First Step of Financial Planning : Planning

This post will tell you why Taking action of Investment is second step , the most important is the first step , planning it well before taking action . I have seen many people pinging me about there investment plan or decision to take Term Insurance or Investment plan through mutual funds for next 10 yrs through SIP.

I would like to congratulate them on there decision and action . They are ahead of most of the people .

“A good plan today is better than a perfect plan tomorrow”

But is it enough ? Is that all ? Is that the initial step everyone should take ? The answer is NO !! . A lot of people have go to the second level and left the first level , which is Planning .

First Step of Financial Planning

The first step not making investments but planning for everything and then executing it , Why is planning important ? Most of the time people concentrate too much on action and not planning . If you take actions without planning things , there will be lack of clarity ,and it will bring doubt in your mind about investment .

A friend of mine invested in mutual funds through SIP . For 6 months markets did good and his portfolio was up , then markets crashed and he stopped his payments . I asked him why is he not continuing his SIP , his answer was markets are going down . But he also said that he don’t need this money any sooner , he is making investments for his Child Education which is 12 yrs later and his investment is for long term in stock market .

His decision of starting investments is great , but investing without any planning and knowing exactly why you are doing it is like driving without knowing were to go . You will eventually go somewhere , but that may not be your destination .

so what are the steps before the action of Investment

Knowing your Goals : First plan, why are you investing , what is the goal associated with your investment . Is it Buying Home ? Buying Car ? Vacation after 3 yrs , Retirement , Child marriage ? etc etc

Knowing your time frame , when you need money : This is very important , because this will decide a lot of things

- The product you can invest in ?
- The risk you can take ?
- The amount you need to invest per month or year ?

This will make your path very clear , after this you just have to follow it without any doubt in mind .

Action and monitoring : Now you just have to take action and dont doubt it again and again , because you have cleared everything before .

Case Study

Case 1 : Unplanned Investment

Ajay is a regular reader of jagoinvestor and after reading some articles on this blog , he decides finally that he will invest k per month through SIP .

He starts a SIP with a mutual fund and now he is happy that he has been investing finally . He invests for 2 yrs and markets have gone up and down and at the end his investments are at same place where it started . So there is no appreciation in value . He decides to take half the money out of his investments and uses in buying a car which was his plan from many years . Markets finally starts recovering , but as usual he realises very late that this is a time to put money in markets (as all the general public realise this very late) .

He starts his SIP again and now continues this for some years . He periodically takes money out of his investments on many occasions like for his vacation and his child education .

What is the problem with this approach ?
- No predefined goals and hence no clarity on investment plan - No idea of how investment should be divided for different investments . - No investment as per risk-appetite and goal’s importance

Conclusion : He started investments which was a good idea , but Ajay jumped on the second ladder , The first step was to first plan for things .

Case 2 : Planning everything

Ajay now knows that he can invest 20k per month , and have to plan how to channelise this investments . He identifies his goals , and how much he would need for it .

He comes up with following things .

To do your own calculations , do it here

Now he exactly know that for which goal where he has to invest . There will be no distraction in between by equity markets going up and down or any other factors like those , because in the start only he has factored in all the possibilities. In short Now he has a clear path and he know how fast or slow he has to walk on it . At the end , if he keeps on walking on it the way he planned , Success is guaranteed .

Conclusion

Planning your finances can be boring, but its vital and most crucial part of financial planning , A person who gives much time planning things , has higher chances of achieving it , Take action is second step . Planning things in advance reduces doubts about certain things , provides clarity in financial life and hence reduces a lot of issues .

Question :

How much difference do you think will happen without planning as per your view ?