Do you want to live life king-size, and yet plan for your retirement, your son’s higher education abroad or your daughter’s marriage?
Do you need to run to your Auditor or Tax Advisor at the drop of a hat, or do you want to avoid this by being proactive?
Relax, it is not as intimidating as it may sound, and if a personalised financial plan is done right and early, you would be surprised as to how much control it gives you over your finances.
Warning: These Factors can Affect your Financial Plan
If a financial plan is not well thought out and done by less experienced professionals, then there is a high possibility that some of the factors affecting the financial planning could have got ignored.
A financial plan may look really cool in the face of it. On the surface, things may look ok. But when we dive deep into the intricacies, we can easily point out
some of the important factors affecting the financial plan are ignored.
When these important factors affecting the financial plan are ignored, it can affect your results adversely:
- There can be a deficit in achieving your financial goals.
- You may have to accept a compromised lifestyle after retirement.
- You may have to postpone some of your goals forcefully.
Regardless of creating a financial plan proactively, there can be a gap between where you are financially and where you want to be.
This is where a professionally prepared financial plan stands out from an amateur financial plan.
What are the Factors Affecting Financial Planning?
The three most important factors that would affect financial planning are
- 1. Lifestyle,
2. Personal and peripheral commitments and
3. Socio-economic factors.
Let’s see how these three factors will shape your financial program and planning
1.Lifestyle: The Flexible Factor Affecting Financial Planning
Present Indian Lifestyle:
With the average age of the working population plummeting steadily, people in their 20s and early 30s have more disposable income to invest in long-term investments like mutual funds. Most households are also dual-income households, with both husband and wife maintaining a steady income.
However, with policies like multi-brand retailing, and international labels setting up shops in India, the spending percentage for Indians have also increased exponentially.
Now, an average Indian monthly expenditure constitutes of fixed components like house/apartment EMI, Car EMI, and student’s loan premium along with essential but variable components like eating out, Malls and Multiplex-shopping and buying premium electronics, with semi-urban areas driving this shift as much as urban sectors.
How to accommodate change in your lifestyle?
Change in lifestyle needs to be expected over a period of time. So this also needs to be considered in the financial plan. If the change in lifestyle is more than what we have assumed in the financial plan, then that will create a problem in achieving the financial goals.
So change your lifestyle slowly over a period of time in a planned manner. Change in lifestyle is surely an important factor in affecting the financial planning of families. Let us be cautious about this important factor that affects financial planning.
A professional financial planner should alert you on these lifestyle changes to make you conscious towards these changes.
You can register here to use our free 30-minute complimentary financial plan consultation to get the experts’ advice to secure your financial life.
Control the controllable:
How much income we earn year after year is uncertain. How much return we get from our investments is also uncertain.
So the only thing which is under our absolute control is how much we spend.
Our spending behaviour and spending pattern are important factors that can make or break a financial plan. Your ability to control your spending is the secret of success of your financial plan.
So a professional financial plan should advocate spending what is left after saving and not saving what is left after spending.
Budgeting before you even spend a single penny out of your pocket is as effective as it gets. You can find many useful spreadsheets and applications online to help you do your budgeting. Or you can use our budget sheet by downloading it here.
However, budget is a powerless tool without understanding. Here is an excerpt from one of our articles giving insights to the factors affecting financial planning.
“The marketers today can get into your mind to make you buy what they want to sell with ease. It should always be you who take the decisions to buy. But in reality, it is them through you. This is a serious money leak from your side.”
–Get Rich or Get Busy Struggling, Holistic Investment Planners
To learn how to have super control over your finances and expenses in particular, you might need a few more techniques. “Get Rich or Get Busy Struggling” discusses and provides such kind of information in detail.
Hopefully, if this is one of the factors affecting financial planning of yours, now you have the answer.
2.Personal: The Essential Factor Affecting Financial Planning
There are some obvious personal factors and there are some not so obvious personal factors, which can influence your financial plan.
A) Obvious Personal Factors:
How many people are financially dependant on you? If your parents or your spouse’s parents are financially dependant on you, that needs to be clearly accounted for in your financial plan.
ii) Financial Goals:
The total number of financial goals and the value of the financial goals will affect your financial plan.
There will be a challenge in your financial plan where you will have to compromise on one financial goal to achieve another.
One basic problem is; which financial goals matter and which financial goals do not? If such situations arise how would you know you are making the right call?
Most of the people think that the failure of their financial plan is because of poor execution. It is because every financial plan looks perfect on paper.
Alignment of your financial goals with your financial plan is a significant factor affecting financial planning. It affects your financial plan with you not even realizing it.
To stop this from affecting your financial plan, you have to have a “Targeted Strategy to Achieve Your Financial Goals”. Make use of this article to learn how to Categorize, Prioritize, Strategize and Implement the Strategy. It should give you a holistic view to align your financial goals with your financial plan.
Your age is an important factor that can affect the amount of risk you can take. Also, your age decides the time left to manage the gap between where you are financially and where you want to be financially.
iv) Financial Potential:
You financial potential will be assessed based on the current savings, current investments and the ability to save more in the future. Your overall financial potential is an important deciding factor in how far you can go financially and how fast you can go financially.
v) Risk Appetite:
Your ability and willingness to take risky investments will influence your financial results. Risk is proportionately related to the reward. If you take less risk, you will get lower returns. If you take more risk, you can expect higher returns.
vi) Personality Traits:
Your personality traits play a vital role in the success of your financial plan.
- Patience is an important trait you need to develop more. Being patient in following the basic values and waiting till you get results are important.
