What is financial planning?

As we have seen in the previous post, personal finance is basically managing how we spend, protect and grow our money. The process of planning personal finance is financial planning.

The principles are simple. But that doesn’t mean it’s easy.

It’s like managing our health – we know we need to eat well and exercise. But not all of us know the nuances of what to eat and how to exercise. We may need a nutritionist and fitness coach to help. If things go wrong, we need doctors too….there are different types of professionals in the broad health area.

Similarly, we may know that we need to spend less than what we earn, protect and grow. But not all of us know the nuances of how to do these. We may need a financial planner or adviser to help.

In fact, there are different types of professionals in the broad wealth or finance area. Such as –

• Financial planners – help ‘plan’ your finances and then track that you are likely to meet your goals, so they help with all 3 steps – budgeting your spend, protecting and growing through investments. But they tend to be generalists.
• Investment advisers – help with only the investment part. Within investments, there are different asset classes and products, as we said earlier, but also the option to outsource if we don’t want to select securities.

So you will see many different types of ‘investment advisers’ –

• Stockbrokers – help you buy and sell stocks
• Mutual Fund Distributors (MFD) – help you invest in mutual funds
• Investment advisers – help you with a broader range of investments
• Bond platforms – help you buy and sell bonds
• Bank relationship managers and investment counsellors – help with banking services such as fixed deposits but also with mutual funds and sometimes stocks and bonds
• Wealth managers – help with broad range of investments, as well as other aspects of wealth such as wealth or estate planning; these could have legal backgrounds

Then there other finance professionals too –

• Accountants – help with tax returns
• Real estate brokers – help with buying and selling of properties
• Insurance agents and brokers – help with buying insurance policies of life insurance or general insurance companies

As you may have noticed, I have listed them according to their area of specialisation. There is another type of difference you need to know about – that’s how they get paid, or their business model.

There are basically only two ways to get paid – either by you, the client, or by the product provider. If they get paid by you, they tend to be ‘fiduciary’…they have to always look for your best interests. If they get paid by the product provider, they are more likely to look at their interests, though not necessarily so, of course.

In the list above, investment advisers, accountants and lawyers get paid by you. All others get paid by the providers. So you may want to always ask about how they get paid.

If you are enjoying this video, you may want to consider joining this industry. The easiest way to do this to start as a mutual fund distributor (MFD). That’s how I started as a 21 year old…in a foreign country. Technically, the license allows you to start helping others in selecting mutual funds …in reality, you can practice being a financial coach. If you like dealing with people, you can choose to become a proper financial planner. If you like the technical side, you can choose to become an analyst …that’s what I did. We will cover the curriculum of the MFD license exam in this series…so keep watching.

What does a financial plan look like

Getting back to the process of financial planning, financial planners help with putting all aspects of your financial life on paper …so they need to know about all your finances. Either they will ask you for all paperwork or they will co-ordinate with other professionals.

A financial plan will include the following sections –

Confirmation of your situation – list of all family members and any other dependents, list of all assets and liabilities

Budgeting – some financial plans go into this while others work with just the current savings number

Goals – list of all goals, typically education, house, travel, retirement, legacy etc with an indication of their importance and timing. A good financial plan will estimate their future costs, adjusted for inflation specific to that goal. For example, if your goal is your kids’ education in 15 and 20 years’ time, the plan should estimate how much this might cost in future, and then bring back to today’s currency. This section should then tell you how much more savings need to be invested (if possible from current income), how to invest current savings differently (to get better returns) or the lower probability of meeting the stated goals.

Insurance – how much life and health insurance you need

Investments – how to invest in different asset classes and products to increase probability of meeting goals

Risk profiling – their assessment of how you tend to respond to investment risks; note a risk profile should ideally include separate out the psychometric risk tolerance from the risk capacity

Recommended actions — including putting in additional savings, insurance, investments

Assumptions – in addition to the information we provide, the financial plan usually makes some assumptions.

Assumptions should be explicitly spelt out, such as –

• Inflation assumptions – when calculating the cost of goals, whether one overall inflation number, such as long term CPI, or different inflation numbers for education, health, retirement etc have been used
• Income assumptions – how your income will grow
• Investment assumptions – how different investments will grow and how much yield they will have

As you can see, a financial plan is supposed to cover a lot of things. So a financial plan can run into more than 20 pages… but it doesn’t need to. There are people who can make a one page financial plan too. And everyone should give a one page summary with the most important points. Next time someone gives you financial advice, ask them for a written plan and see if it’s covered all these aspects.

Financial planning approaches

The video goes into further detail about this aspect.

Financial wellness

While everyone should look at their personal finances, ideally with the help of financial planners, in reality this doesn’t happen. Maybe you don’t know financial planners, maybe you can’t afford them. This can lead to not being in control of your finances…and increased stress.

Large employers have started noting this increased stress levels affect productivity and absenteeism. Hence, companies have started including financial wellness workshops as a benefit.

In essence, financial wellness programs are basically financial planning done at group level. These workshops provide information, worksheets, tools etc for employees to manage their own finances. The aim is to help manage day-to-day cash flows (budgeting), withstand financial shocks (protection), have options and achieve all goals. More on this later.

Financial planning is planning personal finances

In summary, financial planning is simply a way to plan personal finances.