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Archive for the ‘Financial Planning’ Category

Financial planning is similar with budgeting in terms of objectives – to produce positive cashflow by either increasing the income or reducing the expense through various interventions.  Their only differences is in terms of scope.  Budgeting is short to medium term and covers from the daily to the monthly allocation of assets and the management of liabilities.  While Financial planning is medium to long to lifetime and encompasses from the bi-annual to an entire lifetime.  A budget deals with the everyday financial scenario while a financial plan directs the assets and liabilities to achieve a more abundant status.  In short, this plan is about making and keeping you rich and wealthy.

This type of financial planning is basically the utilization of Christian ethics in the conduct of financial planning.  Like in the scriptures, God has made clear that those who stay awake and stand guard against trials will be easily spared.  Builders are also told to plan their constructions as to avoid shortage in materials.  Kings are also warned against fighting a war in which they are heavily outnumbered and disadvantaged.  Christian Financial Planning also entails the application of timeless Christian morals like honesty, humility, unselfishness, concern for the poor, unworldly conduct, stewardship and Christ-centeredness.

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Well, why not?  If you are a devout Christian or knew someone who is, you will notice how Christians properly conduct and deal their finances.  They do it with the outmost devotion to God as a form of service to His beloved people.  Christians also humbly regard themselves as mere stewards of the wealth that they currently possess.  They are therefore generous in sharing and growing this abundance with others.  In effect, a Christian financial plan is a plan of prosperity and generosity.

Just like the Great Flood in Noah’s time, big challenges that can leave us crippled are just around the corner waiting to happen.  It’s no longer a question of what but when.  Noah planned and prepared for the Great Flood while the rest of humanity laughed and mocked at him.  When the 40 days and night of rain drowned the merry-makers, they weren’t amused.  Just like time and again, the people have been warned to build their “arks” of savings and nest eggs.  This  financial planning means building your finances for the hard times ahead while observing Christian virtues.

This financial planning is advantageous in these times because it eliminates the need to circumvent public welfare when gaining or preserving wealth.  By having a Christ-centered financial plan you will be free from the worries of the law of man or God.  Your righteous wealth plan will be above scrutiny and you will be blessed with an honest and bountiful harvest.  It will honor the Lord and you will partake in His works.  Another hallmark of this financial planning is accountability for your decisions, actions and the results.  As a Christian, you are ultimately responsible for yourself and you will answer to God who will weigh your scale.  By being accepting of the consequences, we are now in a much better position to improve our lives.

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Most people are good at handling their finances – they ensure that their bills are paid on time, they manage their grocery shopping, they leave aside some money for entertainment, etc. But when the term ‘financial planning’ is mentioned, they either feign indifference or pretend that they have it all figured out. But the million-dollar question is – are they doing the right thing?

Financial planning involves looking at the big picture with regard to one’s short term and long term financial goals. One identifies certain life goals such as saving up for their children’s education / marriage, saving for one’s retirement, buying a house or a car, etc. Having done so, one needs to follow it up with a systematic financial plan to reach these goals.

According to a well-known phrase -If you don’t know where you are going, any road will take you there. The reverse of this is also true, if you have certain life goals, you must ensure that you start planning or else you might not be able to retire with a nest egg or be unable to afford your children’s educational expenses.

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Financial planning is not one of the most exciting of activities; however, by doing so and sticking to your plan, you will be rewarded with less hassles and tensions, especially during your old age.

It’s never too late to start financial planning. However, the earlier you start doing it, the more beneficial it will be for you. If you are a student or a professional in the early stage of your career, make sure you do not delay financial planning until later.

You do not have to be a financial wizard to start financial planning. Here are a few steps through which you can begin financial planning:

Maintain a notebook, wherein you must write down your long and short term goals. Another way of doing so is by maintaining an online journal.
Take an inventory of your current financial position. Calculate how much saving you have and also how much is your monthly income and expenditure. Also note down all the assets that you own and the debts that you owe.
Ensure that you have sufficient insurance cover as well as medical insurance for yourself and your family. See to it that loved ones will be taken care of, in the event that something were to happen to you.
Lastly, you can pick a goal and create an action plan for achieving it. For eg: If your goal is to buy a house, find out how much you will need for the down payment and what is your current financial position. Then, you can work out the difference and accordingly create an action plan to make up for the shortfall.
Do revisit your diary and track your progress regularly.

Having understood the importance of financial planning, it is essential that one starts doing so at the earliest. However, if one finds their financial situation complex or is unable to make decisions, then they should consult a professional financial planner.

