Till about a decade ago, life was simple, needs and wants were few, all one needed was to get a job to raise a family and most of the needs (both short as well as long term) were met through the salary one earned and maybe a paltry / low amount of savings in fewer and simple financial products. However, fast forward to today and the world has changed tremendously. Needs and wants have increased and the costs associated with them are continuing to increase year after year resulting in people beginning to understand the importance of planning for the future. This has brought to the forefront the need to start making sacrifices during the early phases of one’s professional career to work towards building that corpus for a secure and comfortable retirement many years down the line. Economic cycles are becoming shorter and with inflation here to stay, financial instruments are getting more complex. The need for proper financial planning for one’s future to safeguard from financial worries is becoming more and more important as time goes by.
While proper financial planning is a subject in and of itself, in my experience, to increase levels of financial safety and security for the not too as well as the distant future, a person needs to avoid a few basic mistakes listed below:
Having no set goals: Setting goals prior to financial planning is very crucial. If goals are clearly defined it becomes easy to work towards the goals since each goal has different amounts, timelines, risks associated with them and thus, diversification of a portfolio becomes important. Therefore, with the absence of clearly defined goals it becomes difficult to plan.
Saving post spending: One needs to save first and then start spending rather than spending and then saving as this doesn’t work. Your expenses should be accounted for after you have saved.
Absence of a professional advisor: It is critically important to enlist the services of a certified financial planner to create one’s portfolio as this task has become so complex with risks being so varied. Instead of trying to do this by ourselves, it is advisable to seek professional help to build towards a brighter financial tomorrow.
Not planning for contingencies: We may plan towards achieving various lifestage goals and in doing so, it is very important to set aside a contingency fund to help us through any emergency situations that we encounter which may put our income at risk. This fund is to be used only during and for emergencies and not for expensive holidays or shopping trips or even luxury purchases.
Don’t forget the risks: Your goals can be impacted if you have not accounted in the risks associated. While financial planning one must not forget that things like death, disease, disability may happen to anyone at any point of time disrupting your financial strategy. Sound financial planning takes these factors into consideration and protects you against an economic impact of the same.
Not accounting for inflation: While planning, while accounting for a rise on Year-on-Year income, we need to remember that expenses will also increase proportionately. Due to inflationary costs, savings will start to deplete at a higher rate than expected. Thus, not accounting for inflation will paint an incorrect picture with regard to progress towards financial goals. We also need to remember that the inflation rate for healthcare services and education is significantly higher than the Consumer Price Index based rate of inflation.
Not having adequate life insurance cover: Choosing a cover that sounds attractive and is lighter on the pocket but which may not cover risks to all your financial goals is the biggest mistake one can make. In the case of any eventuality, it is this cover which will help your loved ones sink or swim and save them from financial stress. Generally having an insurance cover of 10-12 times a person’s annual income is considered appropriate.
Not reviewing progress: If a person does all of the above then he has taken a giant step towards securing his financial future. However all of the above will come to a naught if the progress of his / her portfolio is not reviewed periodically. At least set a couple of days every year to review how you are doing against the plan. This will give you a fair insight into if the path that you are on is correct or if a few tweaks need to be made to ensure that the goals are not just met but that one gets maximum bang for their buck when it comes to ROI.
Carefully planned finances are a giant step forward towards a healthier financial future. Committing any of the above listed mistakes will be gambling with one’s financial security. Financial planning is a systematic step by step process that can help you evaluate your financial position, goals and aspirations through a clear and well-thought out plan. The old dictum “failing to plan is planning to fail”, still holds true and so by planning your finances properly not only will a person have safety and security of their finances but most importantly have peace of mind.
The author is EVP & Head of Agency, Max Life Insurance