Investment and Money Matter

We tend to see lakhs and crores worth of assets owned by our employers and companies, whose shares we hold. But when it comes to our own assets, leave aside crores, most of us don’t even see a few lakhs worth of assets and we have already reached middle age. Wondered why?

Life is such that most of us are driven by our financial circumstances. Normally we tend to think - this is all that I can obtain from what I have? One never really thinks in terms of - this is what I want to have, so how can I afford it?

It is not that we don’t know about this doctrine or that this is some new age thought. We practice this philosophy in our lives practically each day. Say we take a particular road each day to work, we think – how can I reach faster? Say we feel we are overweight, we think – how can I reduce? So on and so forth. We go for many training programs from anger management to art of living to possibility thinking. We all use this ‘How can I’ principle practically every now and then in our life. Strangely though, when it comes to money and when we wish to buy something, which we know we cannot afford, we tend to get cold feet and label the event as destiny. Never do we think of using the ‘How can I’ principle. This is why most people end up with barely 10% of what is possible during a lifetime.

What I am talking about here is how can you drive your financial circumstances rather then letting your circumstances drive you.

Lets understand this with a real life example:
Say you want to take a personal loan. You would normally take a loan based on your income papers and start repaying via EMIs (equated monthly installment). The question to ask is how can I have the loan without the stress of repayment? Well, how about taking a loan against some appreciating asset that you have? You get your loan and in terms of your cash outflow it is all the same. The difference is not in your cashflow but in your networth. With a direct loan, there is no change in networth. With a loan against an asset, your networth also keeps improving. Further, if you make good gains you could also use the gains to prepay your loan. The underlying statement here is - first build assets. The golden rule if that the more assets you have, the more liabilities you can afford to have. But first build assets.

There are many reasons why we have been pre-conditioned not to think in terms of ‘How can I’ in money matters. The problem is not with you; it’s with our financial services industry, which is totally product centric instead of being advice centric. What makes things worse is that products are sold based on history. As a result, the advice available is rather shallow and what you may hear is ‘This product has been the best performer’, ‘This is the best product right now - but the scenario may change in 2 months’, ‘Take it or leave it’, ‘Take it before its off the shelf, before its too late’ etc. As a result, people tend to buy tactics of the past hoping the future to repeat the past.

Being stuck in time is another grave error. Yes, history will repeat itself but the characters will be different. You don’t really need a financial guru or a financial astrologer, you simply need a friendly pathfinder to guide you. All you need to do is to change your approach. Always ask yourself – how can I….? Think hard and you will always find a way in finance that is the beauty of finance – there is always a way. Never think in terms of breaking or selling assets, increasing liability without an increase in inflow. Always try to keep what you have and get into the mode of preserving what you have and building more over it.

Yes in financial management, you can have your cake and eat it too. All you have to do is ask yourself ‘How can I have everything?’

Planning ahead, keeps you ahead. Before you start investing here are some integral issues that you should think through in order to maximize your investments.

Many of us delay the process of investing either for the fear of choosing the wrong investment option or thinking that we do not have enough money. First of all, it is important to know that investing is a process, not a one-time activity. Therefore, it is not necessary to have a lump sum to start investing. Thankfully, there are smart investment options like mutual funds that not only allow you to begin your investment programme with a modest sum but also provide you the best in terms of variety, liquidity, flexibility, tax efficiency and professional management of your hard earned money. Besides, by investing regularly over a period of time, you can build up capital as well as reduce the impact of short term volatility. Remember, investing is a very simple process that requires planning, perseverance and time.

However, if you want to be a successful investor, you need to follow certain Do’s and Don’ts. Here are some of them:

Always plan your investments
Most investors start the process of investment without determining their investment objectives and deciding the right mix of equity and debt. There are three simple steps that can help determine an action plan. Firstly, you should make a list of personal and financial goals in the short, medium and long-term. For example, in the short term, you may want to buy a car; in the medium term you may aim to provide for children’s education; and in the long run, retirement funding could be an objective.

