The Role of Financial Planning: The Why of Investing

Warren Buffet, the great investment Guru once said,” The idiot with a plan will always beat the genius without a plan.” 

Rich people plan 15 years ahead whereas the others plan for the Saturday Night and their next vacation.

In my journey as wealth advisors, over the last few years, I have met hundreds of clients, conducted seminars, awareness programs, workshops, etc, and the one thing that has always confounded me is the confusion related to financial planning. 

A majority of clients have left Financial planning to “Ram Bharose”, to luck and to their destiny. Having been brought up in a feudalistic set up, we assume that our “Mai-Baap”, God or the government, will take care of us and if nothing works, the children or the family is always there.

In a recent Retirement survey conducted by HSBC, it was revealed that only 1 out of 3 Indians is saving for retirement and more than 70% Indians expect that their children will take care of them post retirement. A tall ask indeed, in these disrupting social times.

The first question I have always asked an investor has always been, “What is your Financial Goal?” 

Most people equate financial goal with investment and answer, “I don’t know, haven’t thought about it but I have some investments here and there.” That is like saying, I don’t know where I need to reach, but I shall go by car or going to a Doctor and saying, I’am taking these medicines, will I get cured, without telling him the ailment or the symptoms or helping him with any diagnosis. The doctor can tell you that this medicine will help relieve this pain but he cannot cure you of your ailment.

Investment is only a “means”to achieve your goal. Before you decide on your “means”, you need to decide, Why you want to go, Where you want to go, in how much time do you want to reach there & how much are you willing to spend for reaching there and only then can you decide on the means to reach there. 

To put it simply, e.g. I need to go to Delhi from Chandigarh, I need to reach in 5 hours and I can only spend X amount of money. I shall decide accordingly and take a car or a bus or a train and amount of money will decide how comfortably I travel. If I want to reach faster, either I pay more & take a plane ride or take a higher risk & drive faster.

Same is the case with financial planning, I need to decide my financial goals, the time I have to achieve them and amount of money I can spend or spare in achieving them and accordingly we can decide from amongst the various options & choose the option that optimizes my risk & return.

Most investors we meet, have not given any thought to their financial Goals and have started their journey through piecemeal investing. Starting a SIP and investing in a FD or a PPF, thereby assuming all future financial worries are taken care of. 

While conducting a recent workshop for Unit Mangers of a leading MF Distributor, all young & bright MBA’s, when asked, “How many of you are investing?” Most hands went up.

But when I asked, “why are you Investing & what is your financial goal”, 

“Have you drawn up a Financial Plan for yourselves?” Most of them were silent & mind you, this was a group who is supposedly selling products through Financial Goal Planning and they had not thought of making a plan for themselves. 

One brave manager said, “My Goal is to to buy a Mercedes.” Wonderful thought, at least he has a goal, but when asked, “when do you want to buy it? Soon!” He replied. 

I asked him further, “How much do you think it costs today or will cost in the future?” and he had no idea. 

That is the problem, The quantification of goals; the present cost of that goal and the future cost after inflation, the point made earlier about the Goals & the Means, the Why of Investing.

As soon as you decide the three W’s, The Why you want to invest, Where you want to reach & When do you want to reach there, The How will come automatically, the means will make you reach your end Goal. 

Another, interesting observation that we have had in our interaction with investors, is the absence of a time frame and the lack of clarity on the impact of inflation & increase in standard of living. Most people assume that their expense will come down after retirement, not realizing that there will only be a structural shift in the kind and % spend from staples to other areas. 

In a study we did recently, we found that, the impact of inflation can be so strong that it can completely wreck your retirement corpus and bring it to Zero in 10-15 years. 

As highlighted below, suppose you were to retire with Rs 100 lacs at the age of 60 and assuming you make a healthy post tax return of 7.5% on your corpus and that is sufficient to meet your expenses in the first year, still that corpus will be fully eroded by the time you reach 73 years of age, in case your cost of living increases by 10% every year. 

That can be the severe impact of inflation on your corpus and is definitely something that cannot be ignored.

The privileges and perks of the earning years, gets one used to, the luxuries and comforts of life, and these comforts cannot be ignored on retirement. As we age, we require greater level of comfort to enjoy a peaceful life. Health concerns and reduction in ability to perform even the smallest tasks itself leads to an increase in the standard and cost of living, something that we rarely plan for.

While the going is good, we forget about investing and our future goals.

Most investors leave their planning till too late. As we approach our half century, suddenly it dawns on us, that major life goals urgently need to be taken care of. 

I have learnt only one magic trick in my years as an advisor, and that is that, Wealth Creation takes time and one sure shot way of achieving financial goals is through the Power of Compounding. The later you start, the riskier it gets and your chances become bleak.

Think about your financial goals, Make your financial plans and start your journey in your Sunrise years and don’t leave it to the sunset or you will miss the Stars.

Happy Investing!

Stay Blessed Forever.

Sandeep Sahni