Financial and Investment Planning

Financial and Investment Planning

"In preparing for battle I have always found that plans are useless, but planning is indispensable." – Dwight D. Eisenhower

These well-crafted words from a highly-decorated Army General and former US President are a crucial reminder of the importance of planning in life. Financial planning is no different. Even though there are too many unknowns to work out a fool proof plan for the future, but the plan itself is not what is important. The process of guesstimating these unknowns to come up with a projection is what helps you gain real perspective. The best part about having such a plan is that you can keep track of your finances in a more quantifiable way. Let’s face it – if there is one aspect of life where ignorance isn’t bliss, it is your financial health!

The Objective

The idea behind making your financial plan is not to record every small expense or foresee every future financial obligation on Day 1. The main thing to keep in mind is that we are trying to paint a picture of your current and future financial health with very broad strokes! It is important not to get sucked in to the nitty-gritties of the plan right away. We can always keep adding more information and details to it as we go along.

One of the key objectives of financial planning is to also create a suitable investment plan that can help you achieve the financial goals you have in mind. The investment plan will tell you how you can invest your savings into different kinds of products to achieve the desired outcome. It will also help you to judge if your financial goals are achievable with the type of investments that you make.

The Process

The actual process of making the plan is quite straightforward. You can do it yourself if you just decide to put in a little bit of time and effort in collecting the required inputs.

  • The first step is to outline your current financial health. Use your bank/credit card/investment account statements from the last few years to get a quick estimate of the following inputs.

    1. Your total savings

    2. Your current monthly income

    3. Your current monthly expenses

    4. Any other sources of income each year

    5. Recurring large expenses each year

  • That’s it. Most of the heavy lifting is already over. Now all you need to do is to punch in these numbers in a financial planning tool (like this Financial Planning tool), and voila, you will have a first version of your financial plan.

  • There are a few other variables used to build a future projection of your finances.

    1. Inflation – Prices rise every year, as do our expenses. It is crucial to take this into account when planning for multiple years.

    2. Income growth – Most people in the salaried category have a consistent annual rise in income. Promotions and other salary raises are also a factor that we need to include in our estimation.

    3. Pre-retirement returns – No financial plan is complete without an analysis of your investments. How and where you invest your savings is a very crucial part of this analysis. For example, if you invest a major portion of your savings in equities you can expect a return of ~13-14%, but if you keep your savings in fixed deposits then the post-tax returns will be closer to 6%.

    4. Post-retirement returns – For most people, the risk profile and investing traits change drastically post retirement. The returns that you can expect to achieve after retirement should reflect this as well.

    5. Expenses post retirement – There may also be some changes in the household expenses post retirement. Although it may be hard to predict, you can make a guesstimate of whether the expenses will stay the same, increase or decrease by some factor.

The Result

The end result of this exercise is to figure out whether your current spending and investment habits are sufficient for creating a sustainable retirement corpus. If the projections tell you that you can only sustain for a few years post-retirement, then you either need to cut down on your expenses or invest in a way that you can achieve a bigger retirement corpus.

"The best way to predict the future is to create it." – Abraham Lincoln

Trying to predict the future is a fool’s errand. But that doesn’t mean we can’t prepare for it in advance. Financial planning is a simple and powerful tool that can help you prepare well and achieve your financial goals.