Secondly, you need to assess your current position in the financial lifecycle. Thirdly, you must decide as to how much risk you are willing to take while investing. This is particularly important as different financial objectives require different investments.

Take help from professionals
It is quite common to see investors making wrong investment choices as they do not consult professionals. It is vital to deal with a professional and qualified advisor who has the knowledge and expertise to offer the best solutions in terms of working out investment plan as well as selecting the right investment options for you. In addition, a professional can ensure that you remain on course of achieving your investment goals. Make sure you spend time to find a right advisor for yourself before you begin investing.

Don’t allow others to take decisions on your behalf
While it is necessary to take help of professionals, it is equally important to know that you, yourself, have an important role to play in the decision making process. No one will know about your objectives, needs and risk profile better than you. While an advisor can help you in terms of determining the course of action and selection of investment options, you have a big role to play in defining the parameters.

Don’t underestimate risk and/or overestimate reward
It is quite common for a lay investor to underestimate risk and/or overestimate reward from an investment. There is definitely a need to be more careful about this aspect of investing. In other words, estimating the risk associated with an investment option is more crucial than estimating the returns. Investing like many other things involve risk in order to achieve returns. By understanding investment risks and how it relates to potential returns, you can improve your chances of building greater wealth. The key factor here should be to invest as an optimist and manage risk as a pessimist.

Don’t be too scared to try out new investment options
Investors, who have hitherto been investing in assured returns products like fixed deposits and small savings schemes, often refuse to look at other smart options like mutual funds just because they do not offer guaranteed returns. Though investment risk and economic uncertainties can never be eliminated, mutual funds, thanks to their mix of experience, research and analysis are in a much better position to ensure that investors in different segments achieve their investment objectives. However, to benefit from the expertise of professional fund managers, it is necessary to invest in the right type of fund i.e. the one whose objective matches with yours.

Don’t try to time the stock market
There are many investors who believe that the best way to maximize returns from their equity investments is through “market timing”- a strategy in which one tries to buy before the market goes up and sell before the market goes down. Unfortunately, very few can predict the market with any degree of accuracy when, and how much, the stock prices will go up or down. In fact, it has been proven time and again that even experts find it difficult to forecast market movements consistently.

Remember, equity is the only option that has the potential to beat inflation over a period of time. Therefore, follow a disciplined approach of investing regularly into the stock market to benefit from it.

Rebalance your portfolio from time to time
It is quite common for investors to allow the portfolio to ride on when the market is in a bullish phase. Obviously, they forget about the original mix of equity and debt and that makes their portfolio very risky. No doubt, equity market requires a long term commitment to benefit from it, however, it is equally important to book profits periodically and maintain the proper asset allocation. In other words, re-balancing, either up or down, is a necessary ingredient for the long term success. Portfolio rebalancing is a process of bringing the different asset classes back into proper relationship following a significant move in one or more.

Remember, rebalancing is more about risk than return. It is equally important to decide on a time interval, like once a year, and examine the portfolio. If the asset allocation shifts a little, there is no need to bother. If it shifts by more than 5 percent, you should rebalance. This can occur naturally over time or following an abrupt rise or decline in one or more asset classes.

Don’t compromise long term goals for the short term ones
There are many investors who often lose sight of their long term objectives in order to fulfill their short term needs. While at times it may become absolutely necessary to do so, you need to remain focused on longer term goals. This can be made possible by examining various options rather than rushing to look for easier options.

Thanks to Author: Hemant Rustagi

When one thinks of marriage, his/her parents look for a few basic qualifications in the match.

1. A good family background and their reputation in the society.
2. The individual’s traits - honesty, intelligence, professional qualifications and future job prospects/ earning capacity.

Buying an insurance policy too is truly a lifelong relationship. There are a few characteristics that are a must when one chooses an insurance company.

Some of these are hard facts; and some are softer issues. I have tried enumerating them, though cannot really guarantee how easy it is to get down to the details – just as it is possible for the potential groom to camouflage his true nature.

