Friday, 29 May 2015

Financial Planning and Importance

Financial Planning

In continuation of my earlier post, I will try to focus on basic things of Financial Planning.
1.     What is Financial Planning.
2.     What is the Importance of Financial Planning.
3.     Why is financial planning important in our life.

Let me start with a simple language and you will never find me using some financial jargon in my writing. If I use the financial jargon it could sound Greek to all . To start with financial planning, what does it mean to you or everyone or to a layman. It is just a PLAN to achieve your financial GOALs in life. The cash flow to achieve the aspirations of life and not the DREAM. Now to make you understand the difference between the Goals and Dream which needs to be clearly understood, let me take an example. Suppose you are in need of a car after 5 years which is around Ten Lakhs rupees. So you need to start your savings to buy a car which will fulfill your need. But if you try to purchase an Aston Martin or Lamborghini or BMW or Mercedes then you are running after your dreams. Financial Planning is to achieve your Goals, which is to buy a descent car and not to achieve your dream.
Financial Planning takes care of your goals and aspirations and not dreams. So you have to be very clear about your desire, want, wish, dream and Goals. Some common Goals of a Human Life
1.     Child Education
2.     Daughter’s Marriage,
3.     Buying a Flat
4.     Buying a Car
5.     Foreign Tour
And most important is a descent retirement corpus to get a regular income till the end of life  which we generally call as Retirement Planning.

As death is certain but the TIME is not certain, so that is also an important factor in financial planning, which has to be taken into consideration.
            Remember in a human life cycle, normally earning starts between 24 to 27 years of age and ends between 55 to 60 years of age. In a good civil society, an average life span in Indian Sub continent is approx 70-80 years of age. So your earning for 30 years has to be spent over a period of 50 years on an average.

            In Short, the overall management of your incoming cash flow of 30 years which has to be spent over 50 years is called Financial Planning and of course without compromising your existing lifestyle. The Financial Planning is required for all irrespective of a businessman, Well or Poorly paid Salaried employees or even far a highly paid MD of a company or an IT consultant. No one can ignore the fact. Earlier a man start planning, better the Plan Works. Better to start early than to be never….

            So in short I hope I was able to make everyone understand what is Financial Planning. There are end number of examples of Financial Goals. But I have mentioned only few of them. Financial Goals varies from person to person and changes from time to time.

            Why it is important? Now coming to the point, the answer is not so simple and is very much important in human life. Again let me try to make you understand with the help of a simple practical example. Suppose you are trying to build your own Villa or a building. You could buy the bricks, Stones chips mortars, rods and hire some labors and try to build the house. Now just think what the mess will  happen after the house is complete with your own expertise. So to built the house or villa, you just need to make a proper plan, which is done by a civil Engineer, who further makes a blue print before the proper execution is done. So here the Goal is to build the house. To built the house a proper blue print or a plan is required to give a good shape proper strength to your house. Similarly to achieve your financial goals a proper blue print is required. This is the simple reason why a financial planning and a planner is required or it is your money and it is your Goal and it is you who will try to achieve the Goals without any Black&White Plan.
            Fact says, nearly 98% individuals invest money in banks, post office and other instruments without having any plan or just to earn some interest. The Goal should always be linked with the instruments you invest in. Otherwise you will definitely achieve your Goals but not in time like traveling from Kolkata to Mumbai in flight or a Train or a Car or a Cart or even by walking. Destination will come but not in time.
            Another example will make you clear the fact that you are saving your money for your Child’s higher education at the age of eighteen years in a low yield instrument with ZERO risk, which requires 10 Lakhs. But when the exact time comes you see there is a short of 5 Lakhs. How ? These are the facts how it has happened and Why it has happened. Answer is Simple. The time when you were thinking about 10 lakhs has actually exaggerated to 20 Lakhs due to inflation over the years and your investment has not given the same mileage over and above the inflation.

            Now Why you should do a Financial Plan from a CFP?  Its your teeth and you have to take care. Its your health and you have to take care of. And it is also your money so you have to take care of it. Fact is we know how to take care of our teeth and health but not our money or wealth. If you have money you can take care of your health and teeth but in case of financial crisis no one can be of your help except borrowing. Borrowing is not a good solution, rather it solves the problem temporarily but accelerates the future problems.
            As your Doctor knows your health well, similarly a CFP knows Wealth well. A wrong diagnosis can kill you forever whereas a wrong future financial planning may exterminate you and your family when you are alive. This can also be shared by a live example. Just imagine a childless couple in your neighbor or within your family has retired from a Government Service with a handsome amount of 9 Lakhs after voluntary Retirement 10 years back. They have fully invested the money in Post Office for recurring income which fetches rupees 7000 monthly. Ten years back it was descent but now it is hand to mouth and unfortunately if they are alive for more than 10 years then it will be just a MESS.

