For most investors, a plan is not a preferred way to start their investing journey. I get more people asking me about which mutual fund to invest in than asking how should I approach money decisions and structure my portfolio to meet various goals. I hope today you change your mind.
How a financial plan helps
An investor approaches investments quite like popping a Saridon for headache or a Paracetamol for fever. But what if the root cause of the headache and fever is a bad stomach. You are treating the symptoms and not the actual disease. Now, do this pill popping repeatedly and it can lead to chronic gastric issues. Basically, you worsen the problem. (Ask me!)
With investments, this is akin to making random investments leading to a bloated portfolio. A financial plan helps you avoid this path. You take a structured approach to understanding your money situation and make some of the most critical financial and investing decisions with ease.
I understand it may not be easy to fathom how. Hence, using my experience so far, I made a list of 50 decisions that a financial plan can help you with. Most of them are real decisions which investors make.
Financial plan helps you with 50 decisions
Here they are. The list is not exhaustive.
- Should you buy a home (using a loan) or stay on rent?
- Should you purchase another property for investment and rental income?
- Can you move into a bigger home?
- Can or should you buy a holiday home?
- Should you prepay home loan or invest in Mutual Funds?
- Should you sell some of the real estate in your portfolio?
- How much can you spare for education of your children?
- Can you afford to bring up one more child / Can you adopt another child? (Yes, this is real!)
- How soon can you replace your car? Every 3 years? 5 years?
- Can you plan to buy the Tesla 3? Should you buy that car with a loan?
- Should you prepay your car loan?
- How prepared are you to suffer a sudden loss of income? Is the emergency fund sufficient?
- What about meeting medical needs of a senior family member with little or no insurance?
- What about caring for a special child (specially in your absence)?
- Are you insured enough so that your financial dependents are taken care of?
- How soon can you retire? When can you stop working for money?
- Between the spouse and you, can one take a career break or stop working at all?
- Should you retire early or do more sabbaticals and work till 70?
- When can you shift to the hills?
- Can you start your own venture? When?
- Can you fund your daughter’s/son’s venture?
- Can you set up a charity or a fund for supporting social causes?
- What about gifts / inheritance to the children?
- How soon can you generate a passive income? Should you generate a passive income?
- How prepared are you to live till 100? (life expectancy is going up)
- Can you chase more goals (over and above what you have in mind)?
- Did you think of the house refurbishing required after a few years (yes, even after retirement)?
- Can you chase your goals faster (in less time than than you think)?
- Where are you today, financially?
- How diversified is your current portfolio? What is a good diversification for you?
- What’s your portfolio liquidity and expected rate of return?
- How much of your portfolio should you invest in equity or equity MFs? 10%, 20%, 50% or 80%?
- What is the required rate of return to meet your goals?
- Is investing in VPF a good thing for your portfolio?
- Do you need to drive your portfolio investments harder? or yourself harder?
- How much should you withdraw from your portfolio? (For those who are retired)
- Do you need to work more before you can touch your portfolio? (for retired)
- How tax efficient are your investments? Are you paying more tax than you should?
- Should you start with lower risk and increase over time or should you jump in whole hog?
- Should you stick with standard publicly available investment products or go for the exotic?
- Should you continue with your Endowment or ULIP?
- Should you invest in mutual funds or the fancy AIF or PMS?
- Should you choose bank FD or debt fund?
- Should you buy index funds or actively managed funds?
- Does that small cap fund in your portfolio serve a purpose?
- Should you opt for dividend option or growth option?
- Should you invest the lumpsum amount now or over time?
- How frequently and how much should you book your profits?
- How much effort is required to manage your portfolio?
- Does your portfolio allow you to sleep peacefully?
As you will realise, the decision list is about your own desires, fears, concerns and challenges in using money and investments. A financial plan aims to address these and make your portfolio and your actions more focused towards what is important to you.
Each investment option is meant to serve you and by having a financial plan, you can choose the investments for your needs/wants/whims/scares.
While it is tempting to take up a decision as you face it, a financial plan helps you set the overall perspective about your goals, money and investments.
Not just that, you find yourself focused towards leading a better life and not just chasing returns – a question of direction vs speed. It is important to get the direction right first.
As I have noted in my interactions, the worth of a financial plan is realised after you do it. It’s redeeming how the new found awareness can enable you to use the money to shape your life, your way.
It’s worth a lot.
Between you and me: How do you make your financial decisions? With a financial plan? Do share your experience.
If you don’t think a financial plan is worth it, I would love to know your point of view too. The comments section is waiting.