FINANCIAL planning is one of the most loosely used and understood terms in the personal finance domain.
Despite its varied forms of usage and terminologies, understanding of people about this science is pretty common, such as a financial planner will help you get the best returns with the lowest risk. According to another common interpretation, a planner is expected to know the best products in most domains like insurance and investments.
These interpretations widely imply that the process of financial planning is all (or merely) about recommending the best products to an investor.
Sadly, this is far from the truth. Financial planning –
A process: The process of financial planning, in its true sense, involves understanding a person, his needs, concerns, objectives, limitations and then helping the individual to fulfil his needs and achieve his goals keeping in mind all of the above. It is a process of managing the monetary resources to achieve personal economic satisfaction.
Ramesh - in a debt trap Three years back, Ramesh (aged 27 and single) was working in the insurance sector. He got caught in a debt trap due to his spendthrift lifestyle. He got lured away with the easy credit granted to him by a number of banks through credit cards and then was finding it difficult to meet even the `minimum amount due' on the due dates. Interest charges and the delayed payment charges kept piling on and finally Ramesh had to borrow a personal loan to pay-off some of his credit card debt.
So how can financial planning help here? Well, as a part of his solution, his financial plan hooked on three aspects -budgeting, allocated payments and accelerated repayments.
Ramesh's financial plan: A close look at the budgeting for Ramesh helped open additional resources to the tune of approximately Rs 5,000 every month. A lot of his monthly expenditures were allocated upper limits to help Ramesh achieve the target of `extra savings' every month. More so, he had recently taken up a bouquet of life insurance policies, with premium payments ranging from monthly to quarterly modes. All of them, but one, were surrendered and the entire premium savings were now diverted for clearing the debt trap.
Whatever in vestments Ramesh had managed till date, which were not a very big sum, definitely proved to be useful in allocating the same for clearing the cred it card out standings.
Ramesh was put on the `accelerated repayment' technique, where in, with the help of the above two exercises, a commitment amount was denominated per month to repay the debt and card out standings. Second, as soon as one outstanding was cleared, the commitment amount was not lowered, but was applied to the next debt. Thus, money from the debts cleared continued to be combined towards other debts, until all the debts were cleared. This technique helped Ramesh in clearing all his debts, without pumping extra money for the same.
As may be observed from this case, if the process of financial planning was merely about recommending products, then no planning would have been possible for him. Investment or insurance products are possible only when there is an investible surplus, in other cases, a sound plan may help in generating such surplus.
Conclusion: Product recommendations are vital to any financial plan's success, but comprehending this process to remain restricted to only this faction would be definitely under-estimating the power of financial planning. Products are akin to agents with whose help the planner guides an individual to achieve his objectives.
But, they should always be ranked second priority in this process.
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