Financial planning involves a series of steps followed by an individual or an organization for achieving a financial goal.

But the hard fact remains that this process of financial planning is always go with certain hidden or unsuspected danger or difficulty. Therefore it is necessary to have new ideas of financial plan that can overcome these difficulties.

Along with this, the plan that is needed should respond to changing economic conditions of the people and in turn, their changing quality of life as a result of the rising income levels. “You have to know what you have, and you have to know what you need,” says Chandler.

Therefore to help people in avoiding any financial danger or loss the following factors should be considered on:

Is there any provision for accommodating economic changes?

Predicting what will happen in the future normally takes into account what has happened in the past and present. This is where the historical data become important! However, since natural phenomena are never linear in response to changing circumstances. Any prediction may be susceptible to large errors but to do something is better than doing nothing at all.

Most of the calculations for financial planning are based on conclusion of the past financial performances returns and present conditions and use this data to try and predict future return performance. The continuous changing conditions of the economy can, in turn, significantly change the actual returns in particular. To consider and work with long term return expectations is the right way to go.

Managing lifestyle changes:

Most of the models for allocating assets use standard change of income growth and a general increase in price. As incomes rise, the consumption patterns also notice changes, which in turn, affect the income and expense of the household.

With rising income patterns, a consumer tend to change his lifestyle, inclining towards luxury goods, international trips, buying luxury cars and affording a better education for their children.

But all these require some adjustments.  Does a financial advisor, in this scenario, has to play the role of advising his clients on whether such lifestyle changes will be sustainable or not? Possibly, yes. Any changes in the client’s expenditure pattern are observed to adjust his financial plan accordingly. An advisor needs to adapt to changing patterns of client’s income and expenditure.

Dealing with loss of employment:

A major population of the working class in India is employed in private sector. Therefore, it is required to take into account things such as a job loss and a period when there is no income from the salary.

To do this, an important thing to be taken into consideration is the industry in which the investor is working. People employed in manufacturing sectors like FMCG will have greater career stability than people employed in jobs related to the stock market.

The variable bonus structures of people employed in these industries is one thing that works in the favor of the financial advisors. For example, times of good or high payouts can be used for building up one’s earnings for periods of slack or feeble incomes.

It is therefore, important for a financial planner to state to his client that predicting these income streams in the future might be dangerous. So, preventing one from such risks is advised. One can also possibly consider the probability of a ‘no income period’ into his financial plan model.

How to manage the rising interest rate on the Housing Loan?

Housing loan, being a big responsibility, needs much attention in financial planning. With sharp rise in the interest rates for home loans in the last few years, most of the financial models have started taking into account the EMIs for fixed home loans. However, the changing interest rates can lead to a lot of variation in one’s plan. Banks also tend to discourage fixed interest rate loans, in cases where the debts are fixed for the loan’s duration.

Is there any Risk of living a longer life :

Generally in financial plan, people plan their retirement based on their life expectancy. They may assume their life expectancy as 75 years or 85 years. Retirement planning would be easier if you knew exactly how long you’ll live. But what if the person lives longer than that plan? So what can you do to protect yourself against the risk of living too long?

Your financial plan to be practical and workable, it needs to address the issue of living long also.

Therefore, it is recommended to consider the above factors while designing your financial plan. This will not only ensure you with a financial security in the future, but also help you move forward towards a more practical approach of financial planning. Being a financial advisor, I also believe that the need of the hour is a more practical approach of financial planning becoming prominent over the theoretical one.

(The author is Ramalingam. K an MBA (Finance) and certified financial planner. He is the Director & Chief Financial Planner of holistic investment planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He Can be reached at ramalingam@holisticinvestment.in)

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