Yes, you shouldn't do financial planning

My client sent me an email a couple of days ago. He replied to my suggestion to get his financial planning done. What he was trying to say in his reply is why he shouldn’t be doing financial planning. You can read the email here. I have now written my response to his email. Here it is. Read on.

Dear AB

I am glad that you took time to pen down your thoughts and share it with me.

I always have your best interests in my mind. My real purpose in getting you to make a financial plan is driven by the same objective.

I read your email and I totally respect your views. Let me share my views too.

I will take up and respond to each of the points that you have mentioned in your email.

You are not just a planning person – I wouldn’t buy that argument. I will tell you why. I know, for a fact, that you love traveling and you go to various places with your family, 3 to 4 times in a year. You plan your travel to the T. From the decision about which place to go, which dates, applying for leave at work, to which flights, hotel, food, etc., you put in everything down and book everything well in advance. Your simple reason is that you don’t want any unpleasant surprises later. You do your best to avoid them. This is what financial planning does to your money too. You decide your financial goals, when are they likely to happen, how much money will be required to fulfill them and so how should you be channelising your money today so that you can meet the goals well in time and not have any unpleasant surprises later. So, yes AB, you are a planning person. You just have to apply the same principles to your money.
How much of the future can we predict? – Let me be brutally honest here. No one can predict the future. Future happens at its own time and pace. At best we can prepare ourselves to handle it the best way possible. Best guess estimates are one of things you use as a guiding tool. In financial planning, we take best estimates based on our habits today and plan for them. That does not in any way guarantee that we will be absolutely precise. Take retirement, for example. Today if you are spending Rs. 50,000 on your monthly expenses, in 20 years, assuming prices rise by 8% every year, you will need close to Rs. 2,50,000 per month to have the same standard of living. That too will keep rising every year from there on. Now, your actual need could be much higher or lesser than this. But it is good estimate to work on. The questions that needs to be asked is that even with this estimate, do you think you are ready to meet that goal? How can you be ready to have a financially stress free retirement?
How do we incorporate so many variables in a financial plan? – As I mentioned in my previous point, yes, it is not possible to incorporate every single variable into a plan. There are too many that we don’t even know about. There will be future events we can’t predict today. But we can do our best and work with numbers that we can reasonably assume. And no, it is not ‘wishful thinking’ but being pragmatic.
Financial planning is for rich people – There could not be a bigger myth than this. If we understand the purpose of planning, it is about “deploying scarce resources to their most optimum use“. Here is what Wikipedia has to say on planning – “a series of steps dedicated to achieve a defined goal”. Now, who is more likely to have scarce resources – the rich or a middle class person like you? We must understand that the rich became rich because they planned their way to becoming rich and not because they just let things happen. They applied a method to multiply their money and capital resources. There is no reason why you should not do the same. In fact, you as the middle class person with limited resources, need it more than anyone else.
New investments in real estate – And now you throw this bomb at me. You are looking at a new real estate investment. Not again! I know real estate is your favourite, for whatever reasons. But I also know that it’s not your business. You don’t deal in real estate, neither you are builder. Your exposure to the industry is limited. Yet you continue to commit a lot of your money resources to it. I think it is time that you have one hard look at your real estate investments and see what is the actual return they have delivered to you. Coming back to what has this got to do with financial planning – a plan will help you evaluate your investment needs as well. Once you know your goals and how do you plan to reach them, choosing the right investment vehicle will be easier. Then based on your risk taking capacity and the time available, we can choose an investment that is perfect for that goal. This is also known as ‘Asset Allocation‘. Simply put, it means how much of your money should go into real estate (illiquid in short term), mutual funds (market linked), a Bank FD (assured return) and Gold (safety). Remember, the selection process is important. You should not get lured by stand alone opportunities. If at all, you need to understand how they fit into your financial plan and then decide what to do with them. It is like jumping into a train or a bus without knowing where it will take you. Or, like Alice in Wonderland.

The real reasons you shouldn’t do financial planning

So, as I see it, your reasons for not doing financial planning do not hold solid ground. Let me give you some more reasons as to why you should NOT do financial planning. Here they are:

Financial Planning will bring an awareness of your life objectives. You will come to know what is important for you and what you should prioritise. Do you need to put education of your children first or your next big car, the decision will be much easier. If you are not looking for this clarity, you should not attempt financial planning.
The financial plan will enable you to set a road map of your financial journey so that you can meet your financial goals in the most effective way. A defined asset allocation will let you know how much money needs to be invested where and in what instruments. It will guide your financial actions. If you are not looking for this guidance, avoid making a plan.
The plan will set the foundation of decision making with regards to your investments. You need not get lured by the deal which your neighbour says is set to grow 10 times or the hot investment made by your colleague that is likely to deliver 1000% returns. Your mind will not race wildly because you will understand your risk capacity better and choose your investments in line with the requirements for your goals. If you don’t want this peace of mind, don’t do financial planning.

So, this is what I had to say. I hope you take this message in the right spirit.

I remember, about 4 years ago, one of my clients resisted financial planning. I recently got a mail from him where he couldn’t find words to express his gratitude. He was glad he did the exercise then and how he is batting today on a stronger pitch. He is now reviewing the entire financial plan to fit in the current realities.

In any case, the proof of the pudding lies in the eating. So, why not give it a shot and see what it does for you?

I will still respect your decision, whatever it is.

Best regards

Between you and me: How has your financial planning helped you? Do share your feedback in the comments.