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– based on a survey conducted by Financial Planning Association& advisory firmAmeriprise Financial.

The dramatic events of the past few months have prompted many people to take equally dramatic steps: to get out of the stock market altogether, or to drastically alter their savings and investing plans. The same group, who were happily investing when the sensex was at 21000, are now selling when it is down at 8000 – 9000 levels booking huge losses, sometime more than 50%. Is this the smart thing to do? Many a time in past, we have seen that what may seem like a smart decision in the short run could end up having unexpected and unpleasant long-run consequences.  

So how do we tackle this scenario as a well meaning Financial Advisor of our clients, who are puzzled beyond their wit’s end. How do we play the old  record of “Don’t panic” which they have been listening so many times—from politicians, economists, CEOs—since the current financial crisis began. Not to panic is an excellent piece of advice, but it can be very tough to follow, especially when everyone else around you seems to be doing exactly that: panicking. But if there ever was a time to stay calm, cool, and collected—and to stick to a Financial Plan—that time is now.

Let’s look at the course of action we should adopt for our clients now, which may help to regain  their financial health and wealth.

Changing asset allocation

Before the client considers a major change in their asset allocation plans, ask them to take a hard look before they actually do anything dramatic. The first thing to do is to review their overall plan (if they are having any): This is a perfect time to answer questions like, What are my goals (short-term which is less than one year, medium-term defined as one to three years and long term beyond 3 years)? Do I have enough leeway to absorb the losses, which I have incurred? If not, do I need to change my goals?

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Answering these questions rationally will help to clear lot of confusion among their minds regarding their investing health.

Take the case of Mr. Amar, who is essentially investing for the purpose of building a corpus for his retirement which is 15 years from now. In that case he may still be on track. As in that in all probabilities recovery will surely come. It’s important to understand that fall like is part & parcel of the investing cycle.

On the contrary if Mr. Amar is only a year away from retirement and if he is sitting on a mountain of losses, the situation is far worse and needs a disaster management plan, where we may have to deal with scenarios like ‘earning more’, ‘saving more’, ‘spending less’, or ‘delaying retirement’. All these options have their pros and cons, which we need to figure out before taking a balanced decision.

The bottom-line here is that you should induce the client to ask himself, how much are the losses relative to his goals? Does he need to play defense, or can he stay invested and wait for the recovery? Thus by helping them to take an ownership of their financial decisions, you are making them more aware and more responsible towards achieving their financial health. This is the inherent benefit of quality Financial Planning.

Continuing the process of investing

In troubled time like this it’s easy for client’s to say, ‘It’s okay not to save aggressively because if I put money in any financial product, it would just go down anyway.’

This assumption can lead to a huge mistake and rather the opposite is true. If you’re sitting on heavy losses, the amount you need to save has actually gone up & when markets are down, a regular investment plan is even more important.

Having an Emergency Fund in place

Another form of savings that takes on enhanced importance during a downturn is an emergency fund. Having a fund on hand to deal with unexpected expenses provides peace of mind and can help keep the overall financial plan on track.

Ideally this emergency fund can be a pool of demand deposits, which can cover for 12 to 15 months minimum monthly expenses for the concerned person. Create this liquidity for a client only when you see that the regular source of income of your client may suffer in near future.

Creating a spending plan

There are other ways to bring more stability to unstable times. Take a look at the spending habit of your client and make sure they keep their spending under control by creating—and sticking to a budget. Most of them, if they belong to the young or upwardly mobile generation are used to spend, spend, spend.

Cutting down your credit

Mr. Khemka went to a nice restaurant for lunch. He ordered each of all the items on the menu. Food was delicious which he thoroughly enjoyed. He ate for almost two full hours and exhausted with the amount of intake was about to leave. Then came the Bill of Rs. 5000/- ; and he complained that he had only ordered for the food and not the bill.

The above incident seems to go a little overboard. But don’t you think, we also go overboard when we are on a spending trip & that credit card in our pocket makes us artificially rich. We need to tell our clients that they should control that urgency of buying ‘present’ with money, they will earn in ‘future’.

Creating a Financial Plan for your client

Your child needs a career plan; your boss needs a tour-plan; your company needs a media plan; if you need to start a venture – you need a business plan; if you want to build a house – you need a floor plan.

For every sphere of your life, you need a plan. This plans fixes the target for you and when you measure the actual achievement vs. the planned numbers, you know how far / near you are from this target. It helps you to become more disciplined in allocating your resources and give you a better grip on things around you.

