Let’s get one common misconception out of the way; sensible financial planning does not require running to your accountant or tax agent at the drop of a hat. In fact, if you want to live life king-size, and yet plan for your retirement, your son’s decision to study abroad or your daughter’s marriage, you will have to depend on personal financial planning.
Relax, it is not as intimidating as it may sound, and if done right and early, you would be surprised as to how much you control it gives you over your finances.
What are the Factors Affecting Financial Planning?
Good financial planning is all about recognizing the exact order of priority your expenditures will take in every calendar year, and organizing them according to your income cycles.
The three most important factors that would affect financial planning are: lifestyle, personal and peripheral commitments and socio-economic factors. Let’s see how these three factors will shape your financial program.
Lifestyle: The Flexible Factor Affecting Financial Planning
With the average age of the working population plummeting steadily, people in their 20s and early 30s have more disposable income to invest in long-term investments like mutual funds. Most households are also dual-income households, with both husband and wife maintaining a steady income.
However, with policies like multi-brand retailing and international labels setting up shops in India, the spending percentage for Indians have also increased exponentially.
Now, an average Indian monthly expenditure constitutes of fixed components like house/apartment EMI, Car EMI and student loans premium, along with essential but variable components like eating out, Malls and Multiplex-hopping and premium electronics, with semi-urban areas driving this shift as much as urban sectors.
Change in lifestyle needs to be expected over a period of time. So this also needs to be factored in the financial plan. If the change in life style is more than what we have assumed in the financial plan, then that will create problem in achieving the financial goals .
So change your lifestyle slowly over a period of time in a planned manner.
Personal: The Essential Factor Affecting Financial Planning
Personal Financial Planning mimics your personal life more closely than you could imagine. Across urban and semi-urban India, personal decisions like higher marriageable age, early retirements and work-while-you-learn practices affect individual wealth.
You may need to meet the higher education and wedding expenses of your child after your retirement, because of your delayed marriage or your early retirement. You need to meet these large financial commitments during the phase of your life in which you have stopped to generate any income. Your financial plan needs to accommodate this unique personal situation.
Important events like Graduation, Marriages, Parenthood and Retirement bring along a host of peripheral expenditures and incomes. For example, an Indian marriage ceremony includes, across all communities, a steady inflow of relatives and lavish decorations, multiple communal feasts, entire rituals based on exchanging of gifts and often, a rather expensive honeymoon to Kerala or Phuket!
When there are some unique custom in your family or your circle, which demands more money that needs to be accounted. As a parent, you may plan for the higher education and wedding for your child, but you might have ignored to plan for the functions such as upanayanam, first birthday, Chalangai pooja, Arangetram.
Similarly planning for the honeymoon or retirement party need to be included especially when you plan to do it with more money.
Socio-Economic: The ‘Uncertainty’ Factor Affecting Financial Planning
Social and economic policies can also influence your financial planning to a huge extent. These policies define how you create and maintain wealth, as well as how much you have to pay by way of essential expenditures, taxes and fees.
These factors also define incumbent market forces, influencing factors like fluctuations in interest rates, consumer prices and spending rates, and of course, inflation and deflation.
In India, over the last ten years, urban income has risen exponentially, by over 19%. This, in turn, is driving India’s GDP forward, and becoming an important factor in policy features that increases consumer prices and consumer spending rates. This, in turn, creates an upward pressure on interest rates across India. As a consumer, how does this affect your financial planning?
Increased consumer prices increases the price of your average goods. The 42” LED television that you’ve set your eyes on might end up costing Rs 4000 more within a span of one year, throwing a serious spanner to your plans if you have not invested wisely.
However, this also means a tangible increase in spending, creating more jobs and higher wages for the salaried middle- and upper-middle-income groups, along with higher rates of interest.
The above listed socio economic factors affecting financial planning, are far from the forecast of a layman. That is why it is advisable to create a financial plan through a professional financial planner.
A professional financial planner will identify all these crucial factors by his thorough fact finding method and anlysing the economic trends. After identifying these factors he will accommodate and mange these factors in such a way these will not affect your financial plan.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.
