Personal financial plan? Why? I am already investing in different products myself and managing my portfolio to the best of my ability, and I think I am doing better than most of advisors, why do I need a personal financial plan or services of a financial planner to be more specific? This kind of question normally comes up when you ask a person to come out of his comfort zone and be process oriented and disciplined in approach. Or when someone has had a bad experience with an Investment advisor, it is natural not to trust anyone so easily.
All said and done, whatever your experience had been and how efficiently you are managing your portfolio…if you don’t have written personal financial plan, you are not focussed in your approach and tend to have behavioural biases in your personal financial decisions.
Here I am listing down 5 advantages of having a written personal financial plan.
1. It is in writing – The first and foremost advantage of a personal financial plan is that it is written. You have your goals in it, strategies to achieve those goals, your recommended asset allocation as per your risk profile, when to enter and when to exit a particular asset class etc. Now what you have to do is just follow. You don’t have to revise your strategy every now and then or your asset allocation on the basis of some recent happenings. Moreover, you have your goals written in it and you very well know what you are working or planning for. When you write a goal, you visualise it and can direct your efforts to achieve that. Unwritten goals only lead to confusion and misdirection.
2. It puts you into a process – Have you ever thought that why every corporate or every profession has some processes manuals or protocols to follow? This is to eliminate the behavioural or emotional biases from the decision making. When you have your personal financial plan document in front of you, you know what to do and when. For e.g some plans may say when you should come out of equity or when you should prepay the loan. Even if at that moment you are getting good returns on investment, the plan will guide you what is best for your financial goals. When you can follow the process laid down by your company or profession, you would not find much difficulty in following your own personal financial plan.
3. It makes you proactive – When a properly thought of strategy is at its place you become more proactive in your approach. For example rather than waiting for any unforeseen event to take place, a personal financial plan will guide you what and how much insurances should be bought, looking at your cash flow situations it may point out where you are going wrong and what steps you need to take to improve the things, your loan portfolio will be reviewed and you may be advised to close some of your loans otherwise you may find yourself in a fix sometime in future, if your investment portfolio does not suit your risk profile, than timely changes in the portfolio will be advised so you may handle the volatility with confidence and can stay with it for long term to achieve your goals.
4. It helps you in doing Profit booking – Yes, Financial planners also advise on profit booking, but not the way you want it. A personal financial plan will have a clear cut defined Asset allocation strategy in it which has to be rebalanced and reviewed every year. When you rebalance your allocation, the profit booking automatically happens. This allocation will help in taking the profit out of growing asset class and investing more money in asset class which is down at present. So the concept of selling high and buying low automatically applies.
5. It gives you a holistic view of your finances – If you don’t follow a process or don’t have any written goals in front of you, you tend to ignore the effect of one decision on the other. See, all of us have limited means and with which we have to arrange for our multiple goals. We should be aware of what impact our decision on a particular investment or goal is going to give on our other goals. Like for example saving for children higher education and marriage is one of our important goals, but if we allocate most of our resources towards that, how would our savings for retirement be effected? A written personal financial plan will help you understand different scenarios and answer all the “what ifs” rose in your mind. (Read : what if scenario in financial planning)
There’s one very popular saying, which is also called as Six P formula – “Proper prior Planning Prevents Poor performance”. And it’s actually true. We all do some kind of financial planning in our day to day lives and most of that is in unstructured format. If you have written personal financial plan with you, you can be very much organised in your approach.
What do you think? do you agree that having a personal financial plan will make some difference in your financial decision making?
please elaborate why one should prepare his/her financial plan and pay fees to the planner when there are various robo advisors and investment platforms available?
A fee-only financial planner would work in your fiduciary interest and would help you in each and every step of your financial journey in achieving your financial goals and would keep your interest at the forefront.
Thanks for this! After all, financial planning is beneficial. It would be great for everyone to have this kind of mindset. I also suggest seeking professional advice to help you be guided with your financial goals and achieve financial success.