Two Mistakes In Financial Planning
1. Unproductive use of contingency fund
Financial planning is all about aligning savings and investments to one’s needs and goals. After attending to life and health insurance needs, two prime areas that need protection, the next big thing is to set up an emergency or a contingency fund. By now you would have read in many articles and / or discussion forums that the size of a contingency fund should at least be equal to six times of your monthly expenses. This comes in handy if there is sudden job loss or any such unexpected happening. I have often stumbled upon cases where this fund would have drained due to one or many of these reasons:
• a relocation would have occurred,
• painting and repair work in the flat would have been done,
• an increase in income would have increased the life style
• medical support for aging parents would have triggered.
So the bigger question is “Is contingency fund sufficient? or Is contingency fund to be touched for these things which are not unexpected but unplanned ?”
In my opinion, a contingency fund is strictly to be used for own medical emergencies or servicing monthly liabilities in the unfortunate event of your income getting stopped for a brief period. The time of occurrence of these two are completely unexpected and that is where a contingency fund really helps. This fund should not be provided to unplanned needs like repair work or relocation due to change of job and the likes. So it becomes clear that at the time of setting goals, you should explore such areas and provide for such needs so that you do not end up with unpleasant surprises that can throw your financial life out of order.
2. Equating financial planning to maximizing returns
Most individuals confuse wealth management and financial planning. I have seen individuals asking questions like how much returns I would get after the financial planning exercise. Questions like, “Would I be beating real estate returns after this exercise ?”, are very common in the market. Financial planning is not about generating higher returns vis-à-vis a benchmark.
Financial planning provides a platform where realistic return expectations are set for various asset classes, reviewed regularly, savings and investments are redirected according to needs and goals are achieved in the process. So if as an individual, your need is to achieve higher returns as compared to various benchmarks, then you need to opt for wealth management services. You should mark this as one of your needs, prioritize and discuss with your planner. This will help in getting more clarity to your whole plan. To draw a parallel, financial plan is your dream house and wealth management is the garden that you always wanted to have.You can live without a garden but not without a house. Do not confuse wealth management as financial planning.
15 to 20 runs for two overs could change the game of T-20 cricket dramatically and so is the case with these two things that can derail your plans. Ask questions, understand, plan and lead a sound financial life !
Happy Investing
Source : Moneycontrol.com
1. Unproductive use of contingency fund
Financial planning is all about aligning savings and investments to one’s needs and goals. After attending to life and health insurance needs, two prime areas that need protection, the next big thing is to set up an emergency or a contingency fund. By now you would have read in many articles and / or discussion forums that the size of a contingency fund should at least be equal to six times of your monthly expenses. This comes in handy if there is sudden job loss or any such unexpected happening. I have often stumbled upon cases where this fund would have drained due to one or many of these reasons:
• a relocation would have occurred,
• painting and repair work in the flat would have been done,
• an increase in income would have increased the life style
• medical support for aging parents would have triggered.
So the bigger question is “Is contingency fund sufficient? or Is contingency fund to be touched for these things which are not unexpected but unplanned ?”
In my opinion, a contingency fund is strictly to be used for own medical emergencies or servicing monthly liabilities in the unfortunate event of your income getting stopped for a brief period. The time of occurrence of these two are completely unexpected and that is where a contingency fund really helps. This fund should not be provided to unplanned needs like repair work or relocation due to change of job and the likes. So it becomes clear that at the time of setting goals, you should explore such areas and provide for such needs so that you do not end up with unpleasant surprises that can throw your financial life out of order.
2. Equating financial planning to maximizing returns
Most individuals confuse wealth management and financial planning. I have seen individuals asking questions like how much returns I would get after the financial planning exercise. Questions like, “Would I be beating real estate returns after this exercise ?”, are very common in the market. Financial planning is not about generating higher returns vis-à-vis a benchmark.
Financial planning provides a platform where realistic return expectations are set for various asset classes, reviewed regularly, savings and investments are redirected according to needs and goals are achieved in the process. So if as an individual, your need is to achieve higher returns as compared to various benchmarks, then you need to opt for wealth management services. You should mark this as one of your needs, prioritize and discuss with your planner. This will help in getting more clarity to your whole plan. To draw a parallel, financial plan is your dream house and wealth management is the garden that you always wanted to have.You can live without a garden but not without a house. Do not confuse wealth management as financial planning.
15 to 20 runs for two overs could change the game of T-20 cricket dramatically and so is the case with these two things that can derail your plans. Ask questions, understand, plan and lead a sound financial life !
Happy Investing
Source : Moneycontrol.com
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