1. The insurance company must outlive you. The company must be in a position to settle your death claim to your survivors. If you have the slightest doubt in this, a the insurance company, irrespective of how cheap the cover is.
2. The company should have a good image, one that demonstrates that they are in it for the long haul. Their image should convey honesty and efficiency; not that of a lion hungry for prey and increasing their business at the cost of long-term sustainability.
3. It should be able to give you the cover you wish for at cheaper rates. The company should be able to provide better rates to the customers.
4. It should have efficient and experienced people who can invest your money better. Unit linked policies are a rage today. Insurance thus involves active management and growth of your funds as well. Performance of Asset Management Company (mutual fund schemes) offered by the parent company could give you some leads.
5. Their attitude towards sales - are they only concerned with selling their products to meet their targets or do they train their employees and agents well?
6. The quality of their advisors – are they genuinely interested in giving the right solution? The advisor is ultimately the interface between you and the company. He should come across as both honest and competent, and keen to understand your needs before providing an appropriate solution.
7. Issues with rate up - any person whom the insurance company feels is not a standard risk could be dealt with in any of the following manner:
a) Charged extra premium
b) Given a cover lower than what was asked for
c) Postponement of the decision
d) Declined cover

While the emotional angst of not being a ‘standard’ risk exists, one must recognize that the insurance company must act in the larger interest of all its policyholders. Ensuring a lower claim ratio improves the final maturity values of the policies and is ultimately beneficial for you.

Now that you know what you need to look for, go ahead and select the ‘right’ partner for your life insurance – or should one say, insurance for life?

Money Matters Mantras:
1. The Insurance company must outlast you
2. Their product must meet your specific needs
3. It should be come at a cheaper cost
4. Investment track record too plays a role
5. Honest and knowledgeable consultants will provide much comfort
6. A lower claim ratio is more vital than no rate-ups

Thanks to Author: Lovaii Navlakhi

Like we tend to say, ‘let’s get to the root of a problem and fix it in totality’. The same applies to our investments and financial planning. We all want to own the best products in our portfolio but as it turns out, the reality is actually far from it. We then hold destiny and other abstract concepts responsible for it. While I know, we cannot control things that are out of our control; least we can do and must do is to control things that we can. One such thing we can control is how we build our ‘advisor portfolio’ or in other words, the team of our personal financial advisors. Let us understand that no person or entity has all the skills in the world to help us navigate through the complex maze of our financial, accounting and legal affairs.

Just like our investments we must also diversify our advisor risk. Who is advising us? Who is managing what for us? How can we ensure that all is well with us and our affairs? These are questions to consider.

Let’s start counting. Who are the people and entities we require? Here are some broad level suggestions.

1. Bank and relationship manager: It is good to have two banks that you deal with. How we divide between them is up to us. As an example, one bank account could be used for our financial planning the other could be for general expenses.

2. Chartered Accountant (CA): We cannot have two here, but if you are running a private limited company, you could have one for your company accounts and one for your personal accounts. For self employed and partnerships, you obviously need just one CA

3. Financial Planner: You just need this person, as he is your family’s financial doctor. But you must speak to a handful of planners to understand each ones way, style and methodology of work and most importantly how comfortable you are with his/her approach. Remember, this is going to be your most important and lifelong relationship. Take your time to sign up with one but certainly sign up when you are satisfied.

4. Life Insurance Agent: We need to shop really hard here as we could be misled so easily. They know a lot about insurance, many of them will be experts and while that is an advantage, it is also an inherent disadvantage as insurance is all that they know. You could land up paying a huge amount of premium and have little benefit from the policy itself. A simpler way is that you could have a financial planner who is unbiased and you could then use your chosen life insurance agent to do your product purchases. This is tricky as most financial planners could be agents as well, so check before you take the plunge. An unbiased planner is hard to find.

5. Non-Life Insurance Agent: Here, we need someone who we can trust really well, who will be there when we need him desperately in times of making a claim, to remind us of renewals. Here, the person needs to be really efficient in his / her work. If your agent does not fulfil the above criteria on time, you think of a change.

