POSTED BY May 21, 2009 COMMENTS (8)ON
This post will tell you all about why Planning is the most important and first step in the process of Financial Planning!
Any action that is to be taken needs a proper and precise planning before implementing it. I have seen many people pinging me about their investment plans or decisions to take Term Insurance or Investment plan through mutual funds for next 10 yrs through SIP.
I would like to congratulate them on their decision and action. They are ahead of most of the other 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 gone directly to the second level and skipped the very first basic level, which is 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 the last 6 months markets did good and his portfolio showed upward movement, later the market crashed and he stopped his SIP payments. I asked him why is he not continuing his SIP. To this he answered that markets are going down.
His decision of starting investment is great, but investing without any planning and not 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 desired destination.
Knowing your Goals: First plan that 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…
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 don’t doubt it again and again because you have cleared every doubt beforehand.
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 they 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 realizes very late that this is the time to put money in markets (as all the general public realize 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 costs.
– No predefined goals and hence no clarity on investment plan- No idea of how investment should be divided for different financial commitments and not investment as per risk-appetite and goal’s importance.
Conclusion: He started investments which was a good idea but Ajay jumped on the second step of the ladder. The first step was to plan for things.
Ajay now knows that he can invest 20k per month and have to plan how to make proportionate investments for his financial commitments. He identifies his goals and how much money he would need for each.
He comes up with following things:
To do your own calculations, do it here
Now he exactly knows that for which goal where & how much he has to invest. There will be no distraction in between by equity markets going up and down or any other factors because in the start itself he has factored in all the possibilities. In short Now he has a clear path and he knows 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.
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.
How much difference do you think will happen without planning as per your view?