“If you save your money Properly, Money will save your Future Properly”- Tonmoy Roy

To Be Continued……………………..

This is written only to increase the awareness of Financial Literacy among the interested few. If you like my post, kindly click on LIKE icon and if you want to spread the literacy please share the post. For any questions or concerns please feel free to comment on the post.

Monday, 25 May 2015

My First Blog - CFP (Certified Financial Planner)

             It was almost 8 years back I first came to know about the word CFP. I was always wondering about the qualification required to pursue for CFP, as I was from a Pure Science background. Though my qualification was from a science background, I had a fascination to deal and trade in the equity market which is better known for its sophistication. It was during 2003, when I visited a trade fair in Kolkata, India, I came in touch with a Share Broking Firm Called India Bulls. Since my Childhood I was following the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) quotes in Economic Times but there was none to solve the mystery which fluctuates the price movements in the exchange. I was always following and watching the top 50 stocks and bottom 50 stocks of the exchange. Looking at the bottom stocks ,I found few of them were available at the range between 25 paisa to 45 paisa, and was wondering if I could buy those stocks out of my piggy bank savings. But I had no options to purchase those poorly valued stocks out of these two reasons- I was not particularly aware how to buy and I was too small to visit the Bombay stock exchange or Kolkata Stock Exchange. So during those days I could not figure it out the difference between Savings and Investment.
               It took almost one month for Indiabulls to open my Demat and a Trading account for trade activation. After my account was active, I was too scared as well as optimistic to invest in the exchange. In those days very few were aware of the online Trading Platform. I was too inexperienced to understand the economics and financial ratios of the companies which actually drive the market movements. I had only One Thousand Rupees out of my pocket savings, which I made a demand draft to purchase some stocks. I was little curious and wondering which stocks to purchase. After my little research and recommendation from one of my layman friend I found IFCI which was well within my budget of Rs 16 each. Taking an exposure I bought 100 quantities of IFCI at the rate of Rs. 16. I thought if it becomes Rs 16.50, I would rather sell and make a profit of Rs 50 and invest in other descent stock. But the market behaved in a totally different way than what I thought. The price of the stock dropped to Rs 10 within a week time. Out of my fear and Panic, I sold all my 100 shares at a loss of Rs 600 and my original capital became Rs 400 from my Original Rs 1000. Again within a month the stock resumed and reached Rs 20. I panicked because Capital was out of my savings and Rs 1000 was a very big figure during that time. It was just a learning lesson from my first Investment. This buy and sell had taught me a lesson for life. It was not a mistake from my side, but I was trying to get a lesson from the market behavior. So the lessons that I learned from my first investment are 1) Patience is required in every JOB you take in hand 2). It is not possible to time the Market, i.e when to buy and when to sell 3). There is enough Risk as well as Opportunity in the equity market.
              Coming back to CFP, during those days enough information was not available to guide me to pursue CFP. It was during March 2008, when I joined as a regional Trainer in Pune, I came to know little about CFP, which means Certified Financial Planner. And those who are qualified as a CFP are awarded a CFP marked as CFPCM, which is a professional Certificate course from FPSB,India- Financial Planning Standards Board, India, which is an authorized body of the Parent FPSB,Denver,USA. Pursuant has to go through a rigorous training course on main four papers out of the Six papers- Foundation & Importance of Financial Planning, Risk Management and Insurance Planning, Tax Planning, Investment Planning, Retirement and Estate Planning and the last one is of Practical in nature called “ Financial Plan Construction and Professional Responsibilities”. Definitely it is not a course of every Tom, Dick and Harry but everyone from the Pauper to the King should do the Financial planning from the early stage of life. Someone might say, I earn a lot so I don’t need financial planning. Someone might say I do not have enough money to invest, so I do not need Financial Planning. But it is the otherway round that everyone must do a financial Planning from a authorized CFP, otherwise it will be like purchasing a colorful pill from a pharmacist without consulting a Doctor when the disease is deeply rooted inside the bone marrow…..
To be Continued….