What If scenario analysis also called WISA, is generally used in business project analysis which points out unanticipated adversities that can make the project unstable, and thus helps in proactive handling of the situation. In a Non-technical form if we look at this broadly then this analysis can be applied to many other areas in life including personal finances, then we may prepare ourselves for many uncertainties in life.
It’s not only Bad times that we need to be prepared for but also our reaction in the Good times which may not be Good for the financial health. You have to set some rules in any management exercise.
Financial Planning itself is one of the “What if analysis tool”, as it helps in the proactive arrangement of our finances to manage the certainties and uncertainties in a much better way.
You along with your Spouse, Your Financial Planner, and all other stakeholders, need to brainstorm on all the Possible scenarios and try to find the answer to all What Ifs, which you may presume could come up. Some part of it gets covered in the way the financial planning process has been designed, and some are about the management (money and behaviour).
What if, will help you in identifying your Financial Fears, the Excitements, The Biases, and all other scenarios where the possibility of diverting from the process is high.
There are some basic questions when you are at the initial stage of writing the Financial plan for you. Mostly are the Risk management ones. Some of them are:
- What if I lose my job?
- What if I become disabled?
- What if I die tomorrow?
- What if I live longer?
- What if the emergency fund advised does not suffice in future?
- What if the Term plan/health plan advised does not suit my profile later?
All the above and many more such “What ifs” will help you answer the very basic question – “what would happen to your family and you …in case……”. These questions will answer the Requirements of Insurances, Liquidity, and emergency fund in your life. But also when you think over it, you will also think about who will manage the Claim amount, how to file the claim, who you need to seek help from in case of such a situation.
What if, will help you in setting and prioritizing the financial goals.
You automatically will come up with all important goals like- Retirement, Child Education, health issues, etc. when you do the WISA to eliminate financial fears but you have many other desires/goals/queries too which you want to provide for or seek answers for. So to find out their place in a financial plan you need to do some more what-ifs.
- What if I postpone the purchase of Life/health/accident insurance, as I am already covered by my employer, and use the surplus to buy a new gadget or go for vacation? – How will this impact the risk management?
- What if I Pre close my loans now and get rid of my EMIs? – Is this Rationale or Reasonable?
- What if I continue with my loans as I can afford EMIs? – Will this impact the other goals in anyway?
- What if I save for Children education first and later for Retirement as it is too far? – Understand the risks behind the decision
- What if I purchase house first and start with other goals later? – Understand the risks behind the decision
- What if I am not saving enough? Will I be able to achieve my IMPORTANT goals?
- What if my goals have changed? Is this the time to review the financial plan?
- What if my goals keep changing every year? Why is this happening? Why am I Confused?
- What if I am saving more than what is required? Am I living frugally? Or compromising on my otherwise lifestyle or Am happy with that?
- What if Market does not generate the return as expected? – Shall I continue or invest more or Rebalance?
- What if it has generated returns more than expected? – Shall I continue or invest more or Rebalance?
- What if the products I am invested in have not generated equal to or higher than the benchmarks? – Shall I continue or invest more or Rebalance?
- What if they had generated higher than the benchmark? – Shall I continue or invest more or Rebalance?
- What if my investments have not beaten my friends’ stock investment return? – Shall I be in touch with his Financial advisor?
- What if the tweeples are saying they have a better product and will give me higher than what my current portfolio has generated? – Shall I withdraw all I have and buy that product?
- What if the market keeps moving higher, and my investments are more towards defensive, conservative side as per my risk profile? – Would I be concerned or be in peace?
- What if Market falls, and impacted my investments badly since I was into high equity due to my aggressive risk profile? – Would I be concerned or be in peace?
- What if I lose my job tomorrow? – Am I prepared?
- What if I lose my job after 10 years from now? – What can I do so it won’t impact me much?
- What if I live longer than assumed in the Financial Plan? Do I have a Margin of safety?
- What if my spouse dies before me or lives longer? Are there required arrangements so he/she can use the common resources comfortably?
- What if the market falls when I am near to my goals? And what if that goal is Retirement? – How to protect the Portfolio Value?
- What if my Facebook group and tweeple I follow are advising different products then what my financial planner has made me invested in? – Ignore the advice or reconfirm with my Financial Planner?
- What if all this is bothering me, and I am not being able to focus on my work? – Am I confident that my financial planner will take care of all this?
- What if my health, life, accident insurance company does not pay the claim when required? – How to ensure that?
- What if I meet with an accident and get disabled? – Will accident insurance be enough to manage such a situation?
- What if I die tomorrow? – Insurance is there, but what about bank nominations, Will, etc. Do I have arrangements so my family can claim whatever I have done for them?
- What if the financial plan does not work?
Many of these “what ifs” may not be answered instantly and requires a detailed calculation of your finances. and sometimes there is no answer to it, but you need to accept and adjust. But this will surely help you in coming out with your thoughts, preferences and clear cut picture of what you want, and help you in managing the investment and behavior well. And this in turn helps the financial planner or you to come out with a detailed financial plan with all the simulations.
This “what if” analysis helps you prepare in every sphere of life. It will help you in designing the plan B when plan A fails or does not produce the expected results. With “What if analysis” in financial planning, you and your planner
– Can evaluate the feasibility and suitability of the completed plan under unfavourable situations.
– Prepare response plans to avoid or overcome the worst scenario.
– Mitigate the impact of uncertain or unexpected situations.
What do you think? What all What If scenarios could be thought over in managing personal finances.
How about- What if I don’t follow a structured Financial Planning approach?, and What if I do it myself without any professional help and guidance?
Do share your thoughts.