Let us talk about holistic financial planning and why it is important for a smooth life (financially). We had covered individual components of financial planning in earlier blogs, but why should someone prefer holistic financial planning over simply focusing on individual aspects such as investment planning, insurance planning, tax planning, etc.?
Before we answer this, let us understand…
What is a Holistic Financial Plan?
Well, the answer is simple. A holistic financial plan includes all components such as investment planning, tax planning, insurance planning, retirement planning, and much more. It gives you a clear understanding of what your current financials look like (by analysing your cashflows, and current net worth), and drafts a map of what your future financial goals are, and how you can achieve them.
On the face of it, it might just look like goal-based planning, but when you take a deeper look, a holistic financial plan adds so much more value. It takes care of your potential financial risks by building a contingency reserve, planning your insurance, and providing the optimal asset allocation keeping in mind your risk appetite. A sound risk management strategy is crucial for a smooth investment journey.
A simple investment plan is like a ship sailing in the vast wide ocean without any compass to guide its navigation. A holistic financial plan acts as this compass.
What Goes into a Holistic Financial Plan?
There are six components which form a part of a financial plan.
- Personal Financial Management – Analysis of current financial situation. This involves current cashflows and analysing the current net worth to understand existing asset allocation. This is the starting step towards building a sound plan.
- Risk Management – Life is full of uncertainties, so a thorough analysis of the risk factors an individual faces is important. This typically involves assessing the adequacy of contingency reserve and existing life & health insurance policies. If there are any other risks involved, then a plan must be put in place to tackle them. This is crucial because proper risk management lays the foundation for goal planning. Without this, a financial plan will tumble in the wake of any uncertainty.
- Liabilities & Debt Management – There are different forms of debt, and each has its advantages and disadvantages. Understanding one’s liability and its impact on cashflows and future finances are important. A strategy must be put in place to efficiently manage and pay off loans.
- Tax planning – Though paying taxes is necessary, it is not necessary to pay in excess. Efficient tax management will help you save money which can be put to better use.
- Retirement & Financial Goal Planning – It is important to plan for retirement early. But many people fail to do so. This hurts the post-retirement lifestyle. Similarly, having a plan in place will help you achieve both your short- and long-term goals.
- Investment Planning – Investment planning and implementation is the last leg of a financial plan. This must be done keeping in mind your risk appetite and goal timeline.
The 3W’s of Financial Planning – When, Why, & Who
Financial planning is important for everyone irrespective of age, income, and gender. If you are at the beginning of your career, a financial plan can help you plan your future in detail. If you are closer to retirement, a plan can help you plan your post-retirement years. A financial plan can help you plan for your children’s education, wedding, parent’s medical corpus, planning vacation, job switch, etc.
Though a financial plan can help you at any stage of life, it is ideal that you get your plan in place as early as possible. This will not only help you prioritise your goals and aspirations but also helps you achieve them.
There is a lot of awareness about the benefits of starting investments early, but financial planning is often ignored. Investment planning is often misunderstood as financial planning, but as mentioned earlier financial planning provides you with a holistic approach towards your finances and helps you build sustainable wealth over the long term.
Bringing Your Plan to Action
A financial plan is only a road map. Implementing the plan is equally important. A financial plan will help you set up milestones, which must be followed up with an action plan to help you reach these milestones. Any delay in implementation can cost you the financial goal which you set out to achieve.
It could be overwhelming to take all the necessary steps in one go. It is suggested that high-priority action points such as setting aside the contingency fund, putting in place adequate insurance, etc must be done immediately. This is to be followed with any other action points such as adjusting your cashflows, meeting debt obligations, and starting with investments.
Why Not Just Use A Robo-Advisor?
Though a lot of online calculators are now available to identify goals and measure investment corpus, the one area where they lack is the personal touch. Financial planning is a very personal experience for every individual. Think of it to be like getting a health check-up done. Every individual’s result will be different, and the doctor’s advice is based on that individual’s diagnosis. Similarly, a financial plan should be viewed from both qualitative and quantitative aspects, and a Professional Planner can help you draft a customised plan to meet your requirements.
Our team of Award-Winning Financial Planners aim to provide a customized Holistic Financial Plan that would enable you to reach your goals and aspirations, and at the same time keep the basics in check!