6. Agent for post office/PPF (Public Provident Fund) and similar deposit products: You could combine this with any of the above who offer this service too.

7. Mutual fund agent: There are three categories of people you will find here. One who know nothing and are simply product distributors. Buy at your own risk – no accountability for high advice. Simply prevent . The next is a person, who knows a bit about funds, investments, investment objectives etc. You could deal with this person by doing a bit of research by yourself. The third category is that person who understands risk management, asset allocation, portfolio volatility, who can create a strategy for you with a fusion of your financial goals, time horizon and asset allocation. This is your best bet.

8. Portfolio Manager or Fund Manager or Wealth Manager: In this area, most people will sound knowledgeable and that is because they all have the fundamental skills and knowledge of investment management. Per se, their knowledge is good but the slippery ground here is the philosophy of the company they work for. Building wealth is really very easy and is not as complex as it may be portrayed. Prevent philosophies, where the focus is on a single aspect of portfolio management such as momentum or aggression or the ones that use complex jargon. Just look for someone who says, ‘I am interested in building your wealth and nothing else matters’. Investing is simple, really simple. Buy, hold and once in a way restructure and that’s it. Good research, knowledge, patience and fortitude is all that is needed. Complex ideologies and techniques usually imply more churning, more expenses, more brokerage costs for you and all this reduces your return significantly. Do business with someone whose method you understand completely and don’t get carried away by his historical performance. Enrol him for his vision and not solely on the numbers of the past. If you have a lot of money enrol two rather than one.

9. Lawyer: You may not need his services often but a good way would be to check with any of the above, you are friendly with and whom you can trust. Don’t shop here but go by recommendations from people you trust. Again speak to a couple before you sign up.

This is a once in a lifetime exercise. Good luck on building your Advisor Portfolio.

Don’t fall for the “at par” hype and go for a MF new fund offer. It may not suit your investment objective or your risk profile at all.

Secondary market in equity is in the midst of a historic time period. It is creating new highs practically every other day. Investors are making huge profits. The mutual funds are also, accordingly, giving spectacular returns.

In such a scenario it is but natural for the euphoria to pass on to the primary market. While on one hand more and more companies are coming out with IPOs or additional offers, mutual funds too have not lagged behind in coming out with New Fund Offers, NFO, with increasing regularity. And predictably enough, these issues have generated huge interest amongst the investors and raised thousands of crore. In fact investors have redeemed from a well performing existing fund to invest an NFO with similar objectives.

Primary issues in an equity market are a different subject matter in itself.

However, as regards the NFOs from Mutual Funds, there is a need to critically examine the same. Mutual Fund NFOs are nothing but commencement of a new scheme. They should not be confused with equity IPO and hence one should not expect a huge listing gain akin to one.

Various factors need to be considered while making a decision to invest in an MF NFO:

Rs.10 or Rs.100 – NAV makes no difference
One of the major reasons for the success of mutual fund NFOs has been the continued ignorance of an average investor with regards to the NAV. They have all along assumed that if they are getting the units at par i.e. Rs.10, they are getting it cheap.

NAV merely represents the market value of the portfolio. It is the book value. Thus when one invests in a mutual fund one is buying the units at the book value – which is Rs.10 for a NFO and could be Rs.15 or Rs.20 or whatever for an existing scheme.

The NAV of an existing scheme is higher merely for the fact that its’ portfolio has appreciated since the time it built it’s portfolio. Going forward, the returns over a given period of time will be same from an existing portfolio (with a higher NAV) and an identical new portfolio (with Rs.10 NAV). The earlier appreciation of the old fund does not make it expensive vis-à-vis an NFO.

Quality of the portfolio is the key to success
As we seen in the above example, the price or NAV is irrelevant. It is the portfolio, which determines the returns one can expect from a scheme.
Say we had invested in an index fund a year back. We would get returns, which would be more or less equal to the appreciation in the index. But suppose we had invested in a mid-cap fund, our returns would have been significantly higher as the mid-cap stocks have appreciated much more (though of course the risk profile of the two is different).

