FINANCIAL PLANNING: Key to achieving financial goals lies in execution

There are broadly three gaps that surround financial planning. They are:

False sense of achievement – Just taking a gym membership doesn't make one fit. It is the sweating at the gym that does the magic. The key to achieving financial goals lies in execution. Planning is a blueprint that adds a sense of direction to the money management process. Half-hearted or improper execution of the financial plan gives a false sense of achievement – a false sense of well-being.

Fallacy of assumptions – Assumptions play a critical role in financial planning, not getting it right may distort the financial plan significantly.

For a 30 years old person, the future value of Rs 1 crore today will be worth Rs 17.41 lakh, Rs 13.14 lakh or Rs 9.94 lakh at the time of retirement at age 60, assuming an annual inflation of 6%, 7% or 8% respectively.

Alternatively, assuming an inflation of 7% the value of Rs 1 Crore today will be worth Rs 25.84 lakh, Rs 13.14 lakh or Rs 9.37 lakh at retirement age of 60, for a person aged 45 years, 35 years or 25 years of age.

Plan rigidity – A financial plan is similar to Google Map, which provide the best route to the destination, but when the best route gets congested delaying the journey, it pops an alternative route that would work best in the changed scenario. An individual's personal life is dynamic with positive and negative changes, such as, earnings increment, addition of a family member, loss of job, taking a sabbatical, etc. Getting stuck in the same route, in a changed scenario, could make the plan less effective.

Overcome the pitfalls of financial plans by getting the basics right.

Execution – It is an integral part of the financial planning process; once the plan is mutually agreed upon, it must be implemented in totality, in a planned order. However, personal finance situation, lack of enough resources or too much of illiquid assets at times make complete execution of the plan difficult. In such scenario, one must segregate between essential goals (need to be) and lifestyle goals (good to be); prioritise essential goals and gradually execute them based on the availability of resources.

Setting the goalpost right – The important assumptions in setting the goalpost right are, estimating the correct current value and an appropriate inflation benchmark. The divergent inflation rates across various sectors, such as, medical cost, education and the general cost of living, pose a major hurdle to arriving the correct fund requirement. The CBDT shifted the base year to 2001-02 and notified the new cost inflation index from April 1, 2017. As per the new cost inflation index the average cost of living since the new base year 2001-02, until 2018, is approximately 7% annually. However, picking that may not be right for education inflation, which has been growing at a faster pace. According to National Sample Survey office, the cost of professional and technical education has doubled over the last six years, pegging education inflation at 12%.

Goal Value = Correct Current Cost plus the right inflation factored over the number of years to goal maturity.

Navigate the Plan – Making progress towards the goal is very motivating, hence, the plan must be realistic to drive seriousness. This is not a one-time exercise; the plan must be reviewed at regular intervals from various perspective – changes that occur in one's personal life, goals that may be nearing maturity, reviewing the investment performance that fund the goals and reviewing the suitability of few investments based on market scenario.

The writer is founder and CEO, FINCART