Is Financial Planning Meant Only For The Rich?

Most individuals have dreams and desires for themselves as well as for their families. It does not matter whether the individual is rich or not. A financial planner’s job is to convert those dreams and desires into money terms.

The middle class has targets to achieve and income to be earned to help them achieve their goals. What we normally ask every individual is to list how much money they need and when, and for what purpose. We ask for the amounts in today’s value and give an estimated future value. Besides listing the goals or desires that they have, we also ask that they rank them based on priority, so that we know what can be sacrificed in case the funds fall short of meeting one or some of those goals.

I often come across investors who want to delay their financial planning exercise to a time when they have “sufficient” funds. However, as human beings, we keep striving for more. In fact, no one would like to bring down the standard of living that they are used to. So, postponing planning to when you have sufficient funds is like saying that I will plan where to stay, and what to do on my holiday from India to the Far East only when I board the flight to my destination. What gets measured gets done, and thus setting a financial target is the first step in creating a dashboard to check one’s progress.

On the other hand, even the rich have goals. But the difference is that, for the rich, the funds or the corpus available today is more than what is needed for the goals. For them, financial planning can play a role for a portion of their assets to be deployed for these goals. The extra or surplus assets can be invested in an extremely aggressive manner (since the goals will not be compromised) or in an extremely conservative manner, where protection of the surplus assets is the goal. That is the added benefit that they have.

Why Is Goal-Based Planning Important? Wouldn’t Goals Be Automatically Met If I Have Enough Wealth?

Goals can be sequenced chronologically or based on the individual’s priority. Some sort them based on size, others on the fact whether these goals need to be met in full or in different parts. Each of these goals may have a different inflation rate as well. For instance, goals for medical needs have higher inflation than those for education and those for regular expenses. Those need to be taken into account while planning.

Thus, the timing of the goal and its purpose makes a difference. Some of these have a fixed time, such as the dates to pay the semester fees for education. Some can also vary, such as the amounts kept aside for a holiday. However, the paths to accumulating funds for these goals will be different, partly because the number of years to approaching these goals and withdrawing the funds for them will be different. As we approach the goals, we reduce the risks so that we are less impacted by sharp movements in the values of our investments.

If you do have enough wealth and want to be lazy about managing your money, you could have a situation of remaining in sub-optimal asset classes, such as savings bank or fixed deposits, even though the time horizon for the goal is over five years away.

The other extreme would be someone having all the funds invested in equity markets as they have more than sufficient wealth and, hence, can afford to ignore the risks of sharp falls in the equity market. We remember the recent phenomenon of equity markets falling 35 per cent in a short period of six weeks in March 2020 during the onset of the Covid-19 pandemic.

But it is also important to understand that even as we are living life according to our own set of plans, the vagaries of life intervene at the most unexpected of moments and circumstances. At that time, we will feel secure and satisfied that we have been planning for our goals for a while and hence we have made at least some progress in accumulating funds for those goals. It would hence be foolhardy to assume that just because we have enough wealth, our goals would be automatically met—even if they are, they would not be in the most productive way.

The author is the MD & CEO of International Money Matters.