- Your ability to switch off the noise is essential. Market noise creates an emotional imbalance. So the ability to switch off that noise pays off.
- Having a cool head and staying calm during financial storms can help you greatly in getting good returns.
The question you have to ask yourself is, “How Committed Are You to Your Financial Goals?” Understand your current level of commitment towards your financial plan. This mentioned article should help you find out what’s standing between your undistracted commitment and your financial plan.
If you think this factor affecting your financial plan is inherent, you might need something more than that. It’s the holistic perspective of how much of commitment is expected of you. It is guaranteed that you will go through a course of emotional ride while executing your financial plan.
But you should not let that to get added to the list of factors affecting your financial plan. To avoid that you might use this “Financial Freedom: 7 Psychology Hacks” to your advantage. This article details the emotional phases that every investor goes through and how you can use it for your advantage.
Resting on top of all is a professional Financial Planner’s advice.
A professional financial planner should help you develop these traits over a period of time by proper step by step financial coaching.
vii) Past Experiences:
Your own past experience or the past experience of your near and dear will definitely influence your financial decisions.
If you have lost money in stock market in the past, then you may be averse to invest more money in stocks.
At times, even if you are sure of the right decision you will face an internal conflict to make the decision. It could because of the aversion that has grown from the past investment mistakes or financial planning mistakes.
If you face difficulties in taking the financial decisions for your financial plan, you need to develop a decision making process. The article “6 Powerful points to take right financial decisions” discusses the same and should help you in creating a decision making process.
The counselling sessions offered by financial planners too will help you remove these scripting.
B) Not So Obvious Personal Factors:
The following not so obvious personal factors are essential determinants of financial planning. So they should not be overlooked. They should be considered in detail.
i) Changing culture and Evolving Society:
Personal Financial Planning mimics your personal life more closely than you could imagine. Across urban and semi-urban India, these personal decisions affect individual wealth:
- higher marriageable age,
- early retirements and
- work-while-you-learn practices.
These personal practices of an evolving society are a crucial factor in affecting the financial planning.
How does this changing culture influence your financial plan?
You may need to meet the higher education and wedding expenses of your child after your retirement, because of your delayed marriage or your early retirement. You need to meet these large financial commitments during the phase of your life in which you have stopped to generate any income. Your financial plan needs to accommodate this unique personal situation. You need to be thoughtful and careful about this unique personal situation which is one of the significant factors affecting the financial planning.
Important events like Graduation, Marriage, Parenthood and Retirement bring along a host of peripheral expenditures and incomes. For example, an Indian marriage ceremony, across all communities, includes a steady inflow of relatives, lavish decorations, multiple communal feasts, rituals that are entirely based on exchanging gifts, and finally an expensive honeymoon trip.
ii) Influence of unique customs in your financial plan
When there are unique customs in your family or your circle, it demands more money that needs to be accounted. As a parent, you may plan for the higher education and wedding for your child, but you might have ignored to plan for the functions such as upanayanam, first birthday, Chalangai pooja, Arangetram, etc.
Similarly, planning for the retirement party needs to be included especially when you plan to do it with more money.
The unique customs around you also need to be considered as essential factors which will affect the financial planning. These are the factors that make the difference between a readymade financial plan and a customized financial plan.
A customized financial plan by a certified financial planner will account for such expenditures. This will prove to be an efficiency improvement, minimizing the factors affecting your financial plan.
3.Socio-Economic: The ‘Uncertainty’ Factor Affecting Financial Planning
The following socioeconomic factors are important determinants of financial plan success.
a) Policies and taxes:
Social and economic policies can also be an influencing factor in your financial planning to a huge extent. These policies define how you create and maintain wealth, as well as how much you have to pay by way of essential expenditures, taxes and fees.
b) Market Forces:
Market forces like fluctuations in interest rates, consumer prices and spending rates, and of course, inflation and deflation will affect your savings and investments.
In India, over the last ten years, urban income has risen exponentially, by over 19%. This, in turn, is driving India’s GDP forward, and becoming an important factor in policy features, that increases consumer prices and consumer spending rates. This, in turn, creates upward pressure on interest rates across India. As a consumer, how does this factor affect your financial planning?
Increased consumer prices increase the price of your average goods. This is also a factor which affects financial planning.
However, this also means a tangible increase in jobs, higher wages for the salaried middle- and upper-middle-income groups, along with higher rates of interest.
d) Economic cycles:
If the economic cycle is at the stage of expansion, then that will result in increased job opportunities, growth in the economy and price rise. Once the expansion peaks, the cycle will head to contraction stage.
If the economic cycle is at the stage of contraction, then that will result in unemployment or uncertainty in employment, slow down of economy and stabilisation of price.
These economic cycles will influence your saving ability and your overall investment returns.
e) Political Stability:
The stability or instability of political situation in your country will definitely impact the performance of your investments.
f) Global Scenario:
The global political and economic factors will also influence your country’s market. So those also need to be factored in.
The above listed socio-economic factors affecting financial planning are far from the forecast of a layman. So, what can you possibly do for such factors affecting financial planning? Especially when they are not controllable by a common man?
If there’s anything common between these socio-economic factors, it’s that they are only temporary. Every market seeks progress, and these factors that affect financial planning are part of a big process. You, as an investor, can understand and handle this wisely by active management of your financial plan.
That is why it is advisable to create a financial plan through a professional financial planner.
A professional financial planner will identify all these crucial factors which are going to affect financial planning by their thorough fact-finding method and economic trends analysis. After identifying these factors, the financial planner will accommodate and manage these factors in such a way these will not affect your financial plan.
Do you agree these factors will affect your financial planning? Kindly convey your views in the comments section below
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