If that is correct – then why don’t we actually write a Financial Plan for our client. The plan will talk about their goals, their risks, how to cover the risks, retirement needs, asset allocation plans, tax minimization scheme and detailed year to year cash flow & net worth studies.  

I started this article with the findings of the FPA survey – which shows that a client with a written plan will be much more balanced than a client, who doesn’t have one. I believe the clients are ready for their plan; the question is are we as Financial Planners ready to serve them?

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December is a superb month to assess your financial plan. Since it is considered a holiday month, all of us should take the means to look at our financial matters. When January arrives, we shall have an apparent idea of the financial solutions for 2011. People with no financial baggage will surely enjoy his or her holiday season.

To develop a financial plan covering the key aspects of your life is truly a difficult task. Firstly, it takes technical know-how regarding the key facets of financial planning: risk management, liability and cash flow management, investment, tax, estate, and retirement planning. An extensive financial plan is bundled, consisting of various needs and goals. The task by itself can be scary since it is, in fact, an evaluation of your financial health.

However, people who have a financial plan realize that their own financial goals are usually clearer, thereby easier to attain. The plan also shows them a route for creating and preserving wealth.

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Completion of a monetary plan shows the following:

The net worth: Whether all of us possess bigger portion of assets or bigger portion of liabilities.
The cash flow: For many, it is a concern of how massive the deficit is.
Whether all of us have sufficient insurance protection for the loved ones if we die too soon.
Whether the investments are making the profits that we had wanted them to be.
Whether we are going to accumulate sufficient money to stop working after retirement age, or need to continue working.
The value of the estate as well as the amount our heirs could be inheriting upon our demise.

Performing a complete financial plan is quite similar to carrying out a complete medical check-up. It can be frightening but necessary. And, the majority would require help from a competent financial planner.

The very first financial plan is definitely the hardest to make. Subsequent evaluations of this plan will be simpler, unless your initial plan has been done longer than five years ago.

Events that need an evaluation include:

Change in earnings: maybe you were promoted to a better position, changed jobs or maybe opt for voluntary separation scheme.
Increase in certain liabilities: You’ve got a new baby or just bought a new car.
Change in marital status: You have just married or divorced.

The ideal practice is always to look at your own financial plan annually. You can certainly do it on your own if you possess the proficiency and allocated time, or opt for a financial planner.

No matter what stage of career you’ve reached, or even if you’ve retired, there’s a number of key questions that you should be able to answer to give yourself the confidence that you’ve addressed all the important areas of your financial planning.

So, today, I’m going to run through the key areas that we run through with each client to take a ‘barometer’ of their financial planning health.

Let’s get started.

So, have you…?

1. Really thought about what you want for the rest of your life?

The dreaded ‘setting goals’ part…You’ve already done this for your career and no doubt in other parts of your life as well. So, now’s a good time to take stock and think about how you want your life to look from now on. It may well be that it’s in tip top order and nothing needs to change – the key is to go through this ‘discovery’ process with you and your significant other.

2. Fully organised your various assets and analysed how they will help you achieve your goals?

A major goal for all doctors and dentists is planning towards retirement. I presume you have other goals as well, ones that will require money to achieve? So, the question is: will what you’re doing now with your finances allow you to achieve your most important goals? You may or may not know the answer to this. After all, it can sometimes be difficult to work out whether you’ll have enough money for your future.

3. Completed a detailed expenditure plan so that you’ll know how much money you’ll need to live the life you want when you stop working?

How much money, after tax, will you need to fulfill all your goals once you’ve stopped working (and the salary/net profits have ceased)?

£3,000 per month?

£5,000?

£10,000?

What’s YOUR number?

This exercise is crucial and it’s what drives many of the financial decisions that you’ll face between now and giving up work.

4. Created your own Financial Forecast to show when your ‘Financial Independence Day’ will be?

At what age COULD you give up work if you chose, even if you decided to continue working? Financial forecasting will allow you to see your financial future and help you make your financial decisions. Now, it probably IS possible for you to do this exercise yourself, maybe using Excel or a similar tool. However, I would advocate using the services of a financial professional that provides this sort of analysis. Not all do, so you may need to do some detective work. A good place to start is the Institute of Financial Planning’s website.

At the site you’ll be able to search for Certified Financial Planners (you’ll find yours truly on there). Whilst that will not guarantee that they offer financial forecasting to their clients, there’s a high probability that you’ll find one that does.

