What are the main objectives of Financial Planning?
Despite its rising popularity of late, a considerable amount of doubt still exists around the real objectives of financial planning! And why not? The terms “financial planning” and “financial advice” are not just applied very loosely in our industry, but in fact they are in fact often misused.
For instance, a lot of life insurers tend to follow a robust financial planning process, only to “sell” investors fruitless, low yielding endowment policies at the end of the exercise. What, then, are the main objectives of financial planning ? Here are a few of them.
To give you clarity on your personal budget
If you’re like most people, you likely have “too much month left over at the end of your money”, instead of the other way around! Financial planning can help you greatly in this regard. After all, what good is financial advice if your cash flow is all over the place and you’re always stressed out over your finances? By using technology, a financial planner can help you make sense of your monthly spends by bucketing them into essential spends and discretionary spends, and helping you identify money leaks. At the end of the budgeting exercise, you’ll have more clarity on your cash flows and will therefore be in a better position to build a robust savings plan towards your future.
To set up trackable metrics to monitor your financial health
As Karl Pearson said, “What is measured, improves. What is measured and reported, improves exponentially”. This rings true from the perspective of financial planning and financial advice too. A lot of people live their lives with an innate sense of discomfort about their personal finances, without really being able to pinpoint what exactly is wrong. This is where financial advice related ratios can be very useful. Even simple but powerful Financial Planning metrics such as reserve surplus ratio, savings to surplus ratio & debt to income ratio can have a powerful impact on your financial health in the long run, by putting the outcomes of your money decisions into perspective and allowing you to build a plan to improve your present situation gradually.
To enable you to take informed money decisions
Most of us underestimate the cumulative effect of the small, day to day money decisions that we take. Financial Planning can come in extremely handy here as well. Good financial advice enables you to take money decisions keeping the big picture in mind. Financial Planning is like a roadmap, and having this roadmap in front of you or in the back of your mind ensures that you don’t make big mistakes along the way – such as short-term thinking, speculating excessively, investing into low yielding products for long term goals, borrowing excessively, and such. Financial Planning builds your financial confidence, enabling you to take smarter decisions for yourself and your family.
To reinforce correct investment behaviours
Remember, even the best financial advice is fruitless if it isn’t backed by correct investing behaviours! Simply knowing about the best investment products is just the tip of the iceberg. After all, “how you invest” matters a whole lot more than “where you invest”. This is where financial planning (done right) can be helpful. During the financial planning exercise, an advisor should ideally aim to uncover detrimental investing beliefs and behaviours that could potentially jeopardise your entire financial planning journey. These hindrances should be addressed before dispensing any financial advice, using a mix of scenario analyses, behavioural counselling and expectation setting.
And most importantly… to put you on track to meet your goals
What good is financial planning, or any financial advice for that matter, if it doesn’t ensure that you meet your financial goals? Without goal achievement, financial planning becomes nothing more than a one-time, feel-good exercise. Hence, it’s critical that the financial planning process acts as an enabler for you to meet your goals. Your financial advisor should have adequate tools at hand to keep you aligned to the goals that were during the financial planning exercise, even if those goals are years or decades away. Needless to say, this is a challenging task – and goes beyond just dispensing financial advice off the shelf. You and your advisor should regularly revisit your goals together and work on a short term and long-term plan of action to make sure you meet them. Only then can the financial planning exercise be deemed a success.