Relax, it is not as intimidating as it may sound, and if done right and early, you would be surprised as to how much you control it gives you over your finances.
What are the Factors Affecting Financial Planning?
Good financial planning is all about recognizing the exact order of priority your expenditures will take in every calendar year, and organizing them according to your income cycles.
The three most important factors that would affect financial planning are: lifestyle, personal and peripheral commitments and socio-economic factors. Let’s see how these three factors will shape your financial program.
Lifestyle: The Flexible Factor Affecting Financial Planning
With the average age of the working population plummeting steadily, people in their 20s and early 30s have more disposable income to invest in long-term investments like mutual funds. Most households are also dual-income households, with both husband and wife maintaining a steady income.
However, with policies like multi-brand retailing and international labels setting up shops in India, the spending percentage for Indians have also increased exponentially.
Now, an average Indian monthly expenditure constitutes of fixed components like house/apartment EMI, Car EMI and student loans premium, along with essential but variable components like eating out, Malls and Multiplex-hopping and premium electronics, with semi-urban areas driving this shift as much as urban sectors.
Change in lifestyle needs to be expected over a period of time. So this also needs to be factored in the financial plan. If the change in life style is more than what we have assumed in the financial plan, then that will create problem in achieving the financial goals .
So change your lifestyle slowly over a period of time in a planned manner.
Personal: The Essential Factor Affecting Financial Planning
Personal Financial Planning mimics your personal life more closely than you could imagine. Across urban and semi-urban India, personal decisions like higher marriageable age, early retirements and work-while-you-learn practices affect individual wealth.
You may need to meet the higher education and wedding expenses of your child after your retirement, because of your delayed marriage or your early retirement. You need to meet these large financial commitments during the phase of your life in which you have stopped to generate any income. Your financial plan needs to accommodate this unique personal situation.
Important events like Graduation, Marriages, Parenthood and Retirement bring along a host of peripheral expenditures and incomes. For example, an Indian marriage ceremony includes, across all communities, a steady inflow of relatives and lavish decorations, multiple communal feasts, entire rituals based on exchanging of gifts and often, a rather expensive honeymoon to Kerala or Phuket!
When there are some unique custom in your family or your circle, which demands more money that needs to be accounted. As a parent, you may plan for the higher education and wedding for your child, but you might have ignored to plan for the functions such as upanayanam, first birthday, Chalangai pooja, Arangetram.
Similarly planning for the honeymoon or retirement party need to be included especially when you plan to do it with more money.
Socio-Economic: The ‘Uncertainty’ Factor Affecting Financial Planning
Social and economic policies can also influence your financial planning to a huge extent. These policies define how you create and maintain wealth, as well as how much you have to pay by way of essential expenditures, taxes and fees.
These factors also define incumbent market forces, influencing factors like fluctuations in interest rates, consumer prices and spending rates, and of course, inflation and deflation.
In India, over the last ten years, urban income has risen exponentially, by over 19%. This, in turn, is driving India’s GDP forward, and becoming an important factor in policy features that increases consumer prices and consumer spending rates. This, in turn, creates an upward pressure on interest rates across India. As a consumer, how does this affect your financial planning?
Increased consumer prices increases the price of your average goods. The 42” LED television that you’ve set your eyes on might end up costing Rs 4000 more within a span of one year, throwing a serious spanner to your plans if you have not invested wisely.
However, this also means a tangible increase in spending, creating more jobs and higher wages for the salaried middle- and upper-middle-income groups, along with higher rates of interest.
The above listed socio economic factors affecting financial planning, are far from the forecast of a layman. That is why it is advisable to create a financial plan through a professional financial planner.
A professional financial planner will identify all these crucial factors by his thorough fact finding method and anlysing the economic trends. After identifying these factors he will accommodate and mange these factors in such a way these will not affect your financial plan.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.
Flexible, Essential and Uncertainty, all these three factors are majorly affect the financial planning.For this we need a financial planning education which helps us to overcome these factors. Financial planning education is help to achieve that.
ReplyDelete