Saturday, December 17, 2011

Financial Planning-

(An article in the Economic Times, by an 'expert' set me thinking... Financial Planning sure is complex.. The article went round in circles and ...) This article appears in the latest issue of Moneylife FINANCIAL PLANNING OR ADVISE? CHOOSE CAREFULLY.... Recently I was reading an article by an expert on ‘Financial Planning’. It was amazing and an eye opener for me. Apart from talking a lot of gas, his expert advice stunned me. In brief, he said that everyone must save one third, spend one third and the balance one third (all of “NET income”) can be used for meeting debt repayments. Suddenly it struck me. No wonder I can’t plan for myself. In all my years, I struggled with such a poor income that I had to foolishly spend almost ninety percent of my “NET” income on useless day to day things. Only if I had received this sound advice when I started my career? By now I would have been filthy rich. Whether I would have physically survived is a different issue, considering that most of my expenses were towards daily needs. Of course, if you earn enough just to make ends meet, you are of no use to anyone in the financial services industry, since you cannot generate enough money. I also did not have enough borrowings to meet the criterion of having to use ‘one third of my net income’ to be used for repayments of loans. I borrowed very late in life (since in my early days, I did not have enough of margin money to put up as my skin in the game). Also, to keep my expenses within one third, useful hints included “Keeping a limit on unavoidable expenses”, “negotiating”, “bargaining” etc., In “Negotiating” it included such day to day expenses like “room tariff’ in case of hotel bookings etc., The piece also included some hints on using online shopping. By inference, financial planning appears to be a tool for the very high income earner only. Spend restricted to one third of ‘Net’ monthly take home pay. Save at least one third of ‘net’ take home. Does it mean that in reality I save more than one third of my gross? Also, what about my personal situation? Does the one third rule hold good whether I am single, double, have kids, no kids, have house or not, ..? What if I cannot live within one third of my net salary? Does it mean that financial planning is not for me? I always think that if you have to ‘plan’ something with a calculator, it is not worth planning. Salaries and prices keep changing, needs keep changing. So, savings for me is actually a residue. If you earn enough, then you put away something regularly. Now we have a plethora of choices, so I make mine depending on my greed and stomach to take risks. Of course, I have goals. Those goals certainly depend on what I earn and what I can spare. I think one cannot have a goal and then work out the finances. Things have to move from the realm of possibilities to certainties. Only then will I aspire for something. Surely, if I do not save enough, no planner can help me reach a dream. A dream has to be within the boundaries of probabilities. Yes, maybe I may need help in choosing a reasonably good path to get there and a financial advisor may help. Should I make a distinction between the role of a financial planner and a financial advisor? I think it becomes absolutely necessary. My planner should not be compromised because he is also an authorised seller of some product and he gets a commission from that. It is essential that I pay my planner a decent sum so that I get good help with my finances, rather than rely on some “one third” nonsense that I read in the papers. A good financial planner will start with what I have, what I can expect to earn and save rather than ask me what I want and pre-decide what I should save. If he listens to me, prods me and guides me, he has done his work. I can always turn to an advisor for choosing a product or do it myself. In this way, I do not dilute the quality of advice my planner gives me. I think this is extremely important. I do not like those planners who offer ‘planning’ for a fee of nothing to a thousand rupees and then send me forms of mutual funds and insurance products or bonds etc., I want a planner who does not use a silly template and then classifies me as ‘moderate’ ‘aggressive’ or ‘foolish’. I want him to spend time with me, understanding what I have and what I need and giving me paths to choose. That would be the best thing a ‘planner’ can help me out with. I clearly think that the planner and advisor should be separate persons, in order to avoid any conflict of interest. It may be worth having an annual contract with an advisor, where we pay him an annual fee for spending some time with us, holding our hands in money matters and then guiding me. Here, I have to change my mindset about getting ‘free’ advice. The person, who gives me free advice, has no commitment and I cannot hold him responsible for anything. But one thing is clear to me. Financial planner and financial advisor are two separate persons, not from the same organisation and I need them both, perhaps. November 26th- 2011

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