Plan your money management!

By BankBazaar.com | November 23, 2009

When planning is done for almost everything important things in life, why money be any different? One may argue that money is not an end in itself, so why bother about it. But definitely is an important tool to achieve our goals. For instance, an entrepreneur will be very relieved to realize that his savings and investment in appropriate assets and in right quantum have made up for his retirement and he is not required to work once he decides to do so.

Planning is a very crucial starting point for whatever goal we want to achieve in our lives –  be it an exam, a marriage, a family, a career. We determine the objective (why do this), weigh various alternatives to achieve the objective (how to do it), allocate resources (what I need and how much) and finally schedule timelines (when to do it). As management books say, “Through planning we attempt to bridge the gap between where we are and where we want to be”. It is also said that “One who fails to plan, plans to fail”.

When planning is done for almost everything important things in life, why money be any different? One may argue that money is not an end in itself, so why bother about it. But definitely is an important tool to achieve our goals. For instance, an entrepreneur will be very relieved to realize that his savings and investment in appropriate assets and in right quantum have made up for his retirement and he is not required to work once he decides to do so.

Financial Planning is one of the most important activities to be done by someone, but is actually done by very few. And if at all people make the effort of doing financial planning themselves, they are not well-equipped to do so. Either they lack understanding of various aspects of planning or are not able to take right investment decisions. Instead they fall prey of scrupulous brokers, agents and advisors which work for selling the products and do not really bother how well it suits the requirement of the investor.

Your browser may not support display of this image. Another important aspect of financial planning is that it is not a onetime activity. One has to make changes to his/her portfolio (total investment in various securities) in response to changes in his liabilities, goals, age, etc. For example a fresher may not need a very conservative portfolio consisting of less riskier investments or having less exposure towards riskier investments. Why? At this stage he has no major liabilities. Also he has long term goals like retirement, house and some medium term requirements like marriage. However, he has a regular and possible increasing salary getting added to his account. Even in the eventuality that he incurs some losses due to market, he has an investment horizon within which the losses should turn good and with profits in the long run.

But this can’t be said for a 55 year old salaries individual. It can be assumed that he has his Provident Fund and Pension Plan full with lots of savings, but what he should look at is that his capital is preserved. Putting all the money in savings and fixed deposits which provide returns not even matching inflation, means that the investor in actually losing money in real terms. But at the same time he can’t put money to huge risk-bearing investments.

One has to make allocations to the investments based on his requirements and market expectations. In a distressed market expecting a super normal return will be nothing else but unwise. After making a thorough study of goals and risk tolerance, investor must take a survey of the market and make reasonable assumptions about the performance of the economy and various investments. As one can notice, this is a very specialized job and should be done by experts who have knowledge, skills and experience in this field.

Role of an advisor is to help the investor realize what latter’s goals are, when these are to be achieved and what is the most appropriate way to reach such financial goals. But the job of advisor does not end here. He has to make timely changes in the portfolio of the investor based on changes in the plan and market scenario.

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