The KEY benefit is that you’ll be able to work alongside someone that is able to provide you with an objective viewpoint without having an emotional attachment (that inevitably you and your friends or family would have).

5. An overall written Financial Plan and Strategy to guide you over the years?

If you’ve taken the time to take action on the steps above, the KEY is to implement your plan. What action do you need to take to increase your chances of achieving your most important goals?

You’ll probably find that there’s quite a bit of work involved initially, but if you set things up the right way, the ongoing time required to keep your financial plan on track should be minimal, especially if you are using a Financial Planner to drive’ the whole process for you.

Yes, ok, I’m obviously a little biased in my comments seeing as I earn my livelihood from working as a Financial Planner. But let me ask you a question.

How valuable is your time?

Looking at it another way, do you do your own accounts each year?

Exactly! So why spend hours each year trying to learn a skill that you can outsource to a competent professional who performs that role all their working lives?

Choosing the right Financial Planner is a very important decision. Take your time and make sure they are offering a long term strategic financial planning service, rather than a product retailing service (which actually may be fine if that’s all you need).

And make sure you pay them a fee for the service they provide. If they only work on a commission basis, guess what will probably happen at some point in your dealings?

Think about it, how else would they earn an income if you don’t buy a product? (that’s not to say commission is bad – I just believe it should not be used to remunerate a Financial Planner who is providing you with a comprehensive financial planning service).

6. Made sure your Wills are up to date? (assuming you have one)

You do have a Will, don’t you?

If not, this step is crucial. Let’s say you’ve gone to the trouble of putting in place all the steps highlighted. By not taking this last step, all your hard work could be undone. Without a Will, you would die ‘intestate’ and your assets would NOT be distributed in line with your wishes.

So, contact a solicitor and get it set up! The cost is not too much and once you’ve done it you’ll be able to tick another box on the road to creating your robust financial strategy

Whilst you’re getting the Will sorted, ask the solicitor about setting up Lasting Powers of Attorney. In brief, These are legal documents and they provide consent to another party to act on your behalf to deal with your relevant financial matters should you be incapable of doing so.

7. Investigated how much risk you are taking with your investments?

If you have ANY money invested in traditional investment schemes such as personal pensions and equity ISAs, you owe it to yourself to take the time to analyse how risky your investments are. Sadly, some medics and dentists believe they have diversified their risk simply by holding a number of funds within their ISA/pension. But what if all these funds are equity based funds? It’s entirely possible that they are taking too much risk with their money but may not necessarily have access to the right information to make better investing decisions.

8. Analysed how much risk you SHOULD be taking?

Even if you have a good grasp of how much risk your money is exposed to, do you actually know whether you should be taking more or LESS risk in order to achieve your goals? For example, if you’re on track to achieve all your goals, you may be able to reduce the amount of risk you are taking and still remain on track.

9. Checked how much you are paying in investment costs?

When you invest any amount of money into ‘mainstream’ products, such as Equity ISAs and personal pensions, a certain percentage of your money will be taken in charges levied by the investment company/product provider. Typically, these may include:

sales/advice commissions initial charge for the investment (usually ranges between 0-5%) ongoing annual management fee other fund expenses (known as Total Expense Ratio) trading costs within the fund(s) Now, I appreciate that delving into all this may not overly excite you. That’s fair enough. But just because you don’t have the time/interest/inclination doesn’t mean you should ignore it!

As with point 5, get it outsourced to a competent professional. The end result you’re looking for is to check how much you ARE being charged and whether you are able to reduce these, where possible.

10. Recently completed a proper psychometric risk evaluation?

What makes you tick? Do you know why you’ve made certain investment decisions in the past? What influences your decision making process? Rather than simply judging your attitude to investment risk on a scale of 1:10, you need to go ‘deeper’. There are tools available to help you understand how you make financial decisions and how to improve your ability to make these important decisions. Ask us, or your financial adviser/planner, for more information.

BONUS STEP

11. An Investment Philosophy to take you through good times and bad?

Does your investment portfolio consist of a collection of funds that perhaps were selected a number of years ago (and have not been reviewed since), or do you have an investment philosophy that underpins all your decisions?

It’s probably fair to say that many medics and dentists will fall into the former camp, although that’s often the case because their financial adviser/planner has not developed an investment philosophy of their own. Ask your adviser/planner (if you use one) what philosophy they are using for the management of your money.

So there we have it. If you’ve read this far then you’re obviously serious about your financial future. Now all you have to do is take action and make it happen!