Managing one’s cash flow is the backbone of well-planned finances.
It is rightly said that failing to plan often leads to planning to fail. This is especially true with regard to planning finances. It is important, therefore, that one follows a checklist to ensure meeting financial goals with ease. Here are key steps that must be followed to achieve the same.
Cash Flow Management
Managing one’s cash flow is the backbone of well-planned finances; tracking cash outflows, thus, goes a long way in building an effective financial portfolio. Such outflows are typically of two types: fixed and variable. The former consists of regular transactions of which people are generally aware. Variable expenses, by contrast, present a different story. This is primarily so because it is directly linked to one's lifestyle inflation, a concept that eludes us at the best and disrupts our financial planning at the worst.
The idea behind this is fairly simple: one often sees people generalising inflation rates—but what matters more is how much of an impact the inflation is actually causing to one's net worth. One example to illustrate the point is that the inflation on a hatchback car might be 8 to 10 percent; however, a person who once wished for a hatchback no longer desires anything lesser than a sedan or an SUV. It is tempting, in this case, to use the 8-10 percent figure as an estimate for financial planning — but doing so is deceptive, because it fails to account for our desire for achieving a better lifestyle by spending more. This logic applies to all aspects of expenditure, including education, holidays, and even groceries.
Bearing in mind the importance of such management, one can build a portfolio, which—of course—is defined fundamentally by its assets, divided into asset classes. Every asset class—some of which are debt, equity, real estate, and gold—behaves in a particular manner: this is the nature of that asset class, defined often by its risk, return, and liquidity. Each asset class needs to be aligned with one’s goals, highlighting the crucial nature of Asset Allocation.
The issue lies in the fact that, more often than not, assets are acquired on the basis of one’s personal liking or pure returns—seldom taking into account the risk factor and milestones that lie ahead. This is problematic, as the portfolio is seldom balanced and are prone to fluctuations. It is hence vital that one is clear on one’s personal requirements, liquidity, risk-taking ability and only then consider investing and building one’s portfolio, in so allocating assets appropriately.
Preparing for milestones
To be clear on one’s personal requirements, however, it is important to have a clear vision for the future—demonstrating the consequent importance of milestones. These are the foundation of good financial planning: they provide specific, measurable and time-focused goals that must be very distinct to an investor’s personal requirements, based on the investor’s specific goals and the consequent purpose of the portfolio itself.
Creating a financial portfolio without defined milestones is akin to shooting a basketball in the dark and hoping it lands in the net: inherently haphazard and possibly unprofitable. Simply enough, milestones provide a clear direction to one’s plan. However, its benefits also extend to allow us a better understanding of the specific long-term purpose of the portfolio itself. This grants us the ability to analyse schemes not in context of “good” versus “bad”, but rather being “suitable” or “unsuitable” to an investor’s specific requirements—defined, in turn, by the long-term milestones that set the portfolio’s purpose and goals.
To define these milestones, however, it is imperative to acknowledge the fact that, for most people, a financial plan is always for the family. More often than not, only one family member takes responsibility for financial planning—which is a fundamentally flawed approach that tends to lead to issues, as complete family involvement makes a major difference in planning one’s finances.
When the entire family works towards common goals, the chances of those goals being achieved are generally very high, because their success is governed by a united set of goals rather than its uncoordinated counterpart.
Financial planning, therefore, must be seen as a logical, step-by-step process on your path to financial freedom. Essential to this path are two key ideas: discipline and structure — which following these four specific steps serves to help you achieve.
The writer is Co-founder of MSVentures Financial Planners.Aashish Khubchandani, associate planner at MSVentures Financial Planners contributed to this article.