Why we fail to plan our finances?
Indian retail investor is slowly coming to terms with the significance and needs to invest in equity and equity related instruments to achieve their long-term goals. Investors are realizing that with the ever-increasing medical, education and monthly household expenses, savings stacked up in bank savings account and fixed deposits, unfortunately, won’t be enough to achieve long-term goals.
Inflation, as we all know is a monster which reduces the purchasing power of your savings year on year. So, if your investments are not generating inflation-beating returns, you need to rethink and rethink quickly because with each passing year, your investible years are reducing and thus chances of you creating a corpus inline with your goals will diminish. This is a harsh reality which each of us ignores citing busy schedule and delay year on year. Probably we will realize the mistake probably nearing retirement or when you need to immediate plan for expenses of children education, marriage, and other significant, nonnegotiable long-term goals.
There are some encouraging signs now…
Record inflows into domestic mutual funds initiated largely by retail investors is an encouraging sign and it should continue, especially if and when the market experiences a steep correction. Investors should have their SIP’s mapped to their financial goals and not to a particular index (such as Nifty, BSE) target. Investors who have recently started investments in the equity markets systematically through SIP’s must continue them in line with their goals and shouldn’t book out if there is a steep correction as market never moves in a straight line. Investments should be dictated by investor’s risk profile, investment horizon, goal to achieve. Proper asset allocation is must for any successful investment strategy. For SIP’s to continue even if the market turns volatile, it is prudent to link your investments to your goals and for that, you need what is called ‘Financial Plan’.
Need for a financial plan
‘Planning’ is not limited just to your finances. If you have to achieve and fulfill a particular goal, you plan and then vouch for it. Same applies to our financial health. If you plan well and more importantly plan early, it will pay you rich dividends in the long run. Don’t be too perturbed by the amount you can set aside for your long-term goals. You can start a SIP in a mutual fund with as low as 500/- per month. It is important to get into the habit of investing and investing regularly. It is very common among investors to start investing in equity markets only when markets are at an all-time high as there is left out feeling. Investing randomly and trying to time the market will not take an investor anywhere. A big loss in equity markets because of a random investment in untested companies can drive an investor out of equity markets forever. Probably as an investor we realize this mistake as we near our retirement or when for instance, we will have a major expense staring at us all of a sudden such as retirement wherein there. Financial planning will make your thought process crystal as regards the purpose of investing in a particular investment product and will also limit the urge to redeem the investments before the goal corpus is met.
What can lack of financial planning lead to?
Mistake of not planning for our goals strike us as we near our retirement wherein there is less inflow and more outflow of funds, arranging funds for child’s higher education and marriage at a life stage wherein taking new liability in the form of any kind of loan won’t be a natural choice, ever-increasing medical expenses post-retirement eating into your retirement corpus all of a sudden. Possible consequences can very well be delayed retirement, negotiating on some of the life goals you may not want unable to avail best of medical facilities post-retirement due to high medical expenses, not spending on your passion which you always wanted to pursue post-retirement due to lack of funds.
Why we don’t plan for our finances:
Procrastinating the financial planning discussion year on year – Most of us know inside that we need to have a plan in place as far as our finances are concerned. But we seldom discuss our long-term goals plan with our family members. There’s always that hesitation to discuss the life goals and plan for it among the family. We very well plan our monthly expenses but nothing beyond that. Significant life goals such as retirement, children education, and marriage seem far away and not meant to be discussed at the present moment.
Lack of trust as regards source of seeking financial advice – More often than not we all must have started our financial journey by an unpleasant experience of an agent selling us a ULIP policy instead of a sensible advises of initiating investments in equity mutual funds. We realize such a mistake after few years down the line and feel cheated. Post such an experience, there is always a hesitation to go out and seek financial advice from a professional money manager.
Feeling of having enough: With a huge stash of cash in the savings account and property buyout as an investment, we often have a false sense of financial security. We forget to factor in inflation and cost of our life goals at that particular time. Since we feel that all our finances are comfortably in place, goal-based financial planning takes a backseat. Calculating each life goal, taking inflation into perspective will throw some interesting numbers.
Investing randomly in various financial instruments without proper thought process – We all buy financial instruments but randomly without proper thought process going into it as to which goal a particular product will satisfy. If you have a financial plan in place, you as an investor can easily make out if a particular financial instrument fit into your overall investment strategy or not.
Shunning equities altogether and over-reliance on FD’s – Shunning a particular investment product altogether can be detrimental to your financial health. You will not become rich or achieve your long-term financial goals by shunning equities altogether. Make an investment plan in line with your risk profile, investment horizon, asset allocation and follow and track it periodically.
Following traditional family investment methodologies blindly – With changing times, new investment avenues and methodologies have evolved. With various regulations in place, equity investments and other financial transactions are now lots more transparent.We will need to change with changing times and should get benefitted. For instance, the Public provident fund (PPF) come as a natural investment avenue to most of the retail investors since the family has been following that since ages. PPF still makes up a good debt instrument but investing only in a debt instrument for long-term goals won’t be a prudent thing to do. For instance ‘Equity Linked Savings Scheme’ can very well give an equity flavor to your goals besides saving tax. Early in your career, you can ride off the volatility easily as you don’t have too many commitments at your side. Starting a SIP early can do a world of good to your end corpus due to compounding impact.
Have you planned your finances?
Have you planned your finances? If yes, Congratulations!! You are on the right track. Do share with our readers as to how you have gone about it and when such a self-realization struck you. If you haven’t done that, do that without fail as soon as possible and also share reasons for not having a financial plan yet. You can also seek an expert advice who can provide you more clarity as regards your current financial health and how to go about investing for long-term goals in line with your risk profile, time horizon, and appropriate asset allocation.
All the best!!
Disclaimer: The write-up is for information purpose only and is not a recommendation of any sort to the readers. Mutual funds are subject to market risks. Please consult your financial advisor before taking any financial decisions.