It is, therefore, important to give emphasis to the portfolio. This is of course not known for a NFO. Therefore, to judge how the scheme is likely to perform in future one need to look at:

- The fund manager’s past track record and
- The performance of the other similar funds being managed by that AMC.

Of the two, the AMC’s performance is more important because the AMC’s research teams’ recommendations and the investment philosophy of the AMC ultimately guide the fund managers to invest. Moreover, even if a fund manager were to quit, a good AMC would be able find another competent fund manager.

Is there anything ‘NEW’ about it?
Ideally the new fund should have something different to offer. Or at least it should be a new scheme launched by an AMC you are comfortable with. For example, when Standard Chartered launched a normal diversified equity fund, when a 100 other similar funds were available, one could have considered the same for investing, as it was the first diversified equity fund from Standard Chartered.

JM Equity and Derivative Fund, Benchmark Split Capital Fund, a few Fund of Funds etc. are some of the examples of new concepts.

Or say Sahara Wealth Plus had a modified way of charging management expenses. Or we may have Gold Fund or Real Estate Fund, which do not exist today. And therefore investing in such NFOs is worth looking at.

Therefore, unless something different is offered it may be prudent to invest in fund which already has a track record, you are aware of its’ portfolio, its’ investment philosophy, its’ expenses, etc.

It makes no sense for an AMC, which is already managing a diversified equity fund, to launch another diversified equity fund.

Does the NFO meet your investment?
We invest with some objective. Also, we all have our own individualistic risk profile. It is, therefore, important to look at the NFO from these two perspectives – does it meet our investment objective and our risk profile.

It would be wrong and we may end up making a loss if we ignore these two very basic investment tenets.

Just because it is a new offer you should not rush to invest it the scheme.

Study the objectives of the scheme. Ensure that it meets your investment needs and the investment horizon. Look at the risk parameters. For example, if you are not in a position to take risks it would not be correct to invest in an equity NFO.

The ‘cost’ of issue expenses
Marketing a new issue entails substantial expenses for the AMC floating the issue–on ads, road shows, offer documents, the incentives to distributors, among other things. Under Sebi rules, mutual funds can charge up to 6% of NFO collections as marketing expenses to the scheme. These expenses are written off from the NAV over a period of 5 years.

Considering the amounts NFOs have raised these expenses are quite substantial. Say a scheme raises Rs 1000 crore (which has become quite normal today). At 6% the issue expenses work out a whopping Rs 60 crore.

All these costs go to reduce your NAV. In an existing scheme, especially those more than 5 years old, these expenses would have been written off. Therefore, all things remaining same, the net returns from an NFO would be lower to the extent it has to write-off the issue expenses, vis-à-vis an existing scheme.

Concluding…
Do not rush into an NFO. See that it meets your investment objects and risk profile. Do not be misled by ‘at par’ hype. See that is adds quality and diversity to your portfolio.

Thanks to Author: Sanjay Matai

While most of us were spending sleepless nights mulling over the world wide slide in equity markets, and the deep gash its left on our portfolios, a few smart investors have been going about their life as usual. They take comfort in the fact that their investment portfolio is adequately insulated; that the greatest determinant of their portfolios return is the asset mix in their portfolio, which has helped reduce the ill effects of volatility.

Invest in equities preferably for long term: Today if you were in a position to stay invested for 20 years or more, you should not be looking at any other asset class other than equity, it has clearly out-performed all other asset classes (other that real estate in select areas). But most of us are not tuned to investing with such a long time frame clearly mapped out in front of us. While all of us have goals which are long term we invest with a short term mind set. There is a theory which shows that most of us sell our profits very fast and hold on to our losses for long. It’s in fact so ironical that equities which should be invested into only with a long term horizon, is the one asset class most people tend to move in and out off the most. Most of us are in the habit of continuously monitoring our portfolio on a daily basis, some of us have got into the nasty habit of looking at it every hour. This kind of obsessed nature has resulted in us taking decisions which are not conducive to our portfolios long term growth.

