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  Dos and Don’ts of financial planning

     We may be careful about our spending. But we are usually careless about investing. To ensure that you spend and invest wisely, you have to have a financial plan. It involves budgeting your spending, making wise investments, minimizing taxes and planning for a financially trouble free retirement. While all this looks very scientific and rational and financial planners make it seam easy-for the right fee-there are many common mistakes individuals make when setting out to make a financial plan. What should you be on the look out for?

1. Basics: Make sure that you are well-grounded in the basics of all your investments: stocks, bonds and deposits. If a financial plan looks very attractive, but you are unable to gauge it, or you are risk-averse, and then avoid investing your money in it, insufficient research will invariably mean a sub-optimal plan.

2. Budget: A planned budget will help you keep track of your money. If you don’t know where your money is vanishing, this can help you set spending and saving goals.

3. Goals: Are you investing for the short term or the long term? Setting specific targets and determining a comfort level with risk will help you arrive at the right asset mix for you. Your goal and time-frame will determine your investments.

4. Risk appetite: Every investment carries some risk. Deciding how much risk you can take, helps you minimize your loss. Investments with high returns carry the greatest risk. Remember, risk is not constant; it can reduce with time. Stocks do well over the long term.

5. Diversify: Not putting all your eggs in one basket is crucial. The best way to diversify is to have a mix of investments like stocks, bonds and property. Different asset classes perform differently at different times.

6. Monitor: Review your financial situation every quarter and adjust your spending or investments according to the changing scenario.

7. emergency fund: Have an emergency cash fund deposited in an ultra safe bank account or money-market fund, as a protection against unexpected expenses that can disrupt your plans. Even this money will fetch 9% interest income now.

8. Be tax conscious: Your money is worth more to you than to the government. Take full advantage of tax-saving schemes.

9. Start NOW: Don’t think that financial planning is for a time when you get older. The sooner you start planning, the better the start you give to yourself and the more trouble free your financial life will be.

     “People who spend a week choosing a furniture refinisher will sign up with the first FP[financial planner] who calls. People who circle junkyards for matching hubcaps will buy mutual funds without reading the prospectus. People who check the expiration date on cottage cheese wouldn’t think of investigating the background of their broker. They know next to nothing about whether the broker has made or lost money for clients, whether he’s been reprimanded or sued, or how long he’s been in the investment business.”- A Fool and His Money by John Rothschild. This was written by an American for the Americans. But it is equally applicable to anybody anywhere in the world. Now, we shall discuss the don’ts of financial planning:

1. Don’t take media/ads too seriously: Pay less attention to media reports, especially TV. Pay even less attention to ads for new financial products. Avoid buying what everyone buys. Ignore stories of great investment prowess of others.

2. Don’t take hasty decisions: Quick investment decisions can lead to financial disasters. Identify your exact investment needs, analyze the various opportunities available and then plan your investments.

3. Don’t take large debts: To avoid bleeding from debt, you must borrow responsibly. Borrow only to buy assets that appreciate. Don’t roll over your credit card bills. The interest rate would be killing. With excessive use of credit cards, we end up paying far more for things than what we would have paid if we had used cast.

4. Don’t have unrealistic expectations: Financial planning is the process through which you achieve life goals. It is a continuous process and cannot change your situation overnight. Experts and financial intermediaries may highlight huge short-term returns from certain investments. It would be disastrous to extrapolate such returns. There are years when your investment may earn nothing or even lose value. Companies and fund managers are usually poor in anticipating demand reduction, inflation and interest which can decimate your portfolio.

5. Don’t think that FP is only for the wealthy: Everyone needs to plan his/her finances, whether or not a person is rich and each financial plan is unique. With the ever-changing tax laws, changes in healthcare facilities, volatile stock markets, high cost of education, etc., planning finances becomes crucial for all. People also need to plan their finances to achieve goals such as a comfortable retirement and protection against unforeseen expenses.

6. Don’t follow standard solutions: Financial planning is an art. Many planners reduce to a check-box approach. But everybody is different about money. Some people are so afraid of debt that they would spend their last rupee rather than borrow. It is a good attitude but not so smart. You can’t just hand your life savings over to a financial planner and tell him to “set it right”. You will have to do a little homework like reading a good financial magazine. Finally, you are the only person who knows exactly what is right for your situation. Do not turn over absolute responsibility for your finances to the “experts”

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