etc. When I go deeper and discuss their issues with them I always found that many of these were going through some sort of financial stress or have been through a bad financial experience which is because of their own financial mismanagement.
In reality a p, oper personal financial planning addresses these issues only and devise a path to achieve financial goals. There are many factors that influence one’s personal financial planning but out of those I have figured out the 4 most important personal factors which can make or break any financial plan.
1. Spending Behavior
Your complete financial life is linked to your spending behavior This spending factor designs your financial future. Your goal targets and achievements all are linked to your spending pattern. High spending directly affects your lifestyle and thus to your retirement goal and insurance requirement but on the other side it also leads to less investible surplus to allocate towards the same goals.
This in turn also affects the achievement of other goals too. There is very common saying that “An inability to control spending is the root cause of most personal finance disasters.” And this saying does not apply to personal finance only. If you look at our country’s financial condition closely, you will find that one of the reasons of our country’s slow economic growth is high fiscal deficit which is the result of high subsidies and expenses in unproductive areas.
This behavior of not being watchful on expenses is so much into us that in every Union budget speech we are only concerned on the Tax Sops that government has offered, but don’t look at the governments expenditure pattern which we fund out of our tax payments.
When your spending goes out of control, you lose your credibility among lenders, you could not continue with your long term investments and exit much early, you always feel stressed at work and start finding your income to be very less, Increase using credit cards but could not repay in full so start rolling over the balance month on month. Then on advise of some “ me too financial planner” or watching a Finance show on TV you figure out that Credit cards are costly to roll over, let’s take personal loan and clear off all dues…..and slowly starts entering in a debt trap. But the ultimate cause of everything is your “Spending”
If you are serious towards your financial future, rather than blaming your income for everything which is not even in your control, watch out your spending. Follow a budget, define your needs and wants, control impulse buying, and stay focused on your goals. I am sure you will get answers to most of your personal finance problems here only. But if you can’t control your spending, any financial planning will fail.
2. Savings and Investments
Savings and investments are also one of the important factors which directly affect a financial plan performance. Here I am not pointing out the performance of particular schemes but the way you select your investment products and manage the same.
Every asset class has its own specific features, risk and return parameters. Selection of any product depends on your personal and family’s acceptability of risk and the time left before the goal. Your investments do not provide you enough returns when
- you have selected volatile asset class for your short-term goals or safe asset class for your long-term goals,
- you are not comfortable with risk but just under the lure of high returns you invested in highly risky instrument,
- you don’t watch or overwatch the performance of your investments.
Understanding of how different asset classes’ work and controlling your investment behavior is very much required for any investment to help you achieve your goal.
3. Provisioning for emergencies and risk management
Your financial plan will definitely fail if it has not taken a holistic view of your personal finance and answered all “what ifs”. It is wrong to consider that financial planning is just to make investments to achieve goals. Until every aspect of your finance is in order, financial planning can’t be called as complete and neither will it succeed.
For e.g if you have started saving for your long term goals without keeping the adequate emergency fund and without buying adequate insurance coverage than in case of emergencies you will have only one choice to manage the situation which is to withdraw your savings.
4. Financial Advisor/Planner
Your financial advisor/planner also plays a key role in your personal finance. Different people have different kind of advisers.
Many take financial advice from Friends, family, Insurance/mutual funds agents, bank relationship managers, share brokers, accountants etc. Many follow some Personal finance blogs or TV shows to work on their financial life, and many have engaged some professionals like (CAs, CFPs etc.) as their Personal Financial Planner.
Whosoever is your advisor, the success or failure of your financial planning depends on the competency of that adviser and how you are following up with his advice. Some questions to be answered before opting for a Financial planner (be it anyone of the above) can be
- Is he taking holistic view of your finances and is able to advise you on all aspects of personal finance?
- Whose targets he follows – his own, his employer’s, or yours’ or no one’s?
- How he’s getting compensated – salary/bonus, commissions, Fees and commissions Fee only or FREE only? In other terms…why is he advising you??
I will not comment on who to select or not as it all depends on your trust that you place on him and your understanding and suitability of the factors mentioned above. But the wrong selection will definitely lead to the failing of financial planning.
The bottom line is that financial planning will fail if you let it to fail. Financial planning will fail when there’s no financial planning happening in the real sense. Get up and take control of your finances and plan for your financial future properly. Beyond all these there are so many external factors affecting financial planning which are not in our control. So better to concentrate on only those factors where you can improve your behavior on.
Do you agree with me on these important factors that affect financial planning. Do share your views.