Financial Planning and Asset Allocation can help in reducing your portfolios volatility in the short term and more importantly provide some much needed discipline to your investments by providing a basic road map for your savings strategy.

Don’t have an asset allocation? You’re shooting in the dark: All of us spend a huge amount of time, researching on our own as well as on tips, deciding which stocks to buy and which to sell and whether its time now to get into debt. While all of these are genuine concerns which investors must face, your success as an investor as well as your achieving your long term financial goals is deeply entrenched in your asset allocation decision which is more or less stable in the long term.

We have heard of the adage, advising us not to keep all our eggs in one basket. Most of us believe that we are firm followers of this policy, but nothing could be further from the truth. While I agree that we all have some kind of asset allocation in place, how many amongst us have actually planned what asset allocation suits him/her the most. Most of us have some vague idea of the risk we can tolerate and decide that we should invest an “x” percentage of our total assets in equities or fixed income assets. The balance follows through from this decision. What we do not realize is that, no matter what our attitude to risk, we are saving towards certain goals, and to make sure that we achieve those goals, we have to either stretch ourselves and save more or make our money work harder.

Its easier to change your asset allocation than your level of saving: While most people may start their financial planning with their goals and risk tolerance, which in turn determines their asset allocation strategy, and then go on to decide how much more they have to save, I am of the opinion that most people would find it easier to change their asset allocation (in favor of riskier assets) then they do their level of saving. Let’s move on to how you should go about dividing your assets between different asset classes. Every investor faces the challenge of balancing downside protection (against capital loss) with upside potential (for high returns). People are more sensitive to losses than they are to gains of the same magnitude. Your need for downside protection is also a function of the length of your investment horizon (how long before you’ll need the money) and whether or not you are making regular withdrawals from your savings (as would be the case, for example, if you were gradually drawing down your savings to pay your bills during retirement). The shorter the time before you need the money, and the more you’re planning on taking out along the way, the more downside protection you need.

The degree of mismatch between your current and expected savings and your financial goals tends in practice to create situations where the amount of downside protection you want is less than the amount you can afford (in terms of foregone returns on higher risk assets). In other words, there is usually a tradeoff between your lifestyle, your financial goals, and your asset allocation.

As with so many other things in life, there is no free lunch here either!Different asset classes provide different degrees of downside protection and upside potential. Broadly speaking, our economy can be in one of three states: normal, high inflation, or deflation. In the normal state, we don’t need as much downside protection as we do in the other states, and look to equity type investments to generate high returns for us. In the inflationary state, we look to asset classes like real return bonds (not available in India as of now) and commodities (and possibly real estate) to protect the purchasing power of our capital. Finally, in the deflationary state, we look to investment grade bonds to preserve our capital while maximizing our real returns.Those of us who have a portfolio skewed towards equity you might as well book profits as soon as the market recovers and rebalance your portfolio so that you have a healthy mix of asset classes, while those people who do not have or have a very low equity exposure, there is no time better than right now to start investing slowly but surely into equity. As a general guide (very bookish!) you may consider following, any of the general asset allocation strategies which divide your portfolio based on your risk profile. There are scores of such asset allocation guides available over the net and they do a fairly decent job of giving a mix to your portfolio. For a more through understanding of what asset allocation suits you, it’s important to understand your goals, your ability to save, the risk you can take, and your time horizon.

Do not club all your goals into one: You will realize that you cannot club all your goals into one and that each goal has a different time to maturity. It will require you to have a different asset allocation towards each financial goal. This means that each individual amongst us will need a different asset allocation to suit a variety of different goals which arise during our life time. This makes it important for each person to have a financial plan for themselves from which the asset allocation decision can be derived. One of the most important decisions you will make in your life will be the asset allocation decision of your savings. Not having an asset allocation strategy in place is like shooting a moving target in the dark, you are sure to miss, but the worst part is that you would not know that you missed until it’s too late.Most of us have in place an asset allocation of our investments without even being aware of it. Haven’t we all at some time consciously decided ‘how much’ to put into those PO Savings, Bank FDs, 9% Senior Citizens, Balanced MFs , the MIPs, the ELSSs and finally the diversified equity funds and direct equity. It is this initial asset allocation which has sub consciously defined our returns. So you may ask, if all of us follow asset allocation in practice why do we still suffer so badly during these market crashes?

