The Union Budget is a much awaited event each year. We are eager to know what the finance minister has planned for the economy for the year ahead. Nothing wrong with that, but how many of us have actually drawn a similar kind of a plan for ourselves, which takes into account all of our (including our family’s) short-term and long-term requirements?
Our knowledge about financial products may be excellent. We may know about the best stock buys, top performing mutual funds, insurance plans or which asset, gold or property, to bet on. But does this knowledge make us financially literate or aware? Yes, but only partly. Financial literacy is the ability to use knowledge and skills to manage one’s financial resources effectively for lifetime financial security. Undoubtedly you posses the knowledge and skills, but are these being used to manage finances in such a way so as to ensure a lifetime of financial security?
The Life Freedom Index, a recent survey conducted by ValueNotes for HDFC Life, reiterates this point strongly. The survey reveals that urban Indians do not fare well in terms of financial awareness. Out of a 100 point index, they score only 43.3. The results also point out that among urban Indian consumers, awareness about financial events/ goals is much lower than their level of financial product knowledge. It indicates that Indian consumers are not using their financial know-how in planning their future, thus resulting in misalignment of investment options with financial needs.
In an age, when there is no dearth of information sharing platforms or investment options, what is it that restricts urban Indian consumers to plan judiciously?
Financial Planning is more than just a tax-saving exercise!
For most of us, financial planning is usually a tax saving exercise, done mostly in a hurry without keeping the big picture (long term goals, unexpected events) in mind. We usually invest in various financial instruments based on their past and present future performance. Even though we may be able to build a corpus over a period of time, it is highly probable that we may not know if it is sufficient to cover all our expenses. How much should be allocated for the house renovation, how much for the child’s education, how much is required for retirement? All of us identify with such dilemmas. However, most of us do not start early with a goal - based approach. It is only when we are surrounded by a number of expenses does a goal-based approach seems handy.
Identifying financial goals may sound simple but many of us do not place importance in it early in life. Categorization of financial goals into short, medium or long term is the first step towards a disciplined investment plan. While selecting investment instruments one is faced by a number of questions particularly about the lock-in period, level of risk, rate of returns etc. Here the categorization and prioritization of goals comes useful. A clearly defined need makes it easier for you to select the right product.
Once the plan is chalked out and executed, frequent review is essential. Frequent plan review will allow one to beat inflation or other macro-economic forces such as interest rate changes or stock market movements. The key to developing an effective goal-based investment plan lies in improving financial awareness, i.e urban Indians need to become more aware about their financial health and all kinds of requirements that may crop up during a lifetime. Higher awareness will help them in aligning investments more wisely as well as help them assess the suitability of financial advice whether it is from a friend/ relative, or a professional advisor. As Lewis Carroll wisely said – “If you don't know where you are going, you'll probably end up somewhere else.”