Advantages of Financial Planning
Creating and adhering to a financial
plan will enable you to mitigate the adverse effects of:
1. Rising cost of living : The cost of living has risen substantially over the years. This rise has not left any single product/service untouched. Be it groceries, electricity, fuel, eating out or the cable TV bill, the costs for all have risen.
2. Rising Aspirations: With increasing consumerism our aspirations are ever increasing. Today, we all aspire for a higher standard of living which encompasses more and better life style products, better education for our children, bigger and better homes, etc.
3. Time Mismatch of Financial Goals with Maturing Investments: Your financial goals (viz. son’s higher education, daughter’s marriage etc.) will arise at different points of time in your life. Unless your investments that are set aside to meet these specific financial goals do not grow to the estimated level when required, you will be faced with a gap in meeting your goal.
4. Low interest rate regime with vanishing tax-breaks: In the past decade, we have seen interest rates fall from high double digit levels to single digit levels. Though the last few months have witnessed a hardening of rates, it is unlikely that we will see the high levels of the past. For you, this fall in interest rate means that unlike in the past, you will not be able to earn the same attractive returns from fixed income securities.
Further, several of these interest bearing investments came with tax benefits, which made these returns even more attractive. As most of these instruments were issued by the government, they carried only sovereign risk (i.e. backed by the Government of India and hence were virtually risk free).
However, with the Government steadily removing tax-breaks from these investments coupled with falling interest rates, these investments are no longer as attractive. Consequently, wealth creation from interest bearing investments is now going to be even more remote.
5. Longer life spans: With the advancement in science and technology, the average life span of humans has risen. A longer life span means not only a longer post-retirement term but, unfortunately higher medical costs with advancing age.
Generally, an individual’s life can be broadly divided into three phases:
(1) Childhood and education (birth to about 22 years of age),
(2) Earning age (approximately between 22 years and 60 years) and
(3) Retirement (60 years to death).
Thus, in approximately 38 years of your earning life, you will have to provide for approximately 63 years of your post education life (assuming your life span is up to 85 years of age).
Additionally during the earning years, over and above your regular living expenses, you have to take care of some significant life events such as children’s education, marriage, buying a home, etc.