Review your asset allocation at least once a year: The answer is in the fact that even though all of us have some sort of asset allocation in place, it is no longer the same asset mix we had initially planned and perhaps ‘documented’. It’s a policy which we had put in place sometime without serious consideration and didn’t bother to follow up on. This results in your asset allocation not being in tune with your risk appetite and getting skewed towards asset classes which are currently the market flavour.

Most of us would have, over the past one year, seen that our equity portfolios had swollen alarmingly, and yet we continued to pump additional money into equity. This in the end resulted in our portfolio getting so heavily biased towards equity that when the markets corrected it hurt us much more than we could tolerate. A more pragmatic approach would have resulted in us booking some profits or making fresh investments in Fixed Income securities only. This would have moved our portfolio back to our original asset allocation and thus to a risk tolerance we would be able to digest.

While all this sounds like good advice in hindsight, you must remember that this is not ‘me’ timing the market or advising you on market direction, but an automatic way to ensure that your portfolio is always balanced and in-step with your asset allocation.

You will thus realize that financial planning is an extremely important tool to build long term savings. Realising ones financial goals does not involve only putting in place a financial plan but also following it up regularly and taking action as and when required. It’s also important to remember that our risk tolerance and saving capacity keeps changing with the size of our personal balance sheet and cash flow, so having a review of ones financial goals and saving pattern once a year is extremely important. Remember your asset allocation is a function of your risk profile, financial goals and saving capacity. All these 3 are dynamic and keep changing with time and situation, so it’s imperative that you re-visit your financial plan at least once a year for a review. A well documented plan will also ensure that you stick to the same during all times and thus reap the benefits of regular investing.

When you are ready to create your financial plan, the first step you must take is to figure out what you want from your money. In this process, something we often forget is that our hearts are as important as our heads, and our feelings are as valid as our facts.

When we sit down to create our financial plans, whether we have had a sudden windfall of money or not, we still have the opportunity to decide if we need to make not just financial changes, but personal ones as well. Any form of planning, especially financial, is a chance for you to step back and take a look at yourself, who you are, what you have become or achieved, and where you want to be, financially, personally and emotionally. There are four simple steps to establish your goals. They are as follows:

1. Make a wish list and know your dreams: This list will include the things we are deeply passionate about. It’s not about the money involved; it’s about the pleasure derived. If you want to possess a villa in Spain, or own a fleet of powerful bikes, put it on the list. Some questions you can ask yourself, to know what your wish list will comprise of, are as follows:
What would I be doing right now if I had no constrains, where would I be?
What have I always wanted to do but never had the chance? This gives us our dream picture

2. Reality Check: It’s a platform to understand that we can do anything but not everything, so while we may have a huge wish list, we must know our optimum expectation from ourselves with regard to money, risk levels, asset preferences, traveling requirement, family values, financial security and so on. This dream picture needs to be aligned with your other goals and related factors.
While it is difficult to create an accurate financial plan without knowing the limitations of your money, it is equally difficult to know the potential of your money when you have just received a large sum of it. Your reality check will determine whether you can afford to quit working tomorrow, and will determine the long-term projections you need to make. It is sometimes essential to take the professional help of your financial advisor here when there are lot of choices and opportunities at your side.

3. Prioritize your goals: The next thing that needs to be done is to prioritize the list. It can be divided into your needs and your wants. It can then be segmented within these sections also, in terms of those goals that are viable in line with your current reality. Keep in mind that if your desire to fulfill your goal is strong enough, then even if you have to wait a while, you’ll be able to adjust. It is often only the perceived financial limitations that keep our dreams from becoming realities.

4. Set time frames for the goals: In this step we also segregate these goals into short, medium and long-term groups with specific time periods. This is very important to know when we want to achieve our goals. This also helps in selecting and mobilizing the funds in the optimum manner.