5 mins read . 14 Dec 2022
People often wonder whether planning your financial future is a science or an art. In fact, it is a mix of both. It is a science because it is based on some basic ground rules and a body of knowledge on financial planning and investment analysis. It is also an art because customising a solution to a person is a lot of art and discretion and creativity involved.
When it comes to investing, people often wonder how and where to start. You start with a financial plan. The argument is that if you don’t know what you want to achieve in terms of life goals, it will not matter how fast you run and which way you run. The financial plan is all about setting this direction.
So you start with your long-term goals like retirement, children’s education etc. and then work backwards to work out how to plan and invest for the same. That is where science comes in.
The financial plan can be made even by robots, which is what robot advisory is all about. However, that is the science part of it. You can feed a lot of science into a robot, but you can make the robot paint with the creativity of Pablo Picasso. Here are some basic things that make financial planning a fine art.
Quite often, investors get confused between risk appetite and risk capacity when making a financial plan. Remember, risk appetite is more psychological. You may have the risk appetite of a bungee jumper, but your situation may not give you that much risk capacity. What matters is risk capacity. Risk capacity depends on income levels, saving, liabilities and servicing costs. Here you need to apply the art of pragmatism to make it meaningful.
Some goals are, by default long-term goals. For instance, planning for retirement, child’s education and holiday a home are normally long-term goals. They have a tenure of 10-15 years and hence equities can be pegged to such goals for low-risk long-term wealth creation. However, for medium-term goals, hybrid funds or debt funds would help. For shorter-term goals like car margins or home margins, liquid or short-duration funds would be ideal.
As Roberto Kiyosaki rightly said, “It is not how much you earn, but how much you save that makes you rich. The big thing about planning long-term goals is to start early. If you keep a 25 year perspective, even a small monthly outlay in equity SIPs can work wonders in the long term. It ensures that money works a lot harder. The other perspective to squeezing more savings is to first set your saving targets and then plan your expense budget. After all your investment success stems from higher savings.
Financial planning will work best with a dose of art